Milk prices are dropping

Despite the beautiful weather, there are clouds overhead as far as many farmers are concerned. Milk purchasers are dropping their milk price, the value of arable crops continue to fall and beef prices, although they appear to have stabilised, are still around 20% down on the price achieved a year ago.

Milk prices appear to be falling because of increased production here in the UK and falling dairy commodity prices across the world. Dairy farmers have certainly seen reasonably good returns in the last 18 months or so but the tide appears to have turned; for instance Dairy Crest has announced a 1.1p per litre reduction on their standard price from 1st September while Arla has announced a 0.94p per litre drop from August.

Arable farmers appear to be facing even tougher times as grain markets continue to fall. There are a number of factors affecting such prices which include a general expectation of heavy crops this harvest and strong sterling which is making British exports less competitive. There is talk of lower yields in the US where some crops have been hit by drought which may reverse the fall in prices but to counter that the Russian grain harvest is forecast to increase. But, at present it appears to be the supply side of the market which is outstripping demand, hence prices are depressed.

As far as the beef sector is concerned, significant losses have already been made by some beef fattening units which bought expensive “store” cattle a year or so ago and now those cattle are ready for slaughter, the finished beef price has fallen to such a level that farmers are unable to recoup the cost of feeding the animals over the last year.

However, there is cautious optimism that the price of beef has at least levelled out and there are the odd signs that prices may start to gently improve but this is not a moment too soon for most beef farmers, who like arable farmers in particular, will find 2014 a very testing year.

Whether we are entering an era of lower commodity prices is not clear; we hear many people talking about the need to feed more mouths across the world and how this should provide a secure future for farmers, but this has not been borne out by the experience of many farmers over the last year or so. What seems clear to me is that farmers must become used to large fluctuations in world commodity markets and as a consequence they will need to make good use of their profits in the good years in order to survive the lean ones.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Arable prices at their lowest for years

As harvest begins, arable prices have fallen to their lowest levels for some years. “Farmers Weekly” figures for last week show feed wheat trading at around £132/t as compared to £162/t a year ago, and similarly feed barley trading at £107/t as compared to £140/t and Oilseed Rape at £235/t compared to £320/t.

In this area I have only seen winter barley being harvested to date although having been in Oxfordshire last Friday I did see combines rolling in the first fields of oilseed rape. It is too early to comment on crop yields but with prices where they are, farmers will need a bumper harvest to prevent significant losses.

Anecdotal evidence from the farmers I have spoken to indicate that although the crops look good, some have suffered from the very wet winter which has impacted yields, particularly on the wetter land while crops on more free draining land have fared better.

In addition to concerns over commodity prices and yields, farmers are also faced with another raft of decisions to be made concerning next year’s cropping which need to be addressed very soon. This is because next year will see the introduction of new rules for European support payments as the Single Payment Scheme is replaced by the new Basic Payment Scheme.

Allied to this scheme are a raft of new “greening measures” to which I have alluded in previous articles. These measures require arable farmers to observe new rules concerning crop diversification and the introduction of so called “Ecological Focus Areas” (EFAs).

Complying with these rules will be predictably complicated and what is clear is that farmers will need to make decisions very soon while the detailed rules are only just emerging. This is further complicated by the fact that the EFA rules will also impact on the payments received by some farmers under existing agri-environment schemes.

In addition many arable farmers who farm land on a “contract farming” basis will now need to treat these areas as a separate holding from their own land. This may sound simple to the uninitiated but it has the potential to threaten the viability of some long standing contract farming arrangements. As a consequence there will need to be detailed discussions between the landowner and contractor in the coming weeks if the payments due under landowner’s Basic Payment Scheme claim in 2015 are not to adversely be affected.

So, after a reasonably good run over the last few years arable farmers are faced with not only low commodity prices but also rule changes from Brussels which will make things more complicated and expensive with no obvious upside for anyone.

If farmers or landowners require advice on this matter they are welcome to contact James Stephen on 01749 683381.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Rise in interest rates is inevitable

A rise in interest rates is inevitable at some point but Will Mooney, Carter Jonas partner and head of its commercial agency and professional services in the eastern region, wonders how soon is now?

A year ago in these pages I was anticipating the end of the central banks’ monetary stimulus for their economonies. In the case of the Bank of England, it was, at that point, the £375 million worth of quantitive easing.

‘Removing the punchbowl just when the party is getting good’ is the phrase attributed to the Federal Reserve’s longest serving head who first coined it to describe the withdrawal of stimulus. Now there’s another central bank party pooper in the form of the threat of interest rate rises. Or rather, it’s the talk of the threat interest rate rises which is the spectre at the feast.

The Bank of England has held its base interest rate at 0.5 per cent for more than five years. At such a record low level, the only certain way is up. But when? And by how much? Such uncertainty could be damaging at worst but is unhelpful at best.

Since the late 17th Century, governments and, subsequently, the Bank of England have used the cost of borrowing as a means of responding to the economic pressures of the times. In the early years of Margaret Thatcher’s administration, in 1981, interest rates rose to an all-time high of 17 per cent. But that was a time before the great push towards property-ownership which has set itself in the psyche of the British public in the successive three decades to the point where it is commonly accepted as the touchstone of daily, domestic economic prosperity.

Now the 2014 property-owning democracy is incredibly twitchy about any talk of interst rate rises even if they are just going to be incremental by those ‘baby steps’ mooted by some commentators. There’s also a slice of homeowners who’ve moved in to the housing market since 2008 and whose lives are highly-geared around access to finance and low interest rates. There are plenty of other homeowners for whom a time when base rates were always in double figures is a dim and distant memory - if they remember it at all.

There is a view that interest rates are too blunt an instrument to control the complexities of a modern economy. But, in early June, when the European Central Bank slashed its deposit rate to below zero – minus 1 per cent – so it actually will cost commercial banks to keep their money centrally, it must have left many a lay person marvelling at the sophistication of economists, financiers and policy makers. Far from blunt.

In order to avoid the economic - and party political - collateral damage a big hike in interest rates could mean, we’re beginning to see policymakers hint at returning to a time when supply and demand mechanisms were deployed by governments in order to control the economy. Specifically, in 2014 , the housing market.

Measures include the new Mortgage Market Review – the pre-mortgage interview recently introduced where lenders look beyond income to consider household expenditure as a factor before making a mortgage offer. Then in his Mansion House speech, the Chancellor of the Exchequer took his own supply and demand ‘baby steps’ in trying to make councils bring forward brownfield sites for development. There are some who say this should go further and developers should be given the right to build on the green belt.

How far it is politically advisable for the coalition administration to try and control supply-side market conditions with a more hands-on approach remains to be seen.

What would be helpful is certainty. The market doesn’t like uncertainty. Endless speculation about rises in borrowing costs at a time when, in my own commercial property sphere, investors are ready to commit to more than ‘baby step’ investments is probably more harmful than the level at which any actual rise will be pegged.

Will Mooney MRICS
Partner
Commercial, Cambridge

News from the 'Beef Summit'

Last week saw DEFRA’s Farming Minister, George Eustice chair a so called “Beef Summit” with a view to dealing with the desperate situation the British Beef Industry finds itself in. In the last year beef prices have plummeted by around 20% which is posing very real problems to beef farmers, particularly those who “finish cattle”.

What is interesting to note here is that most farmers who finish cattle, purchase animals, called “store cattle”, from other farmers usually by auction at livestock markets. Here it is argued there is fair and open competition and thus the price paid represents the true open market value of the livestock purchased.

However, once the animals have been fattened they have to be sold to the dwindling number of abattoirs who in turn sell the majority of meat to the big supermarkets. It is this processor/retailer section of the food chain where the “market” becomes much less transparent. Thus many beef finishers are finding themselves having to compete for stock in the open market and then having to sell at “fixed” prices to abattoirs without any transparent competition in the system.

It was issues such as this that stimulated the beef summit where representatives from farming organisations, processors and retailers met in Westminster to discuss the problems facing beef farmers. The outcome of the meeting was that representatives from the farming unions and the British Meat Processors Association (BMPA) will meet over the summer to discuss a code to increase transparency.

The code will cover how trading terms, abattoir specifications and penalties are communicated to beef producers. This represents one of the areas of concern facing farmers but the retail sector is also another big issue where the perennial problem of clear labelling and fair pricing of meat is important.

Farmers appreciate that markets do go up and down but if supermarkets truly want to retain beef production in this country they need to work with the industry to give some certainty as to what prices are likely to do over a period of time.

To some extent supermarkets such as Waitrose are doing this and have recently announced that they will hold prices at no less than 345p/kg for their producers through to October. Tesco has also started a promotion of beef although from the advert I have seen includes British and Irish beef which illustrates the problem of labelling where nothing ever seems as transparent as it should be – will it be British or Irish beef that you actually have on your plate?

So it seems that although some progress has been made and that a code of conduct will be a good thing, there is a lot more still to be done before British beef farmers will feel they are at least being treated fairly by the processors and retailers that dominate the food chain “upstream” from the farm gate.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk