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Arla Foods UK plc has announced a change to its milk pricing arrangements, which will establish a mechanism to reflect variable returns in the commodity markets.
Starting from 1 October, the price paid to members of Arla Foods Milk Partnership (AFMP) will have two distinct elements. A core price, unchanged from the current price schedule and which will be held between 1 October 2006 and 1 April 2007. The variable element will develop the market-related component, reflecting year-on-year changes in returns from the commodity markets. This will result in additions or reductions from the core price.
"We believe this is a fair and accurate way in which to translate market movements into producer prices," said Peter Walker, Arla Foods Director of Milk Buying. "It is the culmination of many months of negotiations with AFMP and provides us with a transparent and responsive pricing model."
From 1 October, on a month-by-month basis Arla will compare commodity returns between the current month and the same month of the previous year. This will result in a monthly upward or downward price adjustment - current indications being that a small price reduction is likely over the next few months. However, overall, this method removes estimates from the calculation therefore ensuring that, with a time lag of one month, the correct monies are returned to producers on a monthly basis.
"The benefit to our producers is that, if commodity returns continue to strengthen, deductions will continue to reduce and there will be a potential for that to turn into a plus on the milk price. This is the quickest and fairest way we can devise to ensure market reality is reflected in farm-gate milk price," said Mr Walker.
Arla Foods have committed to AFMP, outside of this commodity-adjusting guarantee, the current milk price as a minimum producer price for the six months from the 1 October 2006 to 31 March 2007.
The Board of Arla Foods Milk Partnership has welcomed the agreement. Jonathan Ovens, Chairman of AFMP said:
"These have been tough negotiations as both sides strove for fairness, transparency and stability in milk prices in a difficult and volatile market. We believe we have achieved that and we are particularly pleased to welcome the fact that the core price will remain unchanged for six months."
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