Lower cream returns erode liquid margins

Tuesday, 15 October 2019

The pressures facing liquid milk manufacturers in recent years are well documented, with excess capacity and increased competition at the retail level eroding margins. Adding further pressure to margins will be the steadily declining price of bulk cream so far this year. For liquid milk processors, market returns are a combination of the price received for the milk and for any products made with the excess cream. For those without the ability to divert excess milk and/or cream to alternative uses, margins will be highly reliant on sales of bulk cream.

Good availability of cream, combined with lower demand for butter from the food manufacturing sector, has had a negative impact on wholesale cream prices over the past 18 months. Since the middle of 2018, wholesale cream prices have been steadily declining, hitting a 36-month low of £1,400/tonne in August 2019.

As a result, we have seen our cream income to a liquid processor measure drop substantially. The average return from cream so far this year (January – September) is 8.46ppl, 27% lower than the average over the same period in 2018 (11.62ppl).

For processors to have maintained overall revenues as cream prices fell, they would need to have increased their sales prices for milk. Using the Producer Price Index[1] as a measure of the factory gate price, there were some increases realised between June and December 2018. Since then, however, they have fallen back despite cream prices continuing to fall. As a result, processors’ overall income will have been reduced since the beginning of the year.

[1] The Producer Price Index is published by the Office for National Statistics and measures the monthly change in prices for goods sold by UK based manufacturers at the ‘factory gate’. The PPI can be used as a measure of the price of goods before they reach the distribution or retail sector.

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