Rampant inflation requires a ‘reset’ of relationships, expectations and price levels in the dairy supply chain

Written by John Swire from Farm Business

Significant cost inflation at farm level and for dairy processors means that price increases must be passed up the dairy chain to consumers to avoid a migration of milk supply to higher value export markets, according to a new report from Kite Consulting.

According to Kite’s data, on farm cost inflation will put the break-even milk price for 2022-23 at between 33 and 34p (as costs stand today). What’s more, dairy processor production costs have increased by between 15% to potentially as high as 70% depending on a processor’s exposure to the energy market and its product mix.

Having analysed a range of different factors, the report concludes that, depending on the scenario, bulk butter prices need to be £3,975 – £4,200/tonne rather than at the medium-term average of £3,200/tonne; and mild cheddar needs to be £3,425 – £3,625/tonne, rather than the current £3,000/tonne.

Commenting on the report’s conclusions, John Allen, Managing Partner at Kite, said: “The analysis we’ve conducted demonstrates the scale and urgency of the inflationary cost pressure in the dairy sector. With costs increasing exponentially, and with margins already slim at farm and processor level, there must now be a ‘reset’ of price levels across the whole dairy chain, with price increases being passed on to consumers. Farmers and processors simply cannot carry these costs.

“If a ‘re-basing’ of consumer prices for dairy doesn’t happen, we predict that milk production will fall, and UK dairy production may increasingly be diverted to serving export markets rather than potentially lower margin domestic retail and foodservice markets.

“But this is about more than price. This inflationary trend comes at a time when supply chain relationships have never been more important. Retailers and processors need to work more closely than ever with farmers to address the challenges around sustainability, particularly the urgent need to mitigate climate change. Success in this area requires long-term relationships built on trust. As such, it is imperative that we see a reset in consumer dairy prices to secure the resilience that UK consumers were so grateful for during the COVID lockdowns, and to ensure that UK consumers can continue to enjoy climate-friendly UK dairy products in the future.

He added: “There is also a pressing need for AHDB to review the cost metrics within the AMPE and MCVE formulas. The last time these were reviewed was in July 2020, but the exponential increase in processor costs means the cost figures built into the indexes are no longer relevant.”

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