Rising UK dairy prices squeeze wholesale and retail price margins
February 02, 2022
Retailers are likely to raise prices
In a recent Agriculture and Horticulture Development Board (AHDB) report, dairy analyst Katherine Jack said wholesale dairy prices in the UK had risen sharply in recent months, adding that market momentum should maintain them at least in the short term.
“But will this translate into higher consumer prices? she asked. “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.
According to Kantar data, the wholesale price fell by £1,775/t between January 2014 and April 2016. Meanwhile, the average retail price only bottomed out in June 2016 and fell by only £788/t between January 2014 and this point.
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 rose by £250/t between November 2016 and April 2017, Jack said.
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 data is available, a sharp rise in the wholesale price of cheddar meant the margin had shrunk from £490 to £1,820/t in just 4 months, said Jack .
“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,” she said.
“It’s not as simple as saying that because wholesale prices have gone up, retail prices should also go up,” she added. “Most retail buying is on long-term contracts, rather than spot prices. However, when spot price increases are sustained, processors will rightly compare yields they can obtain through the various market channels. In other words, the spot price will influence the contract prices when trading.”
“On the other hand, the average retail price is based on what buyers pay,” Jack added. “If retailer prices increase, some shoppers tend to opt for cheaper products, resulting in less fluctuation in the overall average price.”
It’s not just the wholesale price of cheese that will affect processor selling prices, Jack said. The margin between the retail price and the wholesale price must cover all the costs of transporting the product in bulk from the factory to the shelf – cutting, packaging, packaging, transport and labor – and these costs have all increased significantly over the past year.
“With the upward pressure coming from all these different aspects, it’s becoming more and more likely that retailers will have to raise their prices,” Jack said. “But, the pressure to keep consumer price inflation under control will fight this, making it a key watchpoint in the months ahead.”