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Tesco Cuts Milk Prices - Will other retailers follow?

Geoff Riley

13th April 2023

A glimmer of hope here that cost of living pressures might be starting to ease. Tesco has announced cuts in the retail price of milk in response to a fall in prices in the wholesale market. This is their first cut in milk prices since May 2020 during the teeth of the first pandemic lockdown.

This BBC report provides the details and supports the importance of interdependent decision-making among the leading food retailers in an increasingly contestable oligopoly.

"Bigger supermarkets such as Tesco, Asda and Sainsbury's are having to constantly monitor their prices amid stiff competition from discounters Aldi and Lidl."

It is reassuring to read that the cut in retail prices will not affect the price that supermarkets pay to milk producers especially given the very low profit margins in the milk sector.

According to the Agriculture and Horticulture Development Board (AHDB), the average profit per litre of milk produced in the UK in 2022 was just 0.3 pence. This was down from 0.5 pence in 2021. The decline in profit was due to a number of factors, including rising costs of production, such as feed, fuel, and fertiliser, and a decrease in the price of milk.

The AHDB predicts that the profit per litre of milk produced in the UK will continue to decline in 2023. This is due to the ongoing increase in costs of production and the fact that the price of milk is not expected to rise significantly.

The decline in profit for dairy farmers is a cause for concern. It is making it difficult for farmers to make a living and is leading to some farmers leaving the industry. This could lead to a shortage of milk in the UK in the future.

Where milk leads, other products may follow. Producer price inflation for the UK food sector has been falling for several months and many agricultural commodity prices are now falling outright, so expect more of these reports soon - assuming of course that prices are as flexible when moving downwards as they were when prices surged higher.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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