Not pass­ing true value to pro­duc­ers has both its rea­sons and big risk

The Herald - - BUSINESS - ROG WOOD

AC­CORD­ING to AHDB’s Milk Price Cal­cu­la­tor, UK farm prices do not re­flect the true mar­ket value of cream in pay­ments for but­ter­fat.

Milk buy­ers tend to fol­low one of two ap­proaches when milk prices are ad­justed – ei­ther the but­ter­fat and protein pay­ments are both changed in line with his­tor­i­cally set ra­tios, or the base price is ad­justed. Nei­ther ap­proach is cur­rently giv­ing the full mar­ket sig­nal to farm­ers about the value of but­ter­fat.

Be­tween April and De­cem­ber 2016, all dairy com­mod­ity mar­kets rose, but it was the but­ter­fat side that showed the big­gest in­crease. Cream val­ues in the UK rose from £800 per tonne to £1,800 per tonne. In gross terms (mar­ket value as butter), this is equiv­a­lent to fat val­ues ris­ing from 2p per per­cent but­ter­fat in April to 4.5p by the end of the year, a 125 per cent up­lift.

De­spite this, a num­ber of farm-gate prices con­tin­ued to have the same pay­ment for but­ter­fat in De­cem­ber as they had in April. Those that have seen an in­crease in pay­ments have seen move­ment that main­tains the his­tor­i­cally set ra­tion be­tween but­ter­fat and protein pay­ments.

In de­fence of milk buy­ers, the over­all value of but­ter­fat to in­di­vid­ual pro­ces­sors will be de­pen­dent on their prod­uct mix and how much of their fat is sold on the open mar­ket.

There is also a risk of chang­ing farm-gate pay­ment struc­tures too of­ten, to re­flect short-term mar­ket move­ments, be­cause it can send mixed mes­sages on what is valu­able to the pro­ces­sor. For ex­am­ple, cream val­ues could swing dra­mat­i­cally from one month to the next and, if but­ter­fat pay­ments to farm­ers matched those swings, it would be ex­tremely dif­fi­cult for a farmer to al­ter milk com­po­si­tion so quickly to re­act to such a rapidly chang­ing value.

That said, the risk of not pass­ing the true value on over an ex­tended pe­riod of time can be even greater. If farm­ers can­not re­act to the mar­ket be­cause the sig­nals are be­ing “muf­fled” by the sup­ply chain, in­ef­fi­cien­cies are likely to arise. Also, prices could be­come more volatile be­cause the mar­ket has to move even fur­ther be­fore there is a sup­ply-end re­ac­tion. C&D Auc­tion Marts Ltd sold 4,206 prime lambs in Long­town on Thurs­day to a top of £107 per head and 281p per kg to av­er­age 167p (-8p on the week).

The firm also had 3,415 cast sheep for­ward, when heavy ewes sold to £140 for Tex­els and av­er­aged £69.28 (-£4.60), while light ewes peaked at £67 for Che­viots and lev­elled at £34.85 (-26p). Rams sold to £124 for a Texel and av­er­aged £68.12.

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