Defra farmgate prices: when is an average not an average?

Published 20 April 15

The most recent Monthly Report reported the Defra UK average farmgate price for February as being 27.22ppl†. This has led to some questions from industry about the basis of the price and even whether or not it is accurate. As the Defra farmgate price is an average covering approximately 90% of UK milk deliveries and all major milk buyers it is a good indicator for the general trend of overall farmgate prices. However, it does now also hide a considerable and increasing range of prices that looks the largest spread for many years

Much of the recent discussion in the industry has focused on those near the bottom of the range, who certainly will have seen a significant decrease in their milk cheques over the last 12 months. Approximately 20%* of GB milk supply is from farmers under a retailer aligned contract or producing organic milk. These farmers are likely to have some protection from the price decreases announced over recent months. The “average” figure is thus currently much less meaningful to many individual farmers because it will now be a considerable distance from the price they are being paid themselves.

Farmgate price 20.04.15

Following the receipt of amended data from Scotland, the January and February UK farmgate milk prices reported by Defra have since been revised. It should also be noted that the inclusion of significant retrospective payments to some producers in February meant the average price showed an increase from January. Without these payments the average February milk price would have stood at 26.12ppl.

* Estimated from multiple data sources

**Maximum and minimum farmgate prices from the AHDB/DairyCo League Table.

Based on the AHDB/DairyCo League Table, in recent years, the average difference between the bottom and top price paid to farmers in a single month has been approximately 6ppl. The 50 or so contracts included do not cover every single dairy farmer in GB but they do paint a clear picture that the gap has now widened considerably. In March 2015, the difference between top and bottom was over 13ppl, an increase of over 10ppl from just a year ago. In reality, the range is likely to be more than this due to the variation in quality of milk produced by individual farmers and those on spot price linked contracts.

There is also a different angle. In the past it has been emphasised by some that the variation in costs at farm level has exceeded the variation in prices paid. As a result, costs have been identified as a more significant driver of profit than prices for many. However, as the gap between milk prices has widened and with some farmgate prices becoming increasingly influenced by volatile international markets, does this message still hold? Look out for more analysis on this question in an upcoming issue of the Dairy Market Weekly.