MPI– not a spot price

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The UFU Milk Price Indicator (MPI) provides an indicative pence per litre figure of what dairy markets are returning and is based upon a basket of dairy commodities relevant to Northern Ireland; Cheese; Whey Powder; Butter, Skimmed Milk Powder and Whole Milk Powder.

The MPI is a hybrid of the industry recognised AMPE (Actual Milk Price Equivalent) and the MCVE (Milk for Cheese Value Equivalent) calculations. The UFU MPI does not include transport charges nor processor margin. Some processors do not apply a haulage charge, which means that it is better to omit it from the calculation. With processor margin not available from any source, it cannot be included. Added to this, in a recent Dairy Co/AHDB commissioned review, any inclusion of processor margin and transport costs within AMPE and MCVE was questioned.

What is important to note is that the correlation to dairy commodity prices means that there is a six week time lag associated with MPI, but that does not make it a spot price.

Let us consider what the broad definition of what a spot price is. It is the current market price at which an asset is bought or sold for immediate payment and delivery. Spot prices are continually changing and they fluctuate according to varying supply and demand. Already by this definition, we can see that this is a completely different entity to the UFU MPI. This overarching difference is further illustrated when you look at the spot price of milk.

What about the spot price for milk? It is a price on the day for marginal milk volumes that have not been bought by a dairy processor. Spot milk prices are known to be driven by, for example, liquid processors needing to source “top-up” milk needed to meet orders. When milk production is lower than expected, liquid processors will likely also have less milk from their own farmer suppliers, and as a result will look to buy milk on the spot market to fill the gap.

Relatively small volumes of milk are sold on spot markets. When spot milk prices are rapidly rising, it is a sign that there is very little “spare” milk available. Consequently, spot milk prices generally have no significant impact on short-term farmgate prices.

Graph One illustrates 12 months of Spot Milk Prices, NI Base Milk Prices and the UFU MPI.

From July to September 2017, the Spot Price for Milk (illustrated by the blue line) hovered in or around the 40ppl mark and reflected an unexpected shortage in milk. You will see that at the same time, the base prices paid in Northern Ireland (red line) were significantly lower.

Graph One also illustrates how accurate the UFU MPI is when compared to local base milk prices. The green and red lines, monthly MPI and Base Milk Prices respectively are closely correlated, showing just how accurate the UFU MPI has been over the last 12 months.

While the UFU MPI is not a spot price, it continues to be a very accurate indicator/guideline on local milk prices which is available to local dairy farmers.

The UFU MPI is published fortnightly with an analytical commentary in UFU Watch. It can also be found on the UFU website and via the UFU Facebook and Twitter pages.