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23 July 2012 | Kamalpreet Badasha
The profit margins of milk processors are being squeezed as retailers keep milk prices low and farmers simultaneously increase their selling prices.
A report by the non-profit group DairyCo found the average ‘farm gate price’ reported by the UK government – calculated by surveying milk producer prices each month – rose by 11.6 per cent last year. Producers benefited from increased global demand for dairy, especially from Russia, India and China. And increased competition for raw milk supplies as investment increased processing capacity.
Retailers reduced prices paid to a seven-year low of 55.5 pence per litre, using price promotions to encourage consumers into their stores. Processor selling prices are suffering as a result, as processors are unable to pass on the higher milk costs. Another factor was the re-tendering of supply contracts, which resulted in a competitive environment for liquid milk processors.
The market for cheddar cheese fared better as retail prices matched wholesale price increases, allowing retailers to maintain gross margins at 47 per cent for mild cheddar and 49 per cent for mature cheddar. Processors saw margins fall in the cheddar market by 5 per cent for mild cheddar and 4 per cent for mature cheddar.
The report concluded that processors will focus on cost control as retailers remain competitive due to the recession.