How varied are farmgate milk prices?

Thursday, 7 May 2020

By Kat Jack

The range in farmgate milk prices widened in April and May, as well as shifting downwards, after a series of price cuts were announced by processors hit by the coronavirus. Based on non-aligned standard litre prices in our milk price calculator and league table, and on announced milk price changes, our estimates indicate that the gap between the highest and lowest standard litre prices increased by around 0.85ppl March and April, as cuts dropped the low end on the range. The range then contracted in May as prices at the top end followed suit and fell.

Although the above graph shows the range for the core of contract prices, there are other factors to consider. At the top end, contracts aligned to cost of production have seen little change and some have even increased. With most priced at 30ppl and above, the disparity between the aligned and non-aligned prices has increased.

At the bottom end of pricing, farmers paid on A and B pricing systems are likely to have seen even larger price drops for their B litres. There are also reports of changes to payment volumes so that a higher amount of farmer’s milk is paid at the B price. This B price is often influenced by spot milk or commodity markets. These have seen exceptional volatility over the last few weeks following the loss of most of the foodservice sector. Because of this, estimated average spot prices for April and the very start of May were substantially lower than contract prices.

One other factor to consider is how actual milk payments may differ from the standard litre price. Here the news is more positive, as the strong milk composition that has been pushing up milk prices since the autumn has continued through to at least March, which should add some support to those paid for solids.

To help address the supply and demand imbalance that has arisen due to lockdown, several processors have called for their farmers to reduce production. We have since seen a slowdown in production growth despite being in the run-up to the spring peak, suggesting this call is being acted on. This should help towards rebalancing the market and adding some support to prices going forward.

Katherine Jack

Analyst - Dairy

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