Report calls for urgent price ‘reset’
AUTHORS of a new report have highlighted the pressing need for consumer price rises in dairy, with suggestions that the “era of cheap food is over”.
Significant cost inflation at farm level and for dairy processors means that price increases must be passed up the dairy chain to consumers to avoid a “migration of milk supply to higher value export markets”, Kite Consulting has said.
According to data published by the leading dairy consultancy firm, on-farm cost inflation will put the break-even milk price for 2022-23 at between 33 and 34p (as costs stand today).
What’s more, dairy processor production costs have increased by between 15% to potentially as high as 70% depending on a processor’s exposure to the energy market and its product mix.
Analysing a number of different factors, the report - titled ‘Why We Face a New Normal in Dairy Product Prices’ - concludes that, depending on the scenario, bulk butter prices need to be £3,975 - £4,200/tonne rather than at the medium-term average of £3,200/tonne; and mild cheddar needs to be £3,425 - £3,625/ tonne, rather than the current £3,000/tonne.
Commenting on the findings of the report, John Allen, managing partner at Kite, said: “The analysis we’ve conducted demonstrates the scale and urgency of the inflationary cost pressure in the dairy sector.
“With costs increasing exponentially, and with margins already slim at farm and processor level, there must now be a ‘reset’ of price levels across the whole dairy chain, with price increases being passed on to the consumers. Farmers and processors simply cannot carry these costs.”
If a ‘re-basing’ of consumer prices for dairy doesn’t happen, Mr Allen predicts that milk production will fall, and British dairy production may also increasingly be diverted to serving export markets, rather than potentially lower margin domestic retail and food service markets.
But this is about more than price, he added. “This inflationary trend comes at a time when supply chain relationships have never been more important.
“Retailers and processors need to work more closely than ever before with farmers to address the challenges around sustainability, particularly the urgent need to mitigate climate change.
“Success in this area requires longterm relationships built on trust. As such, it is imperative that we see a reset in consumer dairy prices to secure the resilience that UK consumers were so grateful for during the Covid-19 lockdowns, and to ensure that UK consumers can continue to enjoy climate-friendly UK dairy products in the future.”
Mr Allen said: “There is also a pressing need for AHDB (Agriculture and Horticulture Development Board) to review the cost metrics within the AMPE and MCVE formulas.
“The last time these were reviewed was in July 2020, but the exponential increase in processor costs means the cost figures built into the indexes are no longer relevant.”