Dairy Supply Chain Margins: H1 2011/12 update
For the purposes of this report, gross margins are calculated as unit gross margins,
measuring the unit selling price less the unit cost price (in pence per litre terms). The
margins do not account for other sales or production costs and are therefore not indicative of
profit levels. However, the gross margins are representative of the value obtained at that
level of the supply chain and analysis of how the margins have changed over time provides
important insight into how market events have impacted on the distribution of the value
within the supply chain.
Liquid Milk Margins
The average retail price for liquid milk in multiple retailers1 increased to 56.6ppl in the first
half of the 2011/12 milk year (Apr to Sep 11), up from an average 56.0ppl in the preceding
six month period. The increase was largely due to the reduction in multi-buy promotions,
resulting in a rise in the average unit milk price.
Nevertheless, the average retail price for liquid milk prices remains low compared to
averages over the last four years as a result of ‘price wars’ among top retailers that started in
the second half of the 2010/11 milk year. Compared with the corresponding period last year,
the average retail milk price over the six month period of Apr to Sep 11 was down by more
than 8%.
Average processor selling prices also fell over the six month period, from an average 37.3ppl
in the second half of 2010/11 to 37.1ppl for the first half of 2011/12. Average processor
selling prices have fallen steadily since peaking at 47.0ppl in the second half of 2008/09.
Processor gross margins were heavily impacted during the first half of the 2011/12 milk year
as a result of the reduction in average selling prices to customers and upward pressure on
farmgate prices paid for milk supplies. At 27.0ppl, the average Defra farmgate price was
approximately 4% higher compared to the second half of 2010/11, and 12% higher year on
year.
The dual impact of higher farmgate milk prices and reduced selling prices resulted in a fall in
processor gross margins, from an average of 30% in the second half of 2010/11 to 27% in
the first six months of 2011/12. The change is more significant year on year. In the first half
of 2010/11, average wholesale gross margins were at 40%.
The recent fall in processor gross margins reflects in part the inability of processors to pass
on higher input costs to retailers, who are faced with maintaining their competitiveness
during the economic downturn. Also impacting on processor gross margins was the upward
pressure on raw milk prices arising from strong commodity markets.
Retail gross margins recorded a slight increase in the first half of the 2011/12 milk year, up
two percentage points on the second half of 2010/11 to 35%, benefitting from the reduced
processor selling price and the small increase in the average retail price.
1
Includes major food retailer chains operating in Great Britain (including discounters), and not including sales
outlets such as garage forecourts and independently owned shops.
Table 1: Comparisons of liquid milk gross margins2
H1 2010/11
H2 2010/11
ppl
margin
ppl margin
Farmgate milk price3
24.2
26.1
Processor gross margin
16.1
40% 11.2
30%
Processor selling price
40.3
37.3
Retail gross margin
21.4
35% 18.7
33%
Retail price
61.7
56.0
2
H1 2011/12
ppl
margin
27.0
10.0
27%
37.0
19.6
35%
56.6
Expressed in percentage terms, the gross margins reflect the proportion of the selling price retained to cover
operational and overhead expenses and to provide for a return on investment/profit.
3
At the farm level, only the average selling price is reported as this there is no effective ‘purchase’ price for the
milk sold, and consistent data on average costs of production was not publically available at time of
publication.
Mild Cheddar
The average retail price of mild Cheddar has remained relatively stable over the last three
years. At 56.4ppl, the average retail price of mild Cheddar in the first half of 2011/12 was just
1% above both the three-year average of 55.3ppl and the average price of 55.5ppl during
the second half of 2010/11.
Average wholesale prices for mild Cheddar, however, have been increasing since the first
half of 2009/10 when they averaged 26.6ppl. At 31.4pl, the average wholesale price for the
first half of 2011/12 was 1.6ppl (5%) higher than the previous six months, and 2.0ppl (7%)
higher year on year.
The impact of the price changes on gross margins for mild cheddar are summarised in Table
2. The retail gross margin fell in the first half of 2011/12 compared with both the previous six
months and year on year. The retail gross margin for mild cheddar fell to 44% as the
increase in average wholesale prices more than exceeded the rise in retail price. It appears
that in the current economic climate, retailers are reluctant to increase mild Cheddar prices
in order to maintain consumer spend. As such, faced with higher average wholesale prices,
retailers have experienced a fall in gross margins.
Processor gross margins recorded a small increase over the last six month period to 14%,
as processors were able to pass on some of the sustained strength in dairy commodity
markets to the retailer. Processor gross margins were, however, down four percentage
points year on year as the relatively larger increase in farmgate prices over the period had a
dampening effect.
Table 2: Comparisons of mild cheddar gross margins4
H1 2010/11
H2 2010/11
ppl
margin
ppl margin
Farmgate milk price5
24.2
26.1
Processor gross margin
5.2
18%
3.7
12%
Processor selling price
29.4
29.8
Retail gross margin
26.5
47% 25.7
46%
Retail price
55.9
55.5
4
H1 2011/12
ppl
margin
27.0
4.4
14%
31.4
25.0
44%
56.4
Expressed in percentage terms, the gross margins reflect the proportion of the selling price retained to cover
operational and overhead expenses and to provide for a return on investment/profit.
5
At the farm level, only the average selling price is reported as this there is no effective ‘purchase’ price for the
milk sold, and consistent data on average costs of production was not publically available at time of
publication.
Mature Cheddar
Prices for mature Cheddar at the retail level reached an average of 66.2ppl in the first half of
2011/12, an increase of almost 4% (2.4ppl) compared to the preceding six months and over
3% (2.2ppl) higher year on year. Much of the increase can be attributed to the reduction in
prevalence of price promotions in the mature Cheddar market, increasing the average unit
price.
Wholesale prices for mature Cheddar also increased over the period, both in comparison to
the preceding half year and year on year. The average selling price for mature Cheddar rose
to 34.0ppl in the first half of 2011/12; up 4% from an average of 32.7ppl in the second half of
2010/11 and 6% (2.0ppl) higher than the price in the same period last year.
Gross margins for mature Cheddar are summarised in Table 3. Retail gross margins have
remained relatively unchanged, with retailers able to offset the increase in average
processor selling prices with similar increases in average retail prices. The retail gross
margin for mature Cheddar in percentage terms was 49% for the first half of 2011/12,
remaining in line with the five-year average of 50%.
Processor gross margins in the first half of the 2011/12 milk year, at 7.0ppl (21%), were 11%
lower year on year, but marginally up on the second half of 2010/11. While farmgate milk
prices increased by over 3% in the first six months of 2011/12, the relatively larger increase
in selling prices for mature Cheddar (up 4%) resulted in gross margins increasing by one
percentage point. The ability of processors to achieve price increases for mature Cheddar is
likely due to the sustained strength of worldwide commodity markets, combined with the
prevalence of brands in this market segment.
Table 3: Comparisons of mature cheddar gross margins6
H1 2010/11
H2 2010/11
ppl
margin
ppl margin
Farmgate milk price7
24.2
26.1
Processor gross margin
7.9
25%
6.7
20%
Processor selling price
32.1
32.7
Retail gross margin
31.9
50% 31.1
49%
Retail price
64.0
63.8
6
H1 2011/12
ppl
margin
27.0
7.0
21%
34.0
32.2
49%
66.2
Expressed in percentage terms, the gross margins reflect the proportion of the selling price retained to cover
operational and overhead expenses and to provide for a return on investment/profit.
7
At the farm level, only the average selling price is reported as this there is no effective ‘purchase’ price for the
milk sold, and consistent data on average costs of production was not publically available at time of
publication.
Key findings:
Farmgate prices increased on average by 3.4% in the first six months of the 2011/12
milk year, although year-on-year they are up by 11.6% as commodity markets
remained strong throughout the period. However, it should be noted that on-farm
input costs have been rising at the same time.
Liquid milk processors faced continued pressure on gross margins both due to
upward pressure on farmgate prices and the inability to pass on cost increases to
retailers.
Processor gross margins for both mild and mature Cheddar increased from the
second half of 2010/11 as increased selling prices to retailers helped to mitigate
some of the downward pressure on margins arising from increasing farmgate prices,
but were down year on year.
Retailer gross margins for mild Cheddar fell slightly as retail price increases did not
fully cover higher average wholesale prices.
For mature Cheddar, retailers were able to maintain gross margin levels as less
prevalent discounting, resulting in higher average per unit selling prices,
compensated for higher average wholesale prices.