Dairy Supply Chain Margins

Published 14 October 15

Analysis of gross margins1 along the diary supply chain aims to identify who benefits from changes in prices. Historically, this analysis has been done for liquid milk, mild Cheddar and mature Cheddar markets (reports available in the Resource Library).

Increased consolidation and structural changes within the industry has meant data needed to calculate gross margins is no longer available for liquid milk or mature Cheddar.

Mild Cheddar margins – 2014/15

Key findings:

  • 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.
  • 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.

A brief overview of the key events leading to changes in gross margins in the mild Cheddar supply chain can be found here.

Mild Cheddar gross margins*

 

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%

2.6

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

 

*Expressed in percentage terms, the gross margins reflect the proportion of the selling price retained to cover operational and overhead expenses and to provide for a return on investment/profit.

**At the farm level, only the average selling price is reported as this there is no effective 'purchase' price for the milk sold.

Mild Cheddar gross margins

1For the purposes 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 terms). The margins do not account for other sales or production costs and are therefore not indicative of profit levels. However, the gross margins are representative of the value obtained at that level of the supply chain and analysis of how the margins have changed over time provides important insight into how market events have impacted on the distribution of the value within the supply chain.