Commodity watch by Chris Osborne, senior policy officer
Only a couple of weeks ago, Arla said that they were “calling time on cheap milk”. This was accompanied by both ITV and BBC national news running a similar story seven days apart, with dairy industry bosses warning that the price for milk and butter could rise by 50 percent.
Rising production costs, inflationary pressure and the ongoing war in the Ukraine has resulted in a price hike on farming essentials. Farmers are now paying significantly more for the fertiliser, fuel and animal feed they reply on for milk production.
Whether or not this actual figure of 50 percent referenced in the national news headlines will materialise is not relevant in the context of this commodity watch, but what is, is that the retail price of milk and related dairy products are rising.
The UK inflation rate rose to seven percent in the year to March (up from six-point-two percent in February), the highest rate since 1992. The data showed that prices for the ‘milk, cheese and eggs’ category rose by eight-point-six percent, which is the highest of all the staple food categories apart from ‘oils and fats’ which increased by a huge 18 percent.
Of all dairy categories, it was butter that posted the biggest increase and cheese yet to see any noticeable rise on the shelves. The ‘oils and fats’ is significant because it means there is little chance of much butter substitution (i.e., a switch to spreads), which means the demand for butter will be sustained.
On this basis, there appears to be a seismic shift coming and this was indicated by Tesco only three weeks ago when they accepted a 20 percent cost price increase in milk from its suppliers. As far as retail butter is concerned for example, butter packet prices in December 2020 were £1.64 for 250g, rising 10 percent to £1.80 today. Over the same time, the bulk butter price has increased from £2950 to £6000, a 100 percent rise.
On a retail level, we are starting from a very low base. This was confirmed by Arla who last week stated that the price of milk has fallen seven percent over the last decade despite consumer prices as a whole going up by 26 percent. This is shown in the graph below, illustrating the price of a pint of milk over the last 10 years.
In addition, the Agriculture and Horticulture Development Board (AHDB) analysis has shown the price of a pint of milk rose just 4.4p (16 percent) to an average of 28.3p in supermarkets between 1995 and 2021. This is despite the Bank of England showing inflation rose nearly 49 percent over the same period.
Consequently, the move on retail dairy prices is long overdue. Could we see an end to the practice of this valuable primary product being used a loss-leader (especially liquid milk) in the shops?
It would not appear to be so judging by the actions of one retailer last week, when, despite the positive signals and price moves set out in this article, announced they would be CUTTING their liquid milk price.
This move is indefensible for three reasons. It devalues the dairy supply chain, confuses the consumer on the cost of producing milk and creates an environment where milk prices increases are more difficult to achieve. It feels like we are back at square one and illustrates the never-ending challenge facing dairy farmers getting their share of the cake.
The public value the high-quality, sustainable dairy products which farmers produce, yet it needs to be stressed that dairy farmers are not responsible for setting the price of milk for the public. The dairy farmer is a “price taker” which automatically means that they are at a disadvantage in the business relationship leading to implications for the farmgate milk price.
Whilst the long-awaited Department for Environment, Food and Rural Affairs (DEFRA) Milk Purchasing Code represents one positive move in improving the position of the dairy farmer in the supply chain, we still have a long way to go to attaining fairness. Especially considering this move to cut retail milk prices.
