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Arla Foods UK plc and AFMP has agreed changes to its pricing structure with its dedicated suppliers, so that the price paid to producers will more accurately reflect market demand and the need to fully balance milk supply to the business.
Transition
This is part of the move to market related pricing announced to Arla Foods Milk Partnership members in January this year. It supports a long-term strategy to encourage farmers to produce milk with a composition that reflects market demand and on a profile that matches Arla's, mainly, liquid milk customers.
"Farmers producing milk with butterfat between 3.7 per cent and 3.9 per cent, and those who accurately forecast and execute a flat delivery profile, will be least affected." said Peter Walker, Arla's Director of Milk Buying.
"It is about encouraging the whole chain to work together to meet market demands. We are not telling farmers that they have to change their profile - we are presenting the pricing structure that reflects the market place. They must make their own decision about how to respond. Those who supply a level profile, accurately forecast and supply milk with the composition the market demands will benefit."
Outline
Key elements of the new structure are:
* From April 2007, there will be no penalty for producers who agree and deliver against a level profile. Those varying from an agreed profile will incur penalties according to the degree of variation within their profile. Full details will be announced in September 2006.
* As an interim measure, the base price for Arla's supplying farms will fall by 0.4 pence per litre (ppl) from June 1 to reflect core balancing costs.
* There will be a further balancing deduction of 0.45ppl for July, August and September for those farms falling plus or minus 10 per cent outside the core delivery contract. This will be removed in October and November and reinstated in December through to March 2007.
* There will be a reduction in the premium paid for butterfat - from 1.5ppl to 0.5ppl per one per cent fat over 3.7 per cent.
"Realigning the pricing structure is important for achieving long-term market stability. Of course we acknowledge that any reduction in the headline price is not good news. We want to work with farmers and encourage them to produce milk with a composition that the market demands and on a profile which fits our customer requirements," said Peter Walker.
"Today, processors supplying the liquid market require ever lower levels of butterfat. Defra's statistical report, Family Food 2004 - 2005, published last week, revealed that whole milk sales have fallen by 17 per cent in the period while skimmed and semi-skimmed sales had risen by five per cent, such that semi and skimmed volumes now account for around three quarters of the total market. In addition, this summer the next reduction in EU support for the dairy industry will kick in, further undermining the market price for butter. Market related pricing requires inclusion of all these factors.
"Balancing supply carries a cost. In the past, we balanced supply and demand by varying intake from the co-ops and requiring them to be flexible. However, now that Arla Foods Milk Partnership provides more than 80 per cent of our requirements we and AFMP have to assume responsibility for balancing."
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