Current Monthly Prices

Over the first 20 days of June Sterling against the Euro have seen little change, which has resulted in IMPE being unchanged compared to May. The value of the IMPE in June 2008 was 2.5ppl higher than its level of a year ago illustrating the huge change that has occurred over the past 12 months in the relative values of Sterling and the Euro. Market prices for SMP and butter rose in June and as a result AMPE rose by 0.5ppl compared to May. For the first time in almost two years, year-on-year comparisons show AMPE has fallen below its value in the previous year. This is a reflection of the unprecedented rise in market prices that started in spring 2007 and the subsequent fall in prices that started in the autumn of 2007. For further information on UK Wholesale Prices please click here. The premium of the AMPE over the IMPE rose by 0.5ppl from May to 9.5ppl.

(ppl)	June 2008	1 Month Before	12 Months previously
AMPE	26.7	26.2	27.2
IMPE	17.2*	17.2	14.7
* The prices shown for IMPE relate to the first 20 days of the month

Comparison of AMPE with IMPE

The graph below shows movements of the IMPE and the AMPE from 2003 to 2008.

Movements in the IMPE over the period are due to two factors.

The first is variations in the value of Sterling against the Euro. Intervention prices are fixed in Euros. If Sterling strengthens against the Euro, intervention prices measured in Sterling fall, and so the IMPE falls. When Sterling falls against the Euro, the IMPE rises.

The IMPE has risen during four periods of weakness for Sterling against the Euro in the first half of 2003, the second half of 2004, the second half of 2007 and the first half of 2008. For most of the remainder of the time, Sterling has strengthened against the Euro.

The second reason for movements in the IMPE is a change in the value of intervention, measured in Euros. There were intervention price cuts in July 2004, 2005 and 2006 for butter and SMP; and in July 2007 for butter only under the Mid-Term Review.

The AMPE measures market prices for butter and SMP. These market prices are often affected by changes in currency and the AMPE frequently tracks trend movements in the IMPE. The graph above shows two periods - the second halves of 2004 and 2005 - when market prices did not follow support price cuts under the Mid-Term Review until some six or so months after the cuts took place. On both occasions, there was a fine balance of supply and demand especially for SMP, and market prices only fell when supplies outstripped demand at the start and end of 2005. During 2006, the AMPE parted company significantly with the IMPE. The SMP market remained in a fine balance of supply and demand with no stocks in intervention available to balance market shortfalls: this led to rises in market prices in the second half of the year. A shortfall of supplies to meet world demand in the spring and summer of 2007 caused market prices for butter and SMP to rise strongly to unprecedented levels. Although prices fell between the autumn of 2007 and the spring of 2008, they have started to move up again and remain at historically high levels.

The delay in the fall in market prices in relation to intervention prices in 2004 and 2005 resulted in significant premiums opening up for the AMPE over the IMPE at these times. Even though market prices have fallen back since their highs in the second half of 2007, the AMPE was still at a significant premium of 9.5ppl over the IMPE in June 2008.

Comparison of the adjusted AMPE with UK Milk Producer Prices

One of the measures sometimes used to see whether market place price movements are being reflected through to farm prices is to compare farm prices with the AMPE. In this case, farm prices are calculated from UK Milk Producer prices as published by DEFRA by taking out the effect of seasonality payments and variations in compositional quality through the year. The AMPE is a delivered to dairy price and so for this comparison, a transport deduction of 1.5ppl has been made to put it on a farm gate price basis. The graph shows changes to both factors for the period January 2003 to June 2008.

* The UK producer price is the DEFRA price adjusted to take out the price effects of seasonality additions and deductions and variations in milk quality.
Source: DIN

Because the AMPE has price correlations to the IMPE, it tends to pick up price changes due to currency that affect support prices and markets where imports in particular compete with domestic products (eg Cheddar cheese). In recent years, farm gate prices have broadly followed price trends in the AMPE but on a time-lagged basis: see the movements in both factors in 2003.

The AMPE also reflects some sharp market price changes, such as those that occurred at the end of 2004 and the beginning of 2005, that are not directly reflected in farm gate prices. It does not pick up changes in liquid milk prices which are reflected in farm gate prices, although some liquid dairy companies did adjust their farm gate prices in line with changing support prices during this period.

The correlation between the two measures is imperfect, but even so, when looking at trend lines of the two factors, farm gate prices tracked the AMPE down through 2004 and to a lesser degree in 2005 (but on a smoothed and time-lagged basis). The movements in the AMPE since September 2005 suggested that farm gate prices would fall during 2006 and this was reflected in DEFRA prices. The fall in DEFRA farm gate prices stopped in September 2006 and prices have moved up since that time. There was a slightly stronger upward movement in farm gate prices from March 2007 that gathered pace in the late summer and autumn of 2007. With farm gate prices lagging the AMPE by several months, we have seen farm gate prices rising to unprecedented levels that reached a plateau at the end of 2007: they have held at about that level in the first four months of 2008. After falling for seven consecutive months from its peak in September 2007, the AMPE has started to move up again in May and June 2008 (see graph above).

Note: Further information on IMPE/AMPE can be found by clicking on IMPE/AMPE Guide.