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Retailer-aligned price premium disappearing
Thursday, 17 February 2022
Persistent strength in dairy markets in recent months has led to some sizeable increases in milk prices since November, pushing them in line or above retailer-aligned price levels.
Low milk deliveries and firm demand has tightened markets since last summer, pushing up market returns for processors. In the six months to Jan-22, AMPE and MCVE had risen by 15.7ppl (50%) and 9.7ppl (29%) respectively, pulling up the equivalent market value for milk by 33%.
After the typical lag, these higher market returns started to flow through to milk prices on market related contracts in the autumn. Between Oct-21 and Feb-22, based on announced milk price changes, the average price on market related contracts[1] is estimated to have increased by 4.7ppl.
Meanwhile, prices on retailer aligned contracts, which are linked to farm production costs, have increased on average by 1.7ppl over the same period, suggesting that input cost inflation has not been the main reason behind the latest round of price increases.
As we move into the spring, there still seems to be room for further milk price increases – both on retail-aligned and market-based contracts. Cost trackers underpinning prices on retail-aligned contracts have not yet picked up the full impact of higher input costs due to the lagged nature of adjusting for production costs. Meanwhile, some processors have already announced increases for March, and the continued strength in wholesale markets looks set to remain at least until the milk production hits its peak, providing the possibility of further price increases.
You can keep up to date with milk price changes from our monthly summary, and get more detail on the outlook for dairy markets from our latest Agri-market outlook.
[1] Average price paid on all contracts (excluding aligned liquid) in GB, based on the AHDB standard litre
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