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A more market related and transparent milk pricing system has been agreed between Arla Foods UK plc and its dedicated supply group, Arla Foods Milk Partnership (AFMP).
Under this new system producer prices will be directly linked to Arla's sales and returns in four key areas:
* branded added value milks
* fresh milk and cream sales
* butter, export cream and skimmed milk powder
* the impact of balancing seasonal variations in milk production to match Arla's needs
The agreement between Arla and its AFMP suppliers incorporates an immediate price reduction of 0.3ppl, with an extra 0.6ppl reduction operating in February and March only, to account for the steady decline in commodity prices since the autumn. Both parties agree that this change will progressively move them away from a pricing system that reacts to others in the market and towards an era of greater stability and transparency.
"The impact of declining commodity returns for cream, butter and skimmed milk powder has resulted in the agreed milk price reduction. But we see it as a stepping-stone to a more stable and transparent future pricing policy. We believe it will help us maintain the benefits from our premium product mix in the future, against the likelihood of falling returns due to CAP reform," said Arla's Director of Milk Buying, Peter Walker.
"Recent improvements in returns from our customers mean that oil and utility inflation is now dealt with for Arla Foods - our customers have responded positively to a coherent and sustainable argument for a processor increase. The impact of reducing commodity prices, addressed in this agreed package, is an entirely separate issue."
The package, incorporating this immediate 'clear the decks' price reduction followed by an increase, was a strategy agreed by the AFMP board. In a letter to his members, AFMP Chairman, Jonathan Ovens said: "Of course this price reduction is unwelcome to all of us, but the AFMP board does believe it is a necessary first step towards a more transparent and predictable milk pricing structure for all of our members.
"In agreeing our new approach with Arla we have had to respond to the impact of falling commodity returns, mainly due to growing consumer demand for low fat milks giving rise to significant volumes of cream.
"We hope this new approach to pricing, which takes account of many of the suggestions from the NFU Vision for the Dairy Industry document published in 2005, will prove to be a significant lead for the rest of the industry. Our intention is to have revised our payment method and have the basis of the new AFMP structure in place by April 2006," he said.
AFMP now supplies some 80 per cent of Arla's total liquid milk requirement. It is to reflect the importance of this arrangement and the need to build further reliability into its dedicated supply chain that Arla and AFMP will now undertake a comprehensive programme of reforms of the Partnership.
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