Problem Definition
Meadowvale Dairy is a farmer-owned co-operative in the South West of England. Its 150 member farms produce about 300 million litres of milk a year, or roughly 2 million litres per farm, a little above the approximately 1.7 million litres of a typical UK dairy farm. The co-operative does not bottle milk itself. It collects milk from its members and sells it on.
Half of Meadowvale's milk (150 million litres a year) goes to a national supermarket chain, referred to here as "the Retailer", under an aligned contract. The Retailer's appointed processor bottles the milk as the Retailer's own-label fresh milk. In return, the Retailer pays a price based on farmers' cost of production rather than on the volatile commodity market. The aligned price has been 45p per litre for the past year. That is roughly the top of the UK market, where the highest aligned contracts pay approximately 45p per litre. The other 150 million litres are sold on standard contracts to cheese and butter manufacturers, at close to the UK average farmgate price.
UK milk prices have dropped sharply. The UK average farmgate price fell from approximately 43p per litre in mid-2025 to approximately 35–37p per litre in summer 2026, following record UK milk deliveries in 2025. The Retailer's buying director has written to Meadowvale's board. She argues that the aligned price is now 8p above the market and proposes cutting it to 40p per litre from next quarter.
The board has asked your team for advice: Should Meadowvale accept 40p per litre? If not, what price should it counter-propose, and how should it justify that price to the Retailer?
Additional InformationAsk for dataInterviewer’s data
If asked, please share that:
- The aligned contract has 14 months left to run. Under the Fair Dealing Obligations (Milk) Regulations 2024, the price mechanism in a milk contract must be set out in writing, and neither party can change the contract terms on its own
- Meadowvale's members have an average cost of production of approximately 41p per litre (see Exhibit 1)
- The Retailer sells its own-label milk at about the GB average retail price of approximately £1.70 for a 4-pint bottle
- Meadowvale's milk meets the Retailer's welfare, antibiotic-use and carbon-reporting standards, which took members two years to reach
- The co-operative has no other buyer lined up for the aligned volume
Question 1Structuring
How would you approach the question of what price Meadowvale should accept or counter-propose?
Hint · Structuring
Build 3–4 branches that are specific to this client and question, not a generic framework. Check they don't overlap and together cover the problem.
Additional InformationAsk for dataInterviewer’s data
- The Retailer's own-label milk is one of its highest-volume grocery lines and is often used as a price signal to shoppers
- Great Britain has approximately 7,000 dairy producers, down about 2.6% in a year and down about 85% since 1980
Try it first, then checkCheck my answerModel answer
A strong structure has three branches:
1. Meadowvale's price floor
- a) Members' cost of production per litre (average and spread across farms)
- b) Meadowvale's alternative if it walks away: selling 150 million extra litres on standard contracts, at a time when the market already has surplus milk
- c) Blended price members receive across aligned and standard milk, and whether farms stay viable at that price
2. The Retailer's price ceiling and alternatives
- a) The Retailer's margin on own-label milk (retail price minus farmgate, processing and haulage)
- b) The Retailer's alternatives: switching to another aligned group, or buying on standard contracts, and the cost and time of re-auditing new farms
- c) Reputational risk: public commitments to "fair" farmgate prices, and media attention on milk prices
3. Value and terms beyond price
- a) Standards Meadowvale already meets (welfare, antibiotics, carbon data)
- b) Length of contract, review frequency, price formula, and bonuses tied to sustainability
- c) Legal framework: the Fair Dealing Obligations (Milk) Regulations 2024 require a written price mechanism and stop either side changing the contract on its own
Key assumptions to flag: whether the Retailer's processing and haulage costs have also changed, and how quickly the market price is expected to recover.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate will lay out a structure with a clear price floor (Meadowvale's costs and its alternatives) and a price ceiling (what the Retailer could pay and what its alternatives are). A strong candidate will frame the question as a negotiation, with each side's walk-away option (BATNA). An excellent candidate will also bring in the value Meadowvale provides beyond the milk itself, such as secure supply, audited welfare standards and a sustainability story, and will mention that the contract terms and the Fair Dealing regulations limit what the Retailer can impose.
If the candidate jumps straight to "compare 45p with the market price", ask: "Why would a retailer ever pay above market price in the first place?"
So What? cascade:
- Level 1: the Retailer wants 5p less per litre, and the market price has fallen
- Level 2: the aligned price was never meant to follow the market. It is a cost-of-production price that buys security of supply and standards
- Level 3: the right counter-offer is set by Meadowvale's costs, its walk-away option and the Retailer's own margin, not by the spot price alone
Question 2Numeracy
What is the financial impact on Meadowvale of (a) accepting 40p per litre and (b) walking away from the Retailer? What does each option mean for the price members receive?
Hint · Numeracy
Write the formula before you plug in numbers, keep units and zeros explicit, and sanity-check the order of magnitude at the end.
Exhibit 1Meadowvale Member Cost of Production (average of 150 farms, pence per litre)
| Cost item | Pence per litre |
|---|---|
| Purchased feed | 13.5 |
| Labour (including unpaid family labour) | 7.5 |
| Vet, breeding, bedding and other variable costs | 5.0 |
| Energy and fuel | 3.0 |
| Machinery and repairs | 4.0 |
| Rent and finance | 4.0 |
| Depreciation | 4.0 |
| Total cost of production | 41.0 |
Lowest-cost quarter of members: approximately 36p per litre. Highest-cost quarter: approximately 46p per litre. Industry estimates put typical UK costs at approximately 40p per litre or more, depending on the farming system.
Source: Meadowvale Dairy case file
Additional InformationAsk for dataInterviewer’s data
Share Exhibit 1 and the following:
- Aligned volume: 150 million litres a year; standard-contract volume: 150 million litres a year
- Standard contracts currently pay approximately 37p per litre, in line with the UK average farmgate price for August 2026
- If Meadowvale walks away, it can sell the extra 150 million litres on standard contracts, but it would net only about 36p per litre after extra haulage to more distant manufacturers
Try it first, then checkCheck my answerModel answer
Step 1: Today's aligned revenue
- 150M litres x £0.45 = £67.5M
Step 2: Option (a), accept 40p per litre
- 150M litres x £0.40 = £60.0M
- Revenue lost: £67.5M − £60.0M = £7.5M a year
- Per member farm: £7.5M / 150 farms = £50,000 a year (each farm supplies 1M aligned litres x 5p)
Step 3: Option (b), walk away
- 150M litres x £0.36 = £54.0M
- Revenue lost vs. today: £67.5M − £54.0M = £13.5M a year
- Compared with accepting 40p: £60.0M − £54.0M = £6.0M a year worse
Step 4: Blended price members receive (across all 300M litres)
| Scenario | Aligned milk | Standard milk | Blended price | vs. 41p cost |
|---|---|---|---|---|
| Today | 150M at 45p | 150M at 37p | (45 + 37) / 2 = 41.0p | Break-even |
| Accept 40p | 150M at 40p | 150M at 37p | (40 + 37) / 2 = 38.5p | −2.5p (−£7.5M on 300M litres) |
| Walk away | 150M at 36p | 150M at 37p | (36 + 37) / 2 = 36.5p | −4.5p (−£13.5M on 300M litres) |
Insight: At today's prices the co-operative as a whole only just breaks even. Only the aligned contract keeps members at break-even. Accepting 40p would push the average member below cost. Walking away would be far worse. Meadowvale needs a counter-offer the Retailer can accept, not a refusal.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
The maths is simple. The goal is for the candidate to compare the options cleanly and connect the result back to members' costs. A good candidate calculates both options correctly. A strong candidate calculates the blended price per litre and compares it with the 41p cost of production. An excellent candidate sees that accepting 40p is painful but walking away is worse, so Meadowvale's position is weaker than it looks, and it needs a smarter counter-offer rather than a flat refusal.
Question 3Judgement & Insights
The buying director says the aligned price is "8p above market". Using Exhibits 2 and 3, what arguments can Meadowvale use in the negotiation?
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
Exhibit 2UK Milk Price Trends
| Measure | Mid/late 2025 | 2026 | Change |
|---|---|---|---|
| GB average farmgate price, June (pence per litre) | 43.2 | 34.7 | −19.8% |
| UK average farmgate price (pence per litre) | 40.3 (Dec 2025) | 36.9 (Aug 2026) | −8.4% |
| GB average retail price, 4-pint bottle (pence), September | 154 | 170 | +10.4% |
| Share of UK milk processed into liquid milk | 40% (full-year 2025) | 38% (first half 2026) | −2 pts |
UK milk deliveries reached a record of approximately 15.75 billion litres in 2025, up about 5% on 2024.
Source: Meadowvale Dairy case file
Exhibit 3Own-Label Milk Value Chain (pence per litre, approximate)
| Component | Sept 2025 | Sept 2026 (at 45p) | Sept 2026 (at proposed 40p) |
|---|---|---|---|
| Retail price per litre (4 pints = 2.272 litres) | 68 | 75 | 75 |
| Farmgate price paid to Meadowvale | 45 | 45 | 40 |
| Processing, packaging and haulage (Meadowvale estimate) | 17 | 17 | 17 |
| Retailer gross margin | 6 | 13 | 18 |
Retail price per litre: 154p / 2.272 = approximately 68p; 170p / 2.272 = approximately 75p.
Source: Meadowvale Dairy case file
Additional InformationAsk for dataInterviewer’s data
- Share Exhibits 2 and 3
- The processing, packaging and haulage cost in Exhibit 3 is Meadowvale's own estimate, assumed unchanged year on year
Try it first, then checkCheck my answerModel answer
Argument 1: The Retailer's margin has already more than doubled
- Retailer margin per litre rose from approximately 6p to 13p (+7p) while the farmgate price stayed at 45p
- On Meadowvale's 150M litres, that is 150M x £0.07 = £10.5M a year of extra margin for the Retailer
- The proposed cut would add a further 150M x £0.05 = £7.5M, pushing the Retailer's margin to 18p per litre, three times last year's
Argument 2: "Market price" is the wrong comparison
- The spot price is low because of a temporary surplus (record 2025 deliveries). Liquid milk is a shrinking share of UK milk (40% to 38%), so the manufacturing market sets the spot price, not the fresh milk market
- The aligned price was designed to follow cost of production. At 41p average cost, 40p is below cost for the average member
Argument 3: The cost of replacing Meadowvale is real
- The number of GB dairy farms keeps falling (about 2.6% a year). A retailer that pushes suppliers below cost risks losing audited, standards-compliant supply when the market turns
- Re-auditing new farms to the Retailer's welfare and carbon standards would take time. Meadowvale's members needed two years
Caveat to acknowledge: the 17p processing cost is an estimate. If the Retailer can show its processing, energy or packaging costs rose sharply, part of the higher margin disappears. Meadowvale should ask for the Retailer's cost data.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate reads the exhibits correctly: farmgate prices have fallen while the retail price has risen. A strong candidate works out the Retailer's margin per litre and sees that it has roughly doubled. An excellent candidate turns this into a negotiation argument in money terms (the Retailer already gains more on Meadowvale's milk from the retail price rise than it would save from the 5p cut). The candidate should also question the assumption of a flat processing cost, since energy and packaging costs may have risen.
Push back if the candidate says "the Retailer is being greedy". Ask what the Retailer's reply would be, for example that it also has higher wage and energy costs.
So What? cascade:
- Level 1: market milk prices fell by roughly 20% while the retail price rose by roughly 10%
- Level 2: the Retailer's margin on own-label milk has roughly doubled, from approximately 6p to 13p per litre
- Level 3: the Retailer can afford to keep a cost-based price. Meadowvale should argue with the value chain and its own cost data, not with the spot price
Question 4Synthesis
The board meets the Retailer next week. What price and terms should Meadowvale propose, and what is the financial outcome?
Hint · Synthesis
Answer first: the recommendation, two or three reasons with numbers, then risks and next steps.
Additional InformationAsk for dataInterviewer’s data
- Other UK retailers pay aligned farmers bonuses of up to about 2.5p per litre for meeting sustainability targets (emissions, animal health, feed efficiency)
- The Fair Dealing regulations allow a variable price if the factors that set it are written into the contract and the way the price is set can be independently verified
- The Retailer's buying director has hinted she needs "a visible reduction" she can report internally
Try it first, then checkCheck my answerModel answer
Recommendation: counter with a cost-based formula at 43p per litre, plus a sustainability bonus
1. The price formula
- Aligned price = members' audited average cost of production + 2p margin, reviewed every quarter (a variable price is allowed under the Fair Dealing regulations if the formula is written into the contract and can be verified)
- Today that gives 41p + 2p = 43p per litre
- Floor of 40p and cap of 48p, so both sides are protected from extreme swings
2. Sustainability bonus of up to 2p per litre for farms that meet emissions and animal-health targets (in line with bonuses of up to about 2.5p per litre paid elsewhere in the market)
3. Financial outcome
| Metric | Today (45p) | Retailer ask (40p) | Counter (43p) |
|---|---|---|---|
| Meadowvale aligned revenue | £67.5M | £60.0M | 150M x £0.43 = £64.5M |
| Change vs. today | — | −£7.5M | −£3.0M |
| Retailer margin per litre (75p − farmgate − 17p) | 13p | 18p | 15p |
| Members' blended price | 41.0p | 38.5p | (43 + 37) / 2 = 40.0p |
- If half the aligned volume (75M litres) earns the 2p bonus: 75M x £0.02 = £1.5M, bringing aligned revenue to £66.0M, only £1.5M below today
- The Retailer can report a 2p headline reduction, and its margin still rises from 13p to 15p per litre, more than double last year's 6p
4. What Meadowvale must do itself
- At 40p blended against a 41p cost, members are still about 1p per litre below cost on average. Meadowvale should help high-cost members (46p) improve feed efficiency and should look for better-paying outlets for its standard-contract milk
- Offer a longer contract (for example three years) in exchange for the formula. The Retailer gets certainty, and members get a price they can plan around
Walk-away point: do not go below 41p, the average cost of production. Below that, the contract destroys value for the average member. At that point the board should start looking for another aligned buyer during the 14 months left on the contract.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate gives a specific counter-price with a rationale. A strong candidate proposes a transparent price formula rather than a single number, and quantifies the outcome for both sides. An excellent candidate lets the Retailer show a reduction while protecting members, for example with a sustainability bonus, and admits that Meadowvale also needs to work on its own costs because the blended price stays slightly below cost.
Data Sources
Market facts in this case come from the public sources below. Meadowvale Dairy, its members and the Retailer are fictional. Company-specific figures (volumes, member costs, the 17p processing estimate) are illustrative and consistent with these benchmarks.
| Fact used in the case | Publisher, title, year | URL |
|---|---|---|
| UK average farmgate milk price 36.89ppl in Aug 2026 (35.47ppl in July); GB average 34.65ppl in June 2026 vs 43.21ppl in June 2025 (−19.8%) | AHDB, "UK farmgate milk prices", 2026 | https://ahdb.org.uk/dairy/uk-farmgate-milk-prices |
| UK average farmgate milk price 40.29ppl in December 2025 | Defra / GOV.UK, "United Kingdom milk prices and composition of milk – statistics notice (data for December 2025)", 2026 | https://www.gov.uk/government/statistics/uk-milk-prices-and-composition-of-milk/united-kingdom-milk-prices-and-composition-of-milk-statistics-notice-data-for-december-2025 |
| GB average retail price of a 4-pint pack of milk 170p (Sept 2026) vs 154p (Sept 2025), +10.4% | AHDB, "GB retail prices" (Nielsen Homescan data), 2026 | https://ahdb.org.uk/dairy/gb-retail-prices |
| UK milk deliveries a record 15.75bn litres in 2025 (+5%); 40% processed into liquid milk in 2025 vs 45% in 2015, 38% in H1 2026 | AHDB, "Milk utilisation trends: cheese, milk powders, butter and yogurt production on the rise", 2026 | https://ahdb.org.uk/news/milk-utilisation-trends-cheese-milk-powders-butter-and-yogurt-production-on-the-rise |
| Highest aligned retailer contracts approximately 45p per litre, gap of up to 16p per litre to non-aligned contracts; production costs of approximately 40p per litre; 7,010 GB dairy producers (Oct 2025), −2.6% year on year, down about 85% since 1980; typical farm produces approximately 1.7M litres | Farmers Weekly, "Analysis: Milk price crash tests dairy resilience", 2026 | https://www.fwi.co.uk/business/markets-and-trends/dairy-markets/analysis-milk-price-crash-tests-dairy-resilience |
| Cost of production of 40p per litre and above, 40–49p depending on the system | The Bullvine, "UK milk price 2026: why your contract decides survival", 2026 | https://www.thebullvine.com/news/uk-milk-price-contract-gap-2026/ |
| Fair Dealing Obligations (Milk) Regulations 2024: in force 9 July 2024; price factors must be set out in the contract; variable-price contracts must include a verification procedure for how the price is set; no one-sided changes to the contract; enforced by the Agricultural Supply Chain Adjudicator | UK Government, "The Fair Dealing Obligations (Milk) Regulations 2024" (SI 2024/537), 2024; Foot Anstey, "A summary of the new Fair Dealing Obligations (Milk) Regulations 2024", 2024 | https://www.legislation.gov.uk/uksi/2024/537/made ; https://www.footanstey.com/our-insights/articles-news/a-summary-of-the-new-fair-dealing-obligations-milk-regulations-2024/ |
| Sustainability bonus of up to 2.5p per litre paid to aligned dairy farmers who meet emissions, animal health and efficiency targets | Retail Gazette, "Tesco farmers to receive almost £10m in green incentives", 2025 | https://www.retailgazette.co.uk/blog/2025/08/tesco-10m-payout/ |
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