Weak demand forces MMinto 3rd selling round
Weak demand forces MMinto 3rd selling round
By Philip Clarke
MILK Marque has been forced into a third selling round for its milk from April, dropping prices to the trade by another 0.4p/litre.
Under OFT rules, the success of a selling round depends on clearing at least 90% of supplies on offer at prices quoted by Milk Marque.
In the first round, in which the co-op tried to increase its rates by 0.6p/litre, dairy companies only bid for 85%. It, therefore, launched a second round, bringing its prices back to current levels. But this has had almost no impact on demand, with buyers only taking 86%.
"We are disappointed that dropping prices for round 2 had so little effect on apparent demand," said chief executive, David Yeomans. "We are, therefore, reducing our prices again to achieve a market balance."
Whether cheaper milk proves any more attractive remains to be seen. Milk Marque is adamant that its product is now "excellent value for money", especially in the light of improving dairy company profits and stronger commodity markets since last summer.
But, even if the market does clear this time, the damage has already been done for dairy farmers, who will be getting smaller milk cheques from April.
The expectation, however, is that the trade will hold back again, forcing Milk Marque to a fourth round at lower prices still. This will probably be the last round, as Milk Marque is expected to then reduce its cheapest (residual) contract to the Intervention Milk Price Equivalent of 19p/litre, the floor price agreed with the OFT.
Industry observers say there is a growing realisation that the selling system is not working, as the trade has learnt to wind down prices through holding back on bidding. There is also evidence of further "trading down", with dairies increasingly opting for the lowest priced, lowest service contracts, compounding the drop in market realisations for Milk Marque.
"Milk buyers have clearly got the measure of the system," says independent consultant, Mike Bessey. "It is hard to understand why they are making such a fuss to the Monopolies and Mergers Commission when they are clearly the winners.
"There is a dichotomy within the industry," he adds. "About half the milk in this country goes to the liquid market and prices to consumers have not fallen at all. With raw material now costing 20% less, that money must be going into someones pockets."
With the whole milk supply system now subject to an MMC inquiry, change seems inevitable. *