Cheddar Supply Chain Margins 2013/14

Transcription

1 Cheddar Supply Chain Margins 2013/14

2 Contents Introduction: About this report 4 Executive summary 5 Market developments 6 Dairy farm business income 8 Cheddar markets 9 Mild Cheddar margins 11 Mature Cheddar margins 14 Conclusion 17 Appendix 18 While the Agriculture and Horticulture Development Board, operating through its DairyCo division, seeks to ensure that the information contained within this document is accurate at the time of printing, no warranty is given in respect thereof and, to the maximum extent permitted by law, the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained in or omitted from this document. Agriculture and Horticulture Development Board All rights reserved. All figures within this document are as accurate as possible; however, the nature of the information means that all reported figures are averages and approximations. This means that there is a small margin of error from precise figures for individual companies, retailers, contracts, etc. However, all changes should be representative of what has happened over the past decade. 3

3 Introduction: About this report How the Cheddar Supply Chain Margins report is compiled Since 2005, DairyCo has been identifying the main beneficiaries within the dairy supply chain when farmgate, processor, retailer or dairy commodity market prices change. This information was historically collated into the annual Dairy Supply Chain Margins report 1. The information sources for these reports have been farmgate milk prices, wholesale and retail prices on Cheddar cheese. From this data, DairyCo has estimated the gross margins 2 at processor and retailer level, and compared these with calculated gross margins in the previous year to highlight short-term trends. A comparison to gross margins ten years ago is also provided, to indicate longer-term trends. The Cheddar Supply Chain Margins report aims to answer the question of who benefits from changes in prices along the supply chain in the sale of mild and mature Cheddar. This 2014 report provides evidence on the average gross margins made across the 2013/14 milk year, which ran from April 2013 to March Farmgate prices are included but not farm gross margin data as this report focuses specifically on post farmgate margins; information on farm margins can be found in a number of other studies currently available in the industry. How should this information be used? This report provides the transparency and data required to improve farmers understanding of their supply chain. It must be noted that the data provided is an average indication across each part of the supply chain and figures for individual businesses will vary. How to access up-to-date information throughout the year The Dairy Market Weekly and Monthly reports from DairyCo act as a regular guide to changes in the market and prices. Go to dairyco.org.uk/sign-up to sign up to receive these. 1 Reports prior to 2013 include liquid milk supply chain margins. 2 Gross margin is the difference between the selling and buying price. For the purpose of the report, gross margins are calculated as unit gross margins, measuring the unit selling price less the unit cost price (in pence per litre of milk terms). Margins do not account for sales or production costs and are, therefore, not indicative of profit levels. 4

4 Executive Summary Following on from a year of challenging global and domestic production conditions in 2012/13, gross margins along the UK Cheddar supply chain experienced some notable changes in the 2013/14 milk year. The reduced milk volumes in 2012/13 contributed to a depletion of Cheddar stocks in 2013 and the impact of this continued to affect wholesale markets through 2013/14. Although the supply of raw milk in major exporting countries improved in this year, the volumes were still not sufficient to keep up with the growth in global demand for dairy products. Commodity markets responded to this and remained buoyant over the year, adding support to UK farmgate prices. The Defra average farmgate milk price rose to 32.6 pence per litre (ppl) in 2013/14, around 4ppl higher than the average for 2012/13, despite the supply of raw milk in 2013/14 being at its highest level in ten years. In addition to the robust world wholesale markets, other domestic factors also influenced the rise in farmgate prices over the year. A number of processors were aggressively competing for supply and the impact of this on farmgate prices was notable. UK wholesale Cheddar prices were relatively stable over the year following a climb in prices at the end of 2012/13. Consumer demand was stable but domestic supplies had not caught up enough to fully compensate for the drain on stocks from the previous year. Although domestic Cheddar production improved through the latest milk year, it still lagged behind 2011/12 levels and, consequently, Cheddar imports in 2013/14 increased by 8% to around 114,000 tonnes in order to meet the supply gap. Wholesale and farmgate milk prices were both at higher levels in 2013/14 when compared to previous years. Despite this, price competition between the big 5 retailers and the discounters (eg Aldi, Lidl) restrained price increases for Cheddar at the retail level. In addition, sales of budget private label Cheddar grew 16% by volume, while sales of branded Cheddar fell, as retailers moved to provide more of a value offer to consumers. Subsequently, a key finding of this report is that retailers gross margins for Cheddar have decreased over the year, albeit from historically high levels. Processor gross margins were largely stable over the year, as farmgate prices moved in line with the increased wholesale prices. However, processor gross margins may come under pressure in the coming year as global wholesale prices have moved to lower levels in mid-2014, as markets adjust to the improved global supply situation. In addition to the pressure exerted by the rebalancing of world and UK wholesale markets, a continuation of intense price competition at retail level could add further pressure to processor margins. 5

5 Market developments UK milk production was one area of significant change in 2013/14. The total volume of milk produced was the highest since 2004/05 at 13.7 billion litres. This was in stark contrast to 2012/13 when volumes dropped below 13 billion litres, primarily due to challenging weather conditions. Global milk production was also affected in 2012/13 as wet weather and drought hit key exporting regions such as New Zealand and the US. World commodity markets in 2013/14 continued to be influenced by the impact of tight milk supplies from the previous year. Despite the year-on-year growth in global milk volumes in 2013/14, there was still not enough available supply to keep up with the growth in demand. In addition, the global stocks situation was poor; the closing quantity of butter put into EU private storage aid (PSA) in 2013 was 33% lower than in Figure 1: World commodity prices * Source: USDA. * No data collected China s domestic milk production fell sharply during 2013 as a result of disease and regulatory changes to its domestic industry. Consequently, its import demand for milk powders rose significantly, adding further pressure to already high wholesale prices. The average global wholesale price for whole milk powder (WMP) in 2013/14 was almost US$1,300/tonne (37%) higher than in 2012/13 and well above that of Cheddar. The relatively better returns are likely to have encouraged manufacturers to divert milk to the production of milk powders in preference to cheese, affecting the availability of cheeses. In line with global markets, UK wholesale prices also remained high during 2013/14. Prices for fats and skimmed milk powder (SMP) rose sharply at the start of the 2013/14 milk year. Cheddar prices increased at a steadier rate than fats and powders, but rose to around 380/tonne higher than the relatively flat prices over the previous few years. Attractive returns from the fats and powders markets provided opportunities for processors to recoup the added input costs arising from high farmgate prices for raw milk. Therefore, it is likely that any milk not needed to meet contractual requirements would have been diverted into the production of these products rather than cheese, thus maintaining a relatively tight stock situation and supporting wholesale Cheddar prices. 6

6 The increase in UK milk production from September onwards eventually saw record monthly volumes achieved by the end of the milk year. Prices for butter and cream saw the quickest reaction to this, declining from around September, while mild Cheddar prices did not start to fall until the spring. Figure 2: UK wholesale prices * Source: AHDB/DairyCo. * No data collected In response to improved returns from the robust wholesale markets and competition for raw milk supplies between milk buyers, UK farmgate milk prices began to increase in June Month-on-month increases continued from June and eventually reached a peak of 34.55ppl in November an increase of more than 4ppl from the start of the milk year. The market conditions also meant that farmgate prices in 2013 displayed less seasonality than in previous years. GB and Northern Ireland (NI) average farmgate prices tracked closely throughout the 2013/14 milk year, with the NI price 0.2ppl higher on average over the year; in 2012/13, it was 2.5ppl less than the GB price. As more of NI s raw milk is destined for export markets its farmgate price reacts more quickly than GB prices. Consequently, the decline in world commodity markets at the start of 2014 led to the NI price in May 2014 being 2ppl lower than in GB. GB farmgate prices remain less volatile due to the influence of the domestic liquid milk market, which accounts for around 50% of raw milk production. 7

7 Figure 3: Average farmgate milk prices Source: Defra, RERAD, DARD, AHDB/DairyCo. Dairy farm business income Higher farmgate milk prices and increased production, combined with an easing of cost pressure, led to higher dairy farm incomes in 2013/14. The provisional Defra average farm business income value shows a substantial increase over the year for all UK regions with available provisional income figures. Table 1: Average dairy farm business income per Farm England Wales Scotland N.Ireland UK 2009/10 59,000 47,500 80,000 20,000 50, /11 66,000 57,500 78,000 51,500 56, /12 86,500 68,000 82,000 58,000 77, /13 51,500 45,000 45,500 28,000 45, /14* 101,000 84, , Source: Defra Agriculture in the United Kingdom *provisional Accounting years ending on average in February Farm Business Income is the preferred measure for comparisons of farm type and represents the return to all unpaid labour (farmers, spouses and others with an entrepreneurial interest in the farm business) and to all their capital invested in the farm business including land and farm buildings. Although production levels in 2013/14 made a significant recovery from the late cold spring of 2013, input costs at the start of the milk year will have been high for many farmers. This was particularly the case for feed costs, as turnout was delayed and forage stocks were depleted. However, conditions improved significantly in the summer of 2013, boosting milk production, while feed costs started to decline. Consequently, net margins in the latter part of 2013 are likely to have improved the overall average dairy farm business income for the year. 8

8 Cheddar markets Wholesale Cheddar prices rose in 2013/14 following a drop in Cheddar production in 2012/13, which had left stocks low. While the supply of milk to cheese increased in the second half of 2013 and into 2014, this did not result in an over-supply to the market as manufacturers needed to replenish stocks. According to Defra, around 36 million litres more milk was utilised for cheese production in 2013/14 than in the previous milk year. UK cheese production in 2013/14 accounted for 27% of the milk utilised that year and, consequently, total UK cheese make was up 2.4% in 2013/14 compared to 2012/13. Despite this, prices maintained their high levels into 2014, as the increased cheese production would have only served to replenish depleted stocks resulting from the large decline in the cheese make in 2012/13 (Figure 4). With domestic supplies under pressure, imports increased from the previous year, with the strengthening Sterling/Euro exchange rate exacerbating this position. Ireland continued to be the main country of origin for the UK s Cheddar imports, accounting for 77% of the 114,000 tonnes imported in 2013/14. However, as a whole, Ireland s share of UK Cheddar imports declined by two percentage points between 2012/13 and 2013/14, as the number of countries supplying the UK increased. Notably, the United States increased exports to the UK from negligible quantities to more than 3,000t in 2013/14. Figure 4: Cheese make v wholesale prices * Source: AHDB/DairyCo, Defra. * No data collected The lack of available supplies meant mild Cheddar wholesale prices improved by 16% over the course of 2013 and were trading at an average of 3,450/tonne by the end of the year. However, prices started to come under pressure at the start of 2014 as the production and stock situation improved, with the average price of mild Cheddar falling by 150/tonne by the end of the 2013/14 milk year. In a similar fashion to the mild Cheddar market, mature Cheddar prices rose steadily in the first few months of the milk year. The average UK wholesale price for mature Cheddar reached a high of 3,650/ tonne by September 2013 and has remained firm since. This is due to the continued lack of available mature Cheddar stocks as the costs involved with manufacturing the product mean little is made outside of contracted volumes. The 2013/14 milk year started with the premium for mature Cheddar over mild Cheddar at its lowest level since 2007, but ended the milk year in March, trading at a more typical premium of 350/tonne. 9

9 In the retail market, the average price for mild Cheddar fell slightly over the year, by the equivalent of 0.2ppl. This is in part due to a fall in the average price of private label varieties, which make up 94% of this market. In addition, budget private label mild Cheddar, which is typically priced lower, increased its market share to 60% in 2013/14, up from 56% in the previous year. Although wholesale prices increased, this was not reflected in average retail prices as retailers tried to keep prices low in order to keep sales volumes up and maintain market share in the face of increased competition from the discounters. In 2013/14, the average retail price for mature Cheddar increased by the equivalent of 0.3ppl in comparison to 2012/13. While the average retail price for private label mature Cheddar fell, due to heightened competition between retailers, this was offset by price increases in the branded category. The average price for branded mature Cheddar, which makes up around half of this market, rose by 1.9ppl over the year, in line with wholesale price increases. 10

10 Mild Cheddar margins Buoyant wholesale markets for mild Cheddar and competition for milk supplies meant farmgate prices rose through the year. Despite the resulting increase in raw milk costs, higher wholesale prices for mild Cheddar have seen processor gross margins remain stable over the year. A summary of the key events impacting the market for mild Cheddar during the 2013/14 milk year is provided in Table 2. Table 2: Key drivers in mild Cheddar markets 2013/14 Key drivers Competition for market share at retail level leads to decline in the average price of private label mild Cheddar over the year Less milk diverted to Cheddar production in 2013 compared to 2012, leading to decreased Cheddar availability Robust wholesale markets throughout 2013 as a result of low supply and strong demand, with prices only declining in early 2014 in response to improved milk production Increased competition between milk buyers for direct suppliers due to investment into processing facilities Source: AHDB/DairyCo. 1st 6 mths Price impact 2nd 6 mths Segment Retail Processor Farmer Farmer Figure 5: Prices and gross margins for mild Cheddar 2000 to 2014 Source: AHDB/DairyCo. In 2013/14, farmgate prices rose by 15% compared to 2012/13, to an average of 32.6ppl. Despite this, processor gross margins in percentage terms have been maintained and actually improved slightly on a pence per litre basis, as wholesale prices rose in line with farmgate prices. The tight supply situation in mild Cheddar markets over the majority of the year kept wholesale prices at high levels. 11

11 As these figures are estimations of processor gross margins, they do not account for any additional revenue or production costs. Therefore, a change in gross margin or the share of retail price does not necessarily equate to a change in profit levels. Differences exist between businesses both along and at the same stages of the supply chain in areas such as cost structure and level of production efficiency, which will determine the relative profitability of a business. The impact of the time lag between milk purchases and cheese sales on margins must be considered; mild Cheddar sold in 2014 is likely to have been manufactured using costly milk, yet wholesale prices have eased compared to those at the latter end of It is also important to note that the processor gross margins listed here do not include any additional income from Cheddar by-products such as whey powder. Average whey powder prices in 2013/14 were 10% higher than in 2012/13, which may have generated opportunities for increased revenue. Table 3: Comparison of mild Cheddar gross margins (Defra farmgate) 2003/ / /04 ppl margin ppl margin ppl margin Milk price Processor gross margin % 2.6 9% 3.1 9% Processor selling price Retail gross margin % % % Retail price Source: AHDB/DairyCo. Note: Retail prices may differ from previous reports due to reweighting of retail prices from Kantar Worldpanel. The increased wholesale prices over the year appear to have had a greater effect on retail gross margins than processor gross margins, as it declined by eight percentage points over the year. In general, retail prices for mild Cheddar have been rising steadily since 2008, however, 2013/14 saw a slight decline in the average retail price. Retail prices continue to be influenced by retail competition, particularly with the growing influence of the discounters such as Aldi and Lidl. Lower priced varieties of mild Cheddar took up a larger share of the market than in 2012/13, as the major retailers move to provide a value offer to consumers in light of increased consumer budgeting and competition from the discounters. Retailers are now seeing their gross margins fall in a similar way to 2007/08, when wholesale Cheddar prices rose sharply due to declining milk production at a time when economic conditions were poor. The milk price used in Table 3 is the Defra average price and reflects prices paid on all milk contracts, regardless of end use. As a premium is typically paid on liquid contracts, particularly those that are retailer-aligned, DairyCo compensates for this by calculating the typical farmgate price for raw milk bought specifically for cheese production. This is done using information from cheese contracts collected for the monthly DairyCo league table and is based on the DairyCo standard litre 3. 3 See 12

12 Table 4 summarises mild Cheddar gross margins using an average farmgate price paid for milk for cheese contracts ie raw milk which is contracted and priced specifically for cheese production. It shows margins over the past two years, with a comparison to gross margins five years ago. Table 4: Comparison of mild Cheddar gross margins (Milk for cheese contracts) 2009/ / /14 ppl margin ppl margin ppl margin Milk price Processor gross margin % % % Processor selling price Retail gross margin % % % Retail price Source: AHDB/DairyCo. Note: Retail prices may differ from previous reports due to reweighting of retail prices from Kantar Worldpanel. Standard litre data was not available by contract type until As such, there is no comparable data for the 2003/04 milk year. While Table 4 provides figures based on cheese contracts only, the changes in gross margins are similar to that observed when considering the average Defra farmgate price. 13

13 Mature Cheddar margins Wholesale prices for mature Cheddar were largely static in 2013/14, having peaked in September This, combined with slightly lower average retail prices as a result of retail competition, has resulted in a decline in retailer gross margins. A summary of the key events impacting the market for mature Cheddar during the 2013/14 milk year is provided in Table 5. Table 5: Key drivers in mature Cheddar markets 2013/14 Key drivers Average price of mature private label Cheddar decreases between 2012/13 and 2013/14 due to increased competition for market share at retail level Less milk diverted to Cheddar production in 2013 compared to 2012, leading to decreased Cheddar availability Robust UK wholesale markets throughout 2013/14 as stocks remain tight as a result of reduced production in 2012/13 Increased competition between milk buyers for raw milk supplies due to investment into processing facilities Source: AHDB/DairyCo. First 6 months Price impact Second 6 months Segment Retail Processor Farmer Farmer Figure 6: Prices and gross margins for mature Cheddar 2000 to 2014 Source: AHDB/DairyCo. Mature Cheddar processor gross margins have fallen slightly over the year as farmgate prices rose and wholesale prices, though higher than the previous year, did not fully compensate for the resultant increase in the cost of milk. With this decline, the processor gross margin for mature Cheddar is now just five percentage points higher than that of mild Cheddar, compared to twelve percentage points five years ago. 14

14 The wholesale price for mature Cheddar rose by the equivalent of 3.7ppl in 2013/14, while farmgate prices rose by 4.2ppl from the previous year. This slight difference resulted in the average processor gross margin being two percentage points lower than in 2012/13. There are increased costs associated with the production of mature Cheddar, due to the longer maturation period compared to mild Cheddar. These additional costs mean manufacturers tend to make this product to contract. As a result, there is less mature Cheddar traded on spot markets compared to mild Cheddar and prices are more stable. In addition to this, the increased maturation time means there is greater potential for changes in farmgate and wholesale prices to impact processor margins. Mature Cheddar sold in the second half of 2013 is likely to have achieved a better margin than that sold in 2014, as farmgate prices in 2012/13 were lower than in 2013/14, while wholesale prices were high. As with mild Cheddar, processor gross margins listed here do not include any additional income from Cheddar by-products such as whey powder. Table 6: Comparison of mature Cheddar gross margins (Defra farmgate) 2003/ / /14 ppl margin ppl margin ppl margin Milk price Processor gross margin % % % Processor selling price Retail gross margin % % % Retail price Source: AHDB/DairyCo. Note: Retail prices may differ from previous reports due to reweighting of retail prices from Kantar Worldpanel. Retail gross margins in the mature market are down by six percentage points from 2012/13, having fallen in a similar way to those of mild Cheddar. This is due to a slight decline in the average price of private label mature Cheddar, which decreased by the equivalent of 0.8ppl, while wholesale prices rose. The market share by volume belonging to private label mature Cheddar has increased over recent years and now makes up 50% of this market. This is still far less than for mild Cheddar, where private label varieties account for 94% of volumes. The average retail price for mature Cheddar fell by more than that of mild Cheddar, as the retail price for mature Cheddar did not start to climb until the end of the milk year. 15

15 Table 7 shows the gross margins for mature Cheddar when using the average farmgate price paid for milk on cheese contracts. It illustrates the effect of the lower average price on estimated processor gross margins, with a comparison to margins in the previous milk year, as well as five years ago. Table 7: Comparison of mature Cheddar gross margins (Milk for cheese contracts) 2003/ / /14 ppl margin ppl margin ppl margin Milk price Processor gross margin % % % Processor selling price Retail gross margin % % % Retail price Source: AHDB/DairyCo. Note: Retail prices may differ from previous reports due to reweighting of retail prices from Kantar Worldpanel. Standard litre data was not available by contract type until As such, there is no comparable data for the 2003/04 milk year. While processor gross margins increased slightly in pence per litre terms when considering milk for cheese contracts, a decline in the gross margins in percentage terms was still observed. However, this decline is less pronounced on these contracts due to the farmgate price being lower than the Defra average. 16

16 Conclusion In line with global markets, the UK dairy industry saw sustained high wholesale prices for dairy commodities in 2013/14. The Cheddar markets climbed to record highs on the back of difficult production conditions in the previous milk year, which led to the depletion of stocks. Farmgate milk prices continued to be led by events in world commodity markets over the year. In addition to this, competition for raw milk supplies provided further support to farmgate prices, as processors looked to retain or build their milk pools in line with company growth plans. Processor gross margins have been maintained in the mild Cheddar market as wholesale prices rose in line with farmgate prices. For mature Cheddar, processor gross margins declined slightly as, although the wholesale price for mature Cheddar was higher in 2013/14, the increase was not enough to fully compensate for the change in farmgate milk prices. The impact of the time lag between milk purchases and cheese sales on margins must also be considered; mild Cheddar sold in 2014 is likely to have been manufactured using costly milk, yet wholesale prices have eased. Retailer gross margins in the Cheddar market are historically strong and remain so despite a fall in the average retail gross margin between 2012/13 and 2013/14. Downward pressure on retail prices was the result of price competition arising from the growth of the discounters, with an increasing number of consumers choosing the discounters for their main shop. Because of this, retailers were less able to pass on increasing wholesale costs to consumers. Predictions of further growth in the discounters market share imply that price competition at retail level will continue at least in the short-term, adding further downward pressure to retailer gross margins. At the moment, the retailers appear to be absorbing the effect of new low pricing strategies arising in response to retail competition. However, if this continues and the wholesale markets rebalance to lower levels, it could start to negatively impact on processor gross margins. 17

17 Appendix Data Sources The following is a list of the data used in this report, the source of the data and its characteristics. Farmgate milk prices Farmgate milk prices are provided by Defra on a monthly basis and represent average prices received by farmers, net of delivery charges and excluding any retrospective bonuses. The prices are obtained by Defra from a monthly survey of registered milk purchasers in England and Wales, which records volume, value and protein content of milk purchased from farms in England and Wales. All major milk purchasers (those purchasing over 2 million litres of milk per year) take part in the survey and approximately 90% of milk purchased from UK farms is accounted for. The Defra published prices are weighted according to the volume of milk purchased and averages are, therefore, influenced by the larger milk purchasers. For the supply chain analysis, annual average farmgate prices are not weighted but are simple averages of the twelve months of data. Milk for cheese contract prices For comparison purposes, a typical price paid for milk for cheese was calculated using the DairyCo standard litre milk prices for a basket of cheese contracts included in the DairyCo league table. These include the Dairy Crest Davidstow contract, First Milk s compositional and Highlands & Islands contracts, Arla s manufacturing contract, and Joseph Heler s and Wyke Farms contracts. Wholesale prices UK wholesale prices for cheese, butter, powders and cream are collected monthly by DairyCo by obtaining quotations from traders and milk processors and indicative prices are published at dairyco.org.uk/market-information/milk-prices-contracts/wholesale-prices/uk-wholesale-prices/ For the supply chain analysis, annual averages are a simple average. For mild and mature Cheddar, prices collected are based on spot prices and relate to larger quantities of a container or more on a delivered price basis per tonne. These figures are then converted by DairyCo to a pence per litre (ppl) equivalent using a conversion factor of 9.4 litres/1kg cheese. This conversion factor has been used for all previous dairy supply chain reports and has been maintained for this report for historical comparisons. Following a review of the market indicator MCVE (Milk for Cheese Value Equivalent) in 2014, a revised conversion factor of 9.3 litres/1kg cheese has been used since April 2014 and therefore future reports will use this conversion. Retail prices Retail prices for Cheddar cheese are obtained from Kantar Worldpanel, which collects survey data from 30,000 consumers in GB on the volume and value of purchases. Annual average prices for both mild and mature private label Cheddar were calculated using 4-weekly data on expenditure and volume of retail sales. As units sold at retail level are recorded in kilograms, DairyCo converts these to a pence per litre (ppl) basis using the same conversion factor as for wholesale prices. 18

18 Agriculture and Horticulture Development Board Stoneleigh Park Kenilworth Warwickshire CV8 2TL T: E: W: dairyco.org.uk DairyCo is a division of the Agriculture and Horticulture Development Board