Memorandum submitted by the Federation
of Milk Groups (UK) (L14)
1. EXECUTIVE
SUMMARY
1.1 Currency movements have lifted the base price
for raw milk by the equivalent of 2.9 pence per litre since September
2000.
1.2 Initiatives in the liquid sector have
increased the consumer price in this sector (50% of the whole
market) by 4.0 pence per litre over and above the increase in
the base price.
1.3 Since September 2000, the movement in
liquid and cheese retailer prices has increased on average by
4.4ppl. In reality farm-gate prices have increased on average
by only 2.0 pence per litre over the same period. Farmers supplying
direct to liquid dairies have gained more on average than those
supplying direct to manufacturing markets or those supplying the
co-operatives.
1.4 The balance of the increased revenue
was lost to farmers in Spring 2002 when supply and demand were
severely imbalanced. The aftermath of Food and Mouth Disease changed
the seasonal production profile, resulting in increased supplies
and lower farmgate prices.
1.5 The balance of the increased revenue
has been retained by the retailers and processors in the form
of increased margins and has been used by the processors to combat
their own increased costs.
1.6 Retailers and processors now control
the supply and demand balance very closely using "Price Initiatives"
and factory closures. Farmers are looking to re-establish some
level of control by managing their seasonal milk production and
through vertical integration.
1.7 With retailer and processor margins
increasing over recent years, additional costs resulting from
Farm Assurance and increased transport costs have been passed
down the supply chain to the farmer.
2. THE RAW
MILK MARKET
1.1 Raw milk sold in the UK has a variety
of uses and similar manufactured products reach the end consumer
in a variety of ways. The overall market sales are summarised
below as a percentage of the whole market.
|
| Liquid Milk | Major Retailers*
| 35% |
| Middle Ground** | 6%
|
| Doorstep | 9%
|
| Cheese | Mature Cheddar |
10% |
| Mild Cheddar | 6%
|
| Other Cheeses | 7%
|
| Other Products*** | 20% |
|
| Butter/Skimmed Milk Powder |
| 7% |
|
| |
|
*Comprising the majority of Supermarkets.
**Comprising other smaller stores, discounters, convenience stores
(such as garages) and catering outlets.
***Other products include yoghurt, chocolate crumb, cream and
whole milk powders.
Each of the sectors identified has had differing pricing
pressures placed upon it in the last 36-48 months. These pressures
can be split into four main areas, these being:
— Consumer price movements
— Movements in the balance of supply and demand
— Additional On-Farm Costs
These are discussed below.
3. PRICE PRESSURES
AND MOVEMENTS
3.1 Currency Movements
3.1.1 The Euro versus Sterling exchange rate has an impact
on the value of both imported and exported dairy products. The
exchange rate also affects the value of Intervention prices for
both butter and skimmed milk powder.
3.1.2 This impact is therefore mainly on Cheddar cheese,
butter and skimmed milk powder. As such these products are used
as the base prices for raw milk values in the UK.
3.1.3 Since April 2000 the Euro has strengthened considerably
against Sterling, from around £0.60 to £0.70.
3.1.4 This increase has boosted butter and skimmed milk
powder prices for Intervention by around 2.9 pence per litre.
The base September 2000 figure of 16.3 pence per litre with July
2003 reaching 19.2 pence per litre.
3.1.5 This increase should also have impacted on the
cost of imported cheese from within the "eurozone" by
the same 2.9 pence per litre or approximately £290 per tonne.
3.2 CONSUMER PRICE
MOVEMENTS
3.2.1 Liquid Milk Price Movements
3.1.5.1 "Price Initiatives"—Over recent
years consumers have been asked to pay higher prices for liquid
milk on the premise the increase would be returned to dairy farmers
. The first such initiative was seen in October 2000. These initiatives
have offered short-term fixes but because dairy farmers sell to
a range of end use outlets some have benefited by a greater or
lesser amount than others.
3.1.5.2 Raw milk sales for liquid milk within the UK
are no longer carried out as part of a negotiation between buyer
and seller based on the value of that milk. Instead they are based
on "how much more can be extracted from the consumer".
As such retailers have the power, through "Retail Initiatives"
to control the value of milk, limiting other external market forces
which could result in further increases for the farmer.
3.1.5.3 The market now appears to work from the top down.
Increased prices generated from the consumer is passed from retailer
to processor. The processor then has discretion as to how much
is paid on to his supplying farmer or co-op. While there is clear
evidence that middle ground and doorstep customers received letters
from processors advising them that prices were being raised by
3ppl plus "because farmer prices needed to be increased"
some processors have declined to return any price improvement
from this sector of the market. There is evidence that some processors
may be using this increased margin to fund growth in the percentage
of milk they have on direct supply to the detriment of the volume
they buy from co-ops, thus restricting co-op suppliers to lower
value outlets.
3.1.5.4 If we measure the impact in purely financial
terms these initiatives have resulted in differing degrees of
return depending on the sector from which the consumer buys their
milk. In pence per litre terms the movements between September
2000 and July 2003 can be summarised as:
|
Major Retailers
| +8.0 pence per litre
|
Middle Ground
| +5.8 pence per litre
|
Doorstep
| +6.7 pence per litre
|
|
| |
3.2.2 Cheddar Cheese Price Movements
3.1.5.5 In store retail prices for Cheddar, which covers
mild, medium and mature have moved by an average of £420
per tonne in the major retailers between September 2000 and July
2003. This is equivalent to 4.50 pence per litre.
3.1.5.6 Imported cheese represents 45% of total cheese
consumption in the UK, around a third of which is for Cheddar.
3.1.5.7 Sales price for bulk Cheddar is greatly influenced
by these imports. Both retailers and processors alike can import
Cheddar to influence the price they pay for UK manufactured Cheddar.
Total Milk Price Movement
Taking the increase in retail prices to the consumer experienced
since September 2000 for both liquid and cheese, an average increase
of 4.4ppl is reached. In reality, farm-gate prices have risen
by no more than 2ppl. This means that a minimum of 2.4ppl of the
increase has not been passed back to the farmers.
3.2 MOVEMENTS IN
THE BALANCE
OF SUPPLY
AND DEMAND
3.2.1 The outbreak of Foot and Mouth Disease ("FMD")
in 2001 combined to very low farmgate prices earlier in the same
year led to a significant change in the seasonal pattern of milk
production. Milk volumes produced during Spring 2002 were at their
highest level for 10 years.
3.2.2 This supply level, combined with a lack of available
processing capacity in the UK, allowed processors to force down
the price of milk in all market sectors. As a consequence farmgate
prices fell by around 3 pence per litre from the start of April
2002.
3.2.3 Consumer prices did not react to this fall.
3.3 ADDITIONAL ON
-FARM COSTS
3.2.1 As costs of production and processing have increased,
the majority of these costs have been passed back down the supply
chain to the farmer.
3.2.2 Through the processors, retailers have stipulated
that all milk must conform to specific Farm Assured standards.
In reaching the requirements of Farm Assurance, farmers have had
to meet the full costs of achieving the standard. No premium has
been paid by processors for Farm Assured milk.
3.2.3 With Farm Assured milk required across the industry
product range, the question must be asked whether or not the imported
dairy products, in particular cheese meet the high quality standards
demanded of UK farmers.
4. FARM-GATE
PRICES
4.1 The table attached as Appendix 1 [Not Printed] shows
how farm-gate prices have varied between September 2000 and July
2003.
4.2 This illustrates that the impact of price changes
in different market sectors in not spread uniformly across all
farmers.
— Those supplying directly to processors involved
only in the liquid sector have had increases of between 2.1 and
3.0 pence per litre.
— Those supplying to co-operatives who have a range
of customers have had increases of between 1.5 and 1.9 pence per
litre.
— Those supplying direct to manufacturing businesses
have had increases of between 0.8 and 1.8 pence per litre.
4.3 The price increase at the farm-gate is dependent
on the balance of exposure to the various market sectors.
4.4 The movement of farm-gate and liquid milk price changes
is illustrated below:
5. PROCESSOR AND
RETAILER MARGINS
5.1 Detailed analysis of liquid milk processor margins
is very difficult because the price of milk passing from processor
to retailer is not available. A simple analysis of the published
profits of liquid only processors shows that Robert Wiseman Dairies
have a net margin which is the equivalent of 2.2 pence per litre
whilst the figure for Express Dairies (now Arla Foods UK is 1.2
pence per litre).
5.2 Appendix 2 [Not Printed] shows that, by tracking
the average farm-gate price with the retail price for 4-pints
of liquid milk, the farmer's share of the revenue has fallen by
10% over the period from October 2000 to July 2003.
5.3 Analysis in the cheddar market is possible. The actual
margin for cheese sold through retailers can be estimated using
consumer price information from Taylor Nelson Sofres with bulk
cheese prices quoted by the Provision Trade Federation. This analysis
shows:
— 67% of the consumer price for mature cheddar is
to cover costs (cost of production on farm, processing and storage
costs, retailer overheads and transport costs at various points
in the supply chain).
— 33% profit is split as follows:
January 2004
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