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The Market Price Equivalent (MPE)
Posted by The Dairy Group - 04/08/10 01:42PM

The 3rd price increase in 4 months by Milk Link is welcome news and a sign of the times, maybe with Dairy Crest and Wiseman more concerned with their P&L and share price than the UK dairy Co-ops who are at last reflecting true market returns.

Although for now it is only Milk Link, the country’s largest cheese maker, with a portfolio of quality award winning cheeses, which has attained this position in the market place.  It has been a long, difficult 10 years but at last there is a strong farmer owned Co-op in the market place” says Nick Holt-Martyn, Director of The Dairy Group.  “The role of the Co-ops is to return as much of the market returns to the farm suppliers, which also puts pressure on other milk buyers to do the same.  Until the Co-ops had become established, robust, competitive dairy businesses they were unable to apply any pressure.  There have been one or two false dawns which ended in disaster along the way but now hopefully, Milk Link has achieved their place in the industry.”

He goes on to say “the response by the PLCs will probably be muted as the commodity market cools and they wait out any price increases for as long as possible.  PLCs only need to pay a price that brings and retains sufficient direct supply.  The outcome is a closing up of the range in milk prices and less advantage to changing buyer.

The commodity market may have cooled a little, but the farm gate price still lags below the market value and further rises are on the cards over the next few months.  Milk supply has generally improved in the northern hemisphere, but only sufficiently to keep up with rising demand, so while stocks in the southern hemisphere remain low the market should remain firm.  Until the southern hemisphere new season gets well underway towards the end of the year, the market should stabilise allowing farm gate prices to catch up the 2 ppl gap with the Market Price Equivalent (MPE).”

Market Prices
Commodity markets have cooled with declines in all commodities, but the overall market returns remain high.  The cheese returns have been affected by the reductions in the value of the surplus butter rather than any change in the cheese market itself.  Cream and butter slip back due to sales out of intervention, but are generally stable.  The Market Price Equivalent (MPE) eases to 27.19 ppl, with market returns up 2.54 ppl on the year and up 0.98 ppl since February 2010.  All the price indices have eased and there are signs in the whey price that commodity prices will ease further as the summer progresses.

Farm-gate Prices
Despite the easing of market returns outlined above, the gap between market returns and farm gate prices has barely narrowed; indicating further farm gate increases are due.  The rises are beginning to show in the rolling Defra Farm Gate price with a rise to 24.02 ppl in June which will continue as price rises feed through.  There are concerns about the quantity of winter forage and the high cost of protein and energy feeds, which will require higher milk prices to maintain farmer margins.  Stable market returns should deliver milk price increases across the whole industry over the next few months.

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