UK has significantly higher proportion of milk going to liquid market than EU
AHDB said that the UK has a significantly higher proportion of milk going to the liquid market, which is one of the main drivers behind the difference.
In an efficient supply chain, fat and protein payments to farmers reflect the value of milk solids in the end market.
That way if the farmer produces more fat and protein, the end market generates enough additional value to sustainably pay for it.
"Using LTO International Milk Price Comparison and AHDB’s Milk Price Calculator data, we can compare the value of 1% extra butterfat and 1% extra protein for 17 of the main EU milk buyers at a snapshot in time. This includes four of the main non-liquid UK milk buyers.
"Expectation would be those paying more for milk solids, would receive a higher level of milk solids from their suppliers. Unfortunately individual company results are not available to us.
"At country level, the correlation between the rates paid and the milk solids produced is reasonable, apart from a couple of anomalies.
"The rates paid by Ireland and France should be encouraging more milk solids to be produced on farm.
"However, this is a snapshot in time, and changing the output on farm will take many years to achieve.
"It will be interesting to see if the current payment structures are sustained and whether farmers react accordingly.
"Using national averages also brings other challenges. The UK average level of milk solids will be diluted by the large proportion of milk destined for the liquid market.
"Joint haulage arrangements and milk swaps can also muddy the water somewhat; milk paid for by one milk buyer may end up in a competitor’s factory, often into a different end market.
"There are practices, however, being adopted outside the UK that could be beneficial to UK manufacturers.
"For example, a number of milk buyers pay their farmers for milk solids (in €’s per kg of solids) and deduct money for water.
"The logic being that the solids are the valuable part, whereas water adds to transportation and processing costs.
"Some milk buyers are now paying for lactose, as well as butterfat and protein, with prices paid on fixed ratios that are set and reviewed regularly based on the market values of each component.
"We face the prospect of major farm and trade policy changes altering the dynamics of UK agricultural markets over the next few years.
"We should expect this to prompt a look at alternative mechanisms for pricing, risk and reward for farmers.
"Despite a cultural focus on liquid, it is important that the UK does not neglect the true value of milk solids.
"A pricing structure that more accurately reflects the end market for each component would benefit all parties involved, and ultimately lead to a more efficient supply chain," AHDB said. ■