Revealed: Milk contracts most exposed to market volatility
© Tim Scrivener Analysis by AHDB Dairy has revealed which milk contracts which are most exposed to market volatility.
It found non-aligned, manufacturing, and cheese contracts were much more exposed to commodity fluctuations than aligned ones.
Producers on manufacturing contracts saw prices drop by between 35-50% during the dairy downturn, while prices paid on aligned contracts fell by 9-20% over the same period.
However, this has meant farmers on aligned contracts are now having to wait much longer for commodity price rises to feed through to the farmgate than those on manufacturing contracts.
See also: Lessons and advice from the dairy downturn
As dairy commodity markets started to pick up in the summer, prices on most aligned contracts continued to fall (Sainsbury’s contracts fell up to 10%), while those on other contracts started to see rises feeding through to the farmgate.
Milk contracts compared |
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|
Contract name |
Type |
Impact of 1p/litre change to AMPE/MCVE |
Price change Aug 14 – Jun 16 |
Price change Jun 16 – Oct 16 |
|
First Milk Balancing Liquid |
NAL |
0.84 |
-48% |
35% |
|
Glanbia Llangefni |
CH |
0.83 |
-50% |
42% |
|
Arla Direct Manufacturing |
MAN |
0.82 |
-54% |
35% |
|
Lactalis/ Caledonian Cheese – Profile |
CH |
0.81 |
-48% |
28% |
|
Lactalis/ Caledonian Cheese – Seasonal |
CH |
0.79 |
-47% |
30% |
|
First Milk Haverfordwest |
CH |
0.78 |
-46% |
37% |
|
Meadow Foods |
MAN |
0.74 |
-45% |
21% |
|
Wyke Farms |
CH |
0.72 |
-35% |
18% |
|
South Caernarfon Creameries |
CH |
0.70 |
-51% |
40% |
|
Barber AJ & RG |
CH |
0.68 |
-36% |
15% |
|
DC Davidstow – Profile |
CH |
0.67 |
-39% |
10% |
|
UK Arla Farmers Liquid |
NAL |
0.65 |
-42% |
10% |
|
UK Arla Farmers Manufacturing |
MAN |
0.64 |
-42% |
10% |
|
DC Davidstow Variable |
CH |
0.63 |
-39% |
10% |
|
Pattermores Dairy Ingredients |
MAN |
0.61 |
-41% |
17% |
|
MDM Liquid – Profile |
NAL |
0.56 |
-32% |
5% |
|
Grahams Dairies |
NAL |
0.52 |
-30% |
3% |
|
Crediton Dairy |
NAL |
0.50 |
-34% |
4% |
|
MDM Liquid – Variable |
NAL |
0.50 |
-32% |
5% |
|
MM&I Partnership |
NAL |
0.48 |
-34% |
4% |
|
MM&I Cooperative |
AL |
0.29 |
-25% |
-1% |
|
Arla Sainsbury |
AL |
0.14 |
-9% |
-10% |
|
MDM Sainsbury – Profile |
AL |
0.14 |
-9% |
-10% |
|
MDM M&S – Profile |
AL |
0.11 |
-10% |
-4% |
|
MM&I Tesco |
AL |
0.09 |
-20% |
0% |
|
MM&I Sainsbury’s |
AL |
0.08 |
-14% |
-10% |
|
MDM Sainsbury’s – Variable |
AL |
0.08 |
-9% |
-10% |
|
MDM M&S Variable |
AL |
0.05 |
-10% |
-4% |
|
Key: NAL = non-alined; CH = cheese; MAN = manufacture excluding cheese; AL = aligned |
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The research showed that First Milk’s balancing liquid contract reacted the most to commodity markets in pence per litres, moving its milk price up or down by 0.84p/litre for every 1p/litre movement of AMPE or MCVE prices.
AMPE and MCVE refer to the price of dairy commodities after processing, with the former referring to butter and skimmed milk and the latter to cheese.
Producers on Muller Direct Milk’s M&S variable contract saw the least price movements in pence per litre, with their farmgate price changing by just 0.5p/litre for every 1p/litre change of AMPE and MCVE.
See also: First Milk sells sports nutrition business in restructure
Chris Gooderham, senior analyst at AHDB Dairy, said markets moved in cycles and it was important for producers to understand as much as possible about how exposed their contract was to the volatility of spot prices.
“The most important thing is to take a longer term view of prices – like over five years. If prices do go up then money needs to be set aside for low times,” said Mr Gooderham.
Producers should try to understand what influenced the income of their processor and ask their buyer what they were doing to limit their exposure to volatility.