How Accurate is the MPI?
Thursday, 18 April, 2019
Commodity Watch - Written by Senior Policy Officer Chris Osborne
When launched, the UFU MPI concept and workings were set out clearly. In its design, we made the decision to allow for processor costs (industry-ratified data), but since the aim of the MPI was to provide dairy farmers with merely an indicative value of what key commodity milk markets were returning, processor margins were omitted. Processor margin is not something that a processor would be willing to publicise was another mitigating factor.
Recently at a farmer-processor meeting, it was claimed that the MPI was out-of-sync and that it was 5p per litre off when you take into consideration processor margin. This highlights why we omitted it in the first place because the industry was adamant only 6 months ago that processor margin was actually closer to 2p per litre.
We need to allow for a time lag in the MPI when comparing to farm gate prices. Basically, if you take current market prices it will be a number of months before these are reflected in farmgate milk prices. This lag factors in forward sales, invoicing, money getting from ultimate purchasers to milk processor, and then crucially, money getting from processor to farmer.
Graph One below illustrates how accurate the UFU MPI has been when compared with local Northern Ireland prices (converted into Sterling ppl) and allowing for the above lag.
On a similar vein, we have taken the Ornua Price Index in the Republic of Ireland and converted it into Sterling ppl and compared it with the MPI, again allowing for a lag.
The Ornua Price Index is a monthly indicator of market returns on dairy products purchased by Ornua (typically butter, cheese and whole milk powder – broadly similar to the NI dairy product mix), relative to comparable returns generated in a base year.
This comparison is shown in Graph Two below.
Graph Two – MPI v Ornua Price Index
This illustrates a close correlation in both instances and reinforces the accuracy of the UFU MPI.
The UFU Milk Price Indicator is both accurate and robust. It offers an indicative price of what the market is capable of returning at a given point in time. This trending tool assists farmers as to the direction of prices and it continues to be a worthwhile and relevant tool and the above analysis reinforces the accuracy of the MPI.