The slump in dairy markets in the 2014/15 season has had detrimental impacts on both dairy farmers and Cheddar manufacturers
Retailers meanwhile have seen gross margins improve over the period as retail prices have remained stable
The pressure on gross margins at farm level is evident in the increased rate of producer exits from the industry
The processing industry has also been hard hit with some cheese manufacturers reporting financial losses or halting production during the year
2. Key results
• The slump in dairy markets in the 2014/15 season has had
detrimental impacts on both dairy farmers and Cheddar
manufacturers
• Retailers meanwhile have seen gross margins1 improve
over the period as retail prices have remained stable
• The pressure on gross margins at farm level is evident in
the increased rate of producer exits from the industry
• The processing industry has also been hard hit with some
cheese manufacturers reporting financial losses or halting
production during the year
1 Gross margin is defined as the difference between the selling and buying price. For the purpose of this report, gross margins are
calculated as unit gross margins, measuring the unit selling price less the unit cost price (in pence per litre of milk terms). Margins do
not account for sales or production costs and are therefore not indicative of profit levels.
3. H1 2013/14 H2 2013/14 H1 2014/15 H2 2014/15
ppl margin ppl margin ppl margin ppl margin
Farmgate milk price 31.2 34.0 31.7 27.4
Processor gross
margin*
4.1 12% 2.8 7% 0.3 1% -2.1 -8%
Processor selling
price
35.4 36.7 32.1 25.3
Retail gross margin* 24.8 41% 24.5 40% 29.1 48% 35.4 58%
Retail price 60.1 61.2 61.2 60.6
Mild Cheddar gross margins
2013/14 v 2014/15
*Processor gross margins do not include any additional income generated from the sale of by-products such as whey. They
may be underestimated as selling prices are based on spot market quotations, which are generally lower than contracted selling
prices. For the same reason, retail gross margins may be overestimated.
It is important to note that the calculated gross margins for each 6-month period
only represent the average position. As no adjustment has been made to account
for the 3-month lag between purchasing milk and selling mild Cheddar, these
figures should be viewed in terms of how they change relative to past trends.
5. 2014/15 events (1)
• UK milk production recovered in the second half of
2013/14, reaching 10-year highs
• Wholesale prices start to decline in response to the rising
global and domestic production
• Russian ban
further accelerated
decline in wholesale
prices
0
5
10
15
20
25
30
35
40
45
50
800
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
penceperlitre
millionlitres
UK milk production (12-month rolling average) MCVE
Russia
bans
imports
MCVE measures the estimated returns from milk used to produce mild Cheddar
6. 2014/15 events (2)
• Competition among key milk buyers delays farmgate
price drops
• possibly due to influence of Voluntary Code3
• Processor gross margins become negative at the end
of the first half of the milk year
1,000
1,500
2,000
2,500
3,000
3,500
10
15
20
25
30
35
£/tonne(wholesale)
penceperlitre
average milk price
paid on cheese
contracts
MCVE
Mild Cheddar
wholesale price
(£/tonne)
Wholesale market
values dropped
faster than prices
paid for milk
3 More information on the Voluntary Code can be found here: http://www.dairyuk.org/2014-04-23-11-00-42/vcop-home
7. Summary of 2014/15
• Average farmgate prices4 were 9% lower in
2014/15 than in previous year
• largest drop occurred in second half of year
• Processor gross margins moved into a
negative position
• More recently, gross margins have become positive
again
• Retailer gross margins increased
• Retail prices remained stable over the period
allowing for improved gross margins
4 This represents the average price paid to all farmers for all milk supplied to milk buyers
8. Conclusions
• The lag between reduced returns from
wholesale markets and lower farmgate prices
meant processor gross margins fell into a
negative position for part of the 2014/15 milk
year
• Cheese manufacturers are likely to delay
increasing prices paid for milk when the
cheese market recover to compensate for the
period of negative gross margins
9. Data Sources
1. Farmgate milk prices
Farmgate milk prices are provided by Defra on a monthly basis and represent average prices received by producers,
net of delivery charges and excluding any retrospective bonuses. The prices are obtained by Defra from a monthly
survey of registered milk purchasers in England and Wales, which records volume, value and protein content of milk
purchased from farms in England and Wales. All major milk purchasers (those purchasing over 2 million litres of milk
per year) take part in the survey and approximately 91% of milk purchased from UK farms is accounted for. The Defra
published prices are weighted according to the volume of milk purchased and averages are, therefore, influenced by
the larger milk purchasers. For the supply chain analysis, annual average farmgate prices are not weighted but are
simple averages of the twelve months of data.
2. Milk for cheese contract prices
For comparison purposes, a simple average price paid for milk for cheese was calculated using the AHDB Dairy
standard litre milk prices for a basket of cheese contracts.
3. Wholesale prices
UK wholesale prices are collected on a monthly basis and, for the supply chain analysis, annual averages are a simple
average. UK wholesale prices for cheese, butter, powders and cream are collected monthly by AHDB Dairy by
obtaining quotations from traders and milk processors and indicative prices are published on its website. For mild and
mature Cheddar, prices collected are based on spot prices and relate to larger quantities of a container or more on a
delivered price basis per tonne. These figures are then converted to a ppl equivalent using milk equivalent conversion
factors.
4. Retail prices
Retail prices for Cheddar cheese are obtained from the Kantar Worldpanel, which collects survey data from consumers
on the volume and value of purchases. For Cheddar cheese, annual average prices for mild Cheddar were calculated
using 52-week data on expenditure and volume of retail sales. As sales volumes are recorded in kilograms, they were
then converted to a ppl basis using a 9.4litres/1kg cheese conversion factor.