Price determination and discovery in a ‘de-regulated’ milk market: perspectives on the price of UK milk

Abstract

The de-regulation of the UK milk market, in November 1994, saw the end of sixty years of monopoly control by the Milk Marketing Boards, yet milk prices are currently higher than at any time in the history of the MMB. This paper examines the factors which are likely to determine the price of UK milk in the longer term, both at the aggregate market level and for specific transactions. In the future, all milk users in the UK will have an incentive to increase their capacity utilization and add value to raw milk, to justify a higher milk price. The option of importing liquid milk from the continent will become increasingly attractive as cross-channel links improve and transfer costs fall. The price-fixing mechanism adopted by Milk Marque has resulted in a short-term increase in UK milk prices. In the long run, prices will fluctuate within a band, with intervention prices for butter and skimmed milk powder determining the floor and the cost of transfering milk from the continent determining the ceiling.