Monday, 15 October 2012

Milk Quota for Dairy Farmers

Dairy farmers have been feeling the pinch recently but they should still ensure they are keeping up to date with all the latest professional advice because failure to do so could be costly. In this context Milk Quota springs to mind.
Milk Quota is an invention of the European Union (EU) which was introduced in 1984 in order to limit production and nearly 30 years quotas are still with us but how the farming landscape has changed in the intervening years. Back then farmers were subsidised to produce food and the markets were underpinned by intervention support which meant the EU (or EEC as it was then) used to purchase produce when the price fell below a certain level thereby underpinning the market.

This not unsurprisingly led to massive over production as supply was not linked to “demand” and as a result huge stocks of milk and milk products were stockpiled in intervention stores across the EU giving rise to the so called “milk lakes” and “butter mountains”. As a consequence the EU introduced Milk Quotas on 2nd April 1984 which prevented farmers producing more than their allocated quota by imposing penal fines for overproduction.

In the early years following their introduction, the volume of Milk Quota held by a farmer was the most significant limiting factor on production because almost overnight the amount of milk UK farmers could produce had been cut by approaching 20%. This was a hard time for dairy farmers and if they wanted to sustain their level of production they needed to acquire Milk Quota.

Thus a market to buy and sell Milk Quota soon developed and by the mid 1990s when milk prices were high in the immediate aftermath of the de-regulation of the milk industry in 1994, the price of Milk Quota rocketed. Farmers facing fines for overproduction were forced to buy Milk Quota at prices as high as 80p per litre.

However, since then the EU has decoupled subsidies from production and farmers are now exposed to world markets and as a consequence the rules of supply and demand are the primary drivers influencing production and therefore the EU intends scrapping Milk Quota in 2015. But herein lies a potential opportunity for dairy farmers because as production has fallen so too has the demand for Milk Quota which is now only worth in the order on 0.2 p per litre – less than a quarter of one percent of its peak value.

This may not seem like an opportunity but it is in that if a farmer can crystallise this capital loss by selling his Milk Quota and then purchase it back, this capital loss can be “banked” now and can be offset against any capital gains in the future. So, dairy farmers who have not already taken advantage of this opportunity should do so without delay although tenants should be aware that consent of their Landlord may well be required to sell Milk Quota.

James Stephen MRICS FAAV
Rural Practice Chartered Surveyor, Wells

T: 01749 683381

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