Wholesale dairy prices in the UK have risen sharply in recent months and market momentum should keep them buoyant, at least in the short term. But will this translate into higher consumer prices?
If we take retail and wholesale prices for Mild Cheddar as an example, we can see that historically the retail price is much more stable than the wholesale price:
- Between January 2014 and April 2016, the wholesale price fell by £1,775/t. Meanwhile, the average retail price only bottomed out in June 2016 and only fell by £788/t between January 2014 and that point, according to Kantar data.
- When the wholesale price then jumped again for wholesale – increasing by £1,575/t between April and December 2016, retail prices only really started to rise again at the end of the year, and only increased by £250/t between November 2016 and April 2017.
Prior to the recent price hike, the wholesale mild cheddar market had been stable for some time. In November 2018, the margin between wholesale and retail prices was £2,695/t. By July 2021 it had shrunk from just £385 to £2,310/t, partly due to a slight increase in the wholesale price and also a gradual decline in the retail price. However, in November 2021 (the most recent month for which we have retail data), a sharp rise in the Cheddar wholesale price meant the margin had shrunk from £490 to £1,820/t in just 4 month. Assuming the retail price remains unchanged for January, the margin will be just £1,500 per tonne, the smallest it has been on our records – dating back nine years.
What happens next?
It’s not as simple as saying that because wholesale prices have gone up, retail prices should go up as well. Most retail purchases are made on long-term contracts, rather than spot prices. However, when spot price increases are sustained, processors will understandably compare the returns they can obtain through different market channels. In other words, spot prices will influence contract prices when trading. On the other hand, the average retail price is based on what is paid by buyers. If retailer prices rise, some shoppers tend to opt for cheaper products, resulting in less fluctuation in the overall average price.
It is not just the wholesale price of cheese that will affect processors’ selling prices. The margin between the retail price and the wholesale price should cover all the costs of transporting the product in bulk from the factory to the shelf – cutting, packaging, packaging, transport and labor. These costs have increased significantly over the past year.
With the upward pressure coming from all these different aspects, it becomes more and more likely that retailers will have to raise their prices. But the pressure to control consumer price inflation will fight against this, making it a key point of vigilance in the months to come.