The ins & outs of A&B milk pricing

Published 28 May 15

A&B pricing has been around for a number of years, used primarily to take some of the seasonality out of milk production. However, the more recent pricing models are different to those traditionally used.

The new A&B contracts set limits for the total amount of milk delivered (‘A’ volumes) and how it is delivered over the year. The ’A’ price is set in advance and is generally based on returns achieved in the processor’s core markets. Returns from these markets are often more stable and predictable, giving the milk buyer more certainty in setting the price paid to the farmer.

A different ‘B’ price is paid for excesses or shortfalls in production (or ‘B’ volumes) which is determined from actual market returns or spot trade in most cases.  It may be higher or lower than the ‘A’ price depending on whether the market is over or under-supplied. As ‘B’ prices are based on actual market returns, they would need to be estimated or set in arrears.

 

Market is over-supplied

Market is under-supplied

Deliveries   above ‘A’ volumes

Processor sells ‘B’ volumes at   discount

‘B’ price   less than ‘A’ price

Processor sells ‘B’ volumes at   premium

‘B’ price   higher than ‘A’ price

Deliveries   below ‘A’ volumes

Processor buys shortfall at discount

Processor buys shortfall at premium

‘B’ price   lower than ‘A’ price

Possible   penalty for shortfall

How previous A&B contracts have worked

In the older style A&B contracts, the price paid for milk delivered outside a defined base volume (i.e. on ‘B’ volumes) was subject to a fixed deduction or premium applied to the ‘A’ price. As this was set out in milk pricing schedules, ‘B’ prices could be figured out in advance. This was generally done to discourage farmers from spring production and encourage them to bolster production during the trough months.