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Chart: Why it's worth paying attention to the price of milk

Chart: Why it's worth paying attention to the price of milk
September 26, 2016
Chart: Why it's worth paying attention to the price of milk
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But it's actually something which is important for investors too - particularly those who have food producers in their portfolios.

Milk prices have been steadily falling since late 2013 but there appears to have been a recent supply-side correction which could see them rebound.

According to data from the Department for the Environment, Food and Rural Affairs, current monthly production is roughly 7 per cent lower versus the comparable period in 2015 as lower prices have ushered more farmers out of the industry. By the end of August, milk production was 4.3 per cent below the three-year average and UK milk deliveries for that month were the "lowest since the milk market was deregulated in 1994/1995", according to the Agriculture & Horticulture Development Board.

Analysts at Numis have issued a note on their recent trip to Dairy Crest's (DCG) main site in Davidstow and have considered how the milk price could impact the Davidstow and Cathedral City brands the business owns.

"Past milk price reductions were used to build up good stocks of cheese so a rising pricing trend here is a plus for the future and we can recall at the time of the first half in the 2015/16 financial year update that there was mention in terms of subsequent feedback of stock losses of £5m-£10m for the period.

"These will be less marked in the first half of this financial year (which ends in March 2017)."

Basically, because cheese takes time to mature, the price it sells at can change in relation to the price that was paid for the milk to create it. If milk prices continue on a rising trend, this could be beneficial for Dairy Crest in the short term.

Of course though, as milk prices rise, it will pay its farmers more for the milk it buys now.

Numis notes a planned reduction in June was reversed and 1 pence per litre (ppl) has been paid as of 1 September with a further 1 ppl due in October and another 0.5 ppl in November.

"As a result, the price being paid will be 24.22 ppl as of 1 November (that might have been 19.72 ppl if the prior cut planned had taken place with no subsequent payment rises)," Numis said.

"The extra 2.5 ppl to be paid from 1 September equates to an extra cost of £12.5m per annum given the c.500m litres pa of milk purchased for cheese making."