Green £effect chops producer milk price down

14 February 1997

Green £effect chops producer milk price down

By Philip Clarke

PRESSURE is mounting on milk prices after Milk Marque received bids for just 75% of the 14m litres a day it had on offer in its first selling round to the trade.

Under strict new rules imposed by the Office of Fair Trading last summer, Milk Marque is obliged to launch a second selling round at lower prices if it clears less than 90% in the first round.

This is now under way, with quotes back another 0.3p/litre for deliveries from Apr 1, or about 2p/litre less than it is currently making (see table). Dairy buyers have until next Tuesday (Feb 18) to say what volumes they will take at these prices.

"The drop of more than 2p/litre in the residual contract price since the July selling process gives a direct measure of the effect of the green £ revaluations in Nov 1996 and Jan 1997," says Milk Marque chief executive, David Yoemans.

This will impact directly on producer prices in the coming months. Industry consultant Mike Bessey estimates that Milk Marques average realisation will fall from 25.9p/litre to just 23.8p/litre, possibly more if dairies continue to "down trade" to the cheaper contracts. From this has to be deducted administration and transport costs.

But at least the second selling round should be the last. Under the terms agreed with the OFT, Milk Marque can call an end to the process when its cheapest contract reaches what is known as the Intervention Milk Price Equivalent (IMPE).

At 22.1p/litre, this is now the case, though buyers body, the Dairy Industry Federation, argues that even this is too high. Its calculation suggests an IMPE of just 20.4p/litre and this has been submitted to the OFT for consideration.

DIF director general, John Price, said he was not surprised dairies had under-bid in round 1 and expected the same in round 2 as butter/skimmed milk powder production was still uneconomic at these prices.

"This shows yet again that Milk Marques selling system does not work. By setting the prices, they either get too much demand or too little. This is why we believe an auction system is the best way to get a market balance."

If there is continued under-demand in the second selling round, Milk Marque says it will confirm the volumes bid for and roll the remaining milk into the spot and short term markets.

lPrices paid to non-Milk Marque members are likely to follow the downward trend. "The drift in Milk Marque prices is making buyers aware that they are paying too much for their direct contracts," says Mr Bessey.

David Yoemans…fully reflecting the impact of green £ revalua-

tions.

(p/litre)

July 96Jan 97Feb 97

(Round 1)(Round 2)

Premier

service27.126.025.7

Ex-farm

profile26.724.824.5

Fluctuating

supply25.624.023.7

Residual24.3 22.4* 22.1*

*Discount in May and at Christmas.