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