Processing costs for dairy products were subject to further inflationary pressures in the third quarter of 2022, reducing the value of our market indicators AMPE and MCVE.  These changes will be implemented in the January update (due out 27 Jan).

In Q3 2022, electricity costs saw the largest quarterly increase, rising by 28% on average from the previous quarter.  The average costs for gas jumped 6% on the quarter, while overall inflation (as measured by the Consumer Price Index) rose 1.8%.

When compared with year earlier figures, gas and electricity were respectively 78% and 95% higher in Q3 2022, while overall inflation was up by 9%.

The net impact of the latest quarterly cost increases is for the average processing costs within both AMPE and MCVE to move up on the quarter. AMPE costs are now 0.45ppl higher than in the previous quarter, while MCVE costs are up by 0.39ppl on average.

The dominant factor was again the higher energy costs, and their impact on drying cost of SMP and whey powders. However, the steady upward trend in general inflation, and labour costs, is also having an impact. When compared to average processing costs in Q3 2021, AMPE costs have moved up by 2.0ppl and MCVE costs by 1.9ppl.

It is important to note that this latest update only reflects cost inflation to September 2022. The next update will be in April 2023 following the ONS release of the Q4 cost indexes. A breakdown of the latest costs is given below:

The new costs include changes in:

• Energy costs based on the movement in the average prices of gas and electricity purchased by the manufacturing industry in GB as quoted by BEIS, up to Q3 2022.
• Labour costs based on the movement in the unit labour cost for the whole economy as quoted by ONS– these currently only go up to Q2 2022.
• Other costs based on the movement in inflation (CPI) from the 2020 update to Q3 2022

The abbreviations used:

• AMPE (Actual Milk Price Equivalent) is an indicator of the factory gate value of a litre of milk used for butter and skimmed milk powder
• MCVE (Milk for Cheese Value Equivalent) is an indicator of the factory gate value of a litre of milk used for mild Cheddar and whey powder/butter.
• MMV (Milk Market Value) is an indicator of the average market value of a litre of milk based on typical utilisation of milk in the UK.
  Movements in the MMV correlate strongly with changes in farmgate milk prices in 3 months’ time.

Source: AHDB, 04th Jan 2023