UK farmgate prices less responsive than European counterparts

Published 4 January 17

In a series of articles, AHDB is looking at how farmgate prices across Europe respond to movements in European wholesale commodity prices. The first article is available here. In this second article, we will look at how the UK has fared compared with other EU member states.

UK farmgate prices are, on average, less responsive to commodity markets than the other main EU milk producing countries, particularly when markets are rising. AHDB analysis compares the scale and timing of how movements in European AMPE* have impacted on farmgate prices across Europe. The results are split between the impact on a rising market (May 2012 to Dec 2013) and the impact on a falling market (Jan 2014 to Jul 2016).

 Impact of AMPE on EU farmgate prices

Source: DG Agri, AHDB, Defra

The UK shows more asymmetry in price exposure than most other EU countries. In other words, the UK shows a bigger differential between rising and falling markets than other countries. The UK still sits in the second tier of exposure to European commodities when markets are falling. For every €1/100kg drop in European AMPE, UK farmgate prices move, on average, €0.5. This means, overall UK farmgate prices have been less responsive to commodity markets than some of the other main EU milk producing nations. 

As part of the analysis, AHDB also looked at how quickly European commodity prices have flowed through into farmgate prices. The EU-28 average farmgate price moves up and down at the same rate, around two months behind movements in commodity prices. In the UK, the situation is slightly different. When markets fall, the UK farmgate prices tend to move around one month later. When markets are rising, farmgate prices have risen much slower, taking three months to show commodity price increases.

The analysis has been undertaken comparing the correlation between European AMPE prices and average farmgate prices. The impact on an individual farmer will be highly variable and depend on a number of factors. One of the main factors will be how quickly the processor can realise improved returns from end markets. This, in turn, will depend on the volumes traded on long-term deals compared to spot markets and the processor’s ability to direct milk to different markets.

It would be expected that prices paid by milk buyers who sell a large proportion of their product on spot markets, or on short-term deals, would track AMPE more closely than those who are less active in these markets. Changes in market values should, therefore, affect sales revenues, and flow through to farmgate prices, relatively quickly. On the other hand, those milk buyers who sell most of their product through forward contracts may take longer to realise improved returns and, therefore, may take longer to increase farmgate prices.

AHDB will look at the impact on specific farm prices in a future article, along with what needs to change in the industry if the position is to improve in the future.

Key to the table:

Orange signifies a delay of 4 months or more between markets moving and farmgate prices moving. Yellow signifies a delay of 2-3 months. Green signifies a movement in farmgate prices within 1 month of markets moving. None means no clear correlation could be found between markets and farmgate prices

Notes:

* European AMPE uses the published European commodity prices for butter and SMP in Euros per tonne and converts them into a milk price equivalent in Euros per 100kg of milk.

Due to the length of the recent downturn in commodity prices, it was possible to run the analysis for 33 months to assess the impact of a falling market. For the rising market, the time period is shorter, at 20 months, and older, finishing in December 2013. The UK milk market has moved on quite significantly since December 2013, and a number of farmgate prices will be calculated differently today than they were the last time the markets were rising. This includes a number of farmgate prices on formulae-based calculation. As such, it is currently too early to determine whether the delay previously recorded on a rising market will continue through the current surge in commodity prices.