Dairy giant Müller is introducing changes to its milk contracts which it claims will help stabilise milk prices in the supply chain.

The new structure will affect all its 1300 Müller Direct dairy farmers and will ‘boost stability, competitiveness and transparency’. The contracts will be launched later the spring after a consultation process with the dairy farmers.

Currently, the vast majority of the milk supplied by farmers, about 94%, is used to manufacture dairy products like fresh milk, yoghurt and butter. Müller’s planned new contract will base the payment for this percentage of volume on an independent price methodology.

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The calculation formula is yet to be disclosed, but is thought to be linked to the cost of production, meeting high welfare standards and carbon reduction. Only the remaining 6% of milk supplied would be paid relating to volatile global markets.

Historically, the standard farmgate price paid by Müller, as with most processors, had been heavily influence to global commodity price fluctuations. Only direct suppliers to retailers had the cost of production calculations taken into account for their price.

Head of agriculture at Müller, Richard Collins, said: “This move reflects the value in the fresh milk and dairy products destined for our retail customers, and this will be the bedrock of the milk price we offer.”

He added that independently produced modelling, using available forecasts, suggested the revised Müller contract would ‘provide higher annualised returns for our Müller Direct farmers and less volatility than our current contract offering, while ensuring we can continue to meet our customers’ desire to maintain supply groups to meet their specific needs’.

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“We also know issues such as sustainability and herd welfare are of utmost importance to our customers and consumers, and the high standards we expect from our supplying farmers will be maintained as part of this new revised contract,” he said.

Last year saw record prices across the milk sector, however there is growing concern that in 2023 the market could crash. John Allen, managing partner at Kite Consulting, warned recently that prices could drop as low as 30ppl in the second half of the year. However, the price of production is likely to remain, or even rise from the current estimated average of 45ppl.

Recently, Müller announced that dairy farmers supplying the processors who met the conditions of the processor's 'Advantage' scheme would see a milk price decrease from February to 47ppl. This scheme has around 600 farmers on its books and is aimed at supporting businesses to address a range of issues, such as supply chain collaboration, herd health and reductions in environmental impact.