Wednesday, 14 July 2021
By Chris Gooderham
We recently reported on input cost inflation and highlighted the risk to processor margins. Here we put the rise in costs into perspective, in terms of our key market indicators; AMPE and MCVE*.
We review our market indicators every three years to ensure they stay representative. Both indicators include a range of costs for processing, including energy, labour, raw materials, maintenance, storage and depreciation.
The graph below shows the assumptions we use in the AMPE and MCVE calculations for processing costs. The bars show the share of the costs that equate to labour and energy, with the data labels giving the cost in pence per litre (ppl). Energy has a particular impact on the cost of producing powders (skimmed milk powder, buttermilk powder and whey powder) because of the energy required for drying. For example, of the total cost of 3.44ppl to produce skimmed milk powder, 1.30ppl comes from the cost of energy and a further 0.66ppl to cover labour.
In pence per litre terms, the combined cost of labour and energy equates to 2.6ppl for AMPE and 2.7ppl for MCVE. These costs are based on the levels recorded in 2019/20. The latest ONS indices have shown a rise in energy and labour costs since our last review. If we applied the ONS indices for Q1 2021 to our indicators, the processing costs for both would rise by 0.3ppl. The result would be a reduction in AMPE and MCVE of 0.3ppl compared with the published figures.
While labour and energy are the biggest contributors to processing costs, other inputs cannot be ignored. Plastics, cardboard and fuel prices, in particular, have shown rapid rises over the last few months. Some of these costs will also have a knock-on impact into other areas. For example, mild Cheddar storage costs are estimated at around £30 per tonne (0.3ppl), but the biggest contributors to storage costs are energy and labour.
Input costs can fluctuate considerably, which is why we only update our official AMPE and MCVE calculations every three years. However, we do offer an online spreadsheet that allows you to enter bespoke costs and milk quality into the calculations. This will then calculate unique indicators based on your own circumstances.
* AMPE is the Actual Milk Price Equivalent for turning milk into butter and skimmed milk powder. MCVE is the Milk to Cheese Value Equivalent and gives an indication of the value of milk if it is turned into mild cheddar, whey powder and whey butter.
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