How do spot milk prices impact on the wider market?

Published 29 July 16

With spot milk prices continuing to rise, farmers are starting to ask when these will filter through into farmgate prices. AHDB looks at what impact we can expect from spot milk prices on the wider market prices in GB.

Increases in spot prices are normally driven by liquid processors needing to source “top-up” milk to satisfy their customers’ orders. When milk production is lower than expected in the country, liquid processors will likely also have less milk from their own farmer suppliers, and as a result will look to buy milk on the spot market to fill the gap.

The volume of milk sold on the spot market is usually relatively small. When spot milk prices are rising rapidly, as they are currently, it is normally a sign that there is very little “spare” milk available, and therefore the volume of milk being sold on the spot market will be even smaller than normal. Because of this low volume, in isolation, spot milk prices would not normally be expected to have a significant impact on farmgate prices in the short term.

Britain is somewhat unique in its ability to have a raw milk spot market out of kilter with commodity markets. This is mainly due to the size of the liquid milk market in the country, and the high cost of bringing milk in. That said, if the supply-demand imbalance is sustained and spot milk prices remain high, this will push up the price of British-made dairy products. That is because manufacturers will consider whether they can make more money by selling some of their milk supply rather than processing it themselves. We have already started to see this happen, as reported in the latest AHDB UK wholesale survey.

There is a risk that the high spot milk prices in Britain may attract imports of raw milk if the premium is high enough to cover the additional transport cost of getting milk across the water. Such a move can dampen the premium and bring British prices back closer in line with mainland Europe.

Although the spot milk sales volumes are small, they do give an indication of the value of additional litres. As such, any processor operating A&B pricing should be considering the return for spot milk when deciding on the message to their farmer suppliers about producing more milk. In other words, any additional milk they can get from their farmers can effectively be sold on the spot milk market, provided they are not relying on it to fulfil their own customer orders.