Upturn in milk prices

Dairy farmers flocked to the Dairy Show held at the Bath and West Showground on 5th October and I was struck by how positive many of the attendees were despite the very difficult year that many have experienced.

This generally positive attitude is perhaps a reflection of the recent upturn in milk prices and the hope that there will be further more significant increases to come. However the picture painted by farm accountants Old Mill appears to be rather more gloomy than the mood at the show would indicate.

Based on analysis of both Old Mill and the Farm Consultancy Group clients’ accounts this showed that on average dairy farmers lost 2.71p/litre in 2015/16 and are set to lose a worrying 2.81p/litre in 2016/17.  However these figures exclude non-milk income such as calf and cow sales and when these are included this produces small profits of 0.99p/litre and 1.08p/litre respectively.

Even so, these are not huge profits but although they are average figures and what always astounds me is the huge variation in performance between the top and bottom 25% of dairy businesses and this was once again borne out by Old Mill’s analysis.

Their figures showed that production costs among the lower quartile were a hefty 33.87p/litre, against 22.84p/litre in the top 25%. The bottom 25% also received 2.29p/litre less for their milk, at 25.01p/litre. This meant they made a loss of 5.65p/litre in 2015/16 – including non-milk income - compared to the top quartile’s average profit of 8.75p/litre.

Andrew Vickery, head of rural services at Old Mill, commented that, “It’s encouraging to see that, even in these tough times, the UK’s top dairy farmers are still managing to make a profit,”  but he went on to add, “all producers have looked hard at their cost base and found ways to reduce expenditure. However, while many have improved efficiencies, there is now very little meat left on the bones for any further cost reductions.”

As a result, following a prolonged period of low milk prices, cash flow is a significant issue for many dairy farmers and so now more than ever it is important to look forward and plan ahead.  In this context having a clear understanding of one’s cost of production is vital according to Phil Cooper from the Farm Consultancy Group.

Phil commented, “Improved dairy commodity values are now starting to filter through to farm-gate milk values, so producers need to make sure their business is in the best possible shape going forward, he adds. Don’t make drastic changes in times of uncertainty, but do plan ahead. Take professional advice and understand your costs of production, so that when you make a decision to change you’ll know it’s the right one.”

So, after a challenging year it appears most dairy farmers are keen to hang on to fight another day which demonstrates to me the resilience of this very important part of our farming community here in the south west.

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

Milk price optimism as production shrinks

In the last two years we have seen milk prices slump to unsustainably low levels for many farmers because world markets became oversupplied.  However, it appears supply and demand are now coming back into balance as dairy farmers cut production.

Here in the UK dairy farmers have probably reacted to this problem more actively than in many other parts of the world.  This is exemplified by the latest Agriculture and Horticulture Development Board dairy milk production figures which show milk production in the first two weeks of July was down 10.2 per cent on last year.

In the same period the number of producers in England and Wales has fallen by 239 but that only represents a drop of 2.4 per cent.  Therefore, assuming these producers were representative of the average dairy farmer, this indicates that the cut in production has been across the whole industry, including many farmers who intend remaining in production. 

I suspect the reason is that many farmers have cut back on feeding expensive concentrates in favour of maximising production from fodder, a cheaper form of production which generally gives lower yields.

As a consequence supply has tightened and in the UK in particular this has also been exacerbated by the fall in value of sterling following Brexit which is making imports more expensive.  Accordingly milk prices appear to be on the rise as demonstrated by recent announcements from dairy companies such as Dairy Crest and First Milk.

This is most welcome news for dairy farmers, although even after the latest milk price rises many will still be struggling to make a living - especially because the fall of sterling is a double edged sword which is likely to force up many input costs such as fuel and fertiliser.

However, I am hopeful that the tide has now turned in the milk production cycle, which will mean dairy farmers can expect to see a period of growth in commodity prices. 

Of course that will probably also mean food price inflation in the shops which is something the government will not want to see just at a time of interest rate cuts and more quantitative easing. 

But the long term consequences of our exit from the EU is quite another story of potential opportunity and risk which has yet to unfold.

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

Supermarket contracts

I came away from the Andersons farm business consultants’ annual seminar on the outlook for UK agriculture with the gloomy message that things are very difficult for most sectors but most worrying is the plight of our dairy farmers.

Andersons predict little prospect of improvement for at least another year as milk prices continue to fall at an alarming rate for the 80 per cent of dairy farmers not on “supermarket-aligned contracts”.  

Some of these farmers are lucky that for one reason or another they have been able to secure one of the supermarket contracts where they are effectively paid a milk price related to the cost of production rather than one based on the market price.  

As a consequence the supermarket contracts are offering about 30p per litre but the other 80 per cent of farmers are receiving between 20 and 24p. The milk price being paid to these farmers is influenced by world milk commodity markets where supply exceeds demand.  

Of course the market will one day right itself but not before the fundamentals have rebalanced and that will inevitably mean yet more dairy farmers having to leave the industry.

This depressing picture was reinforced by a leading dairy analyst, Chris Walkland at an NFU conference in Birmingham where he warned of a “spring tsunami of milk bringing more price pain” and said: “It is going to be pretty horrendous over the next three months.”

Walkland went on to predict the spot price for milk is likely to drop to around 10p per litre later this spring/early summer and as a result the total income for milk in April, May and June this year is predicted to be down by approaching 40 per cent on the peak seen only two years ago.

So why would anyone want to continue dairy farming at all? The answer is that some farmers are still making money, particularly those on the supermarket contracts and if you look back over say five years most dairy farmers will have seen good profits at times. 

And this is perhaps how dairy farmers need to budget, looking at five years rather than just one year but at the same time recognising that the current crisis has to be survived.  If that is not possible, then difficult decisions need to be made sooner rather than later because milk prices are unlikely to fundamentally improve for at least a year.

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

Goodbye and good riddance

Goodbye and good riddance: 2015 has been a year to forget for most farmers.  The bright side has probably been the weather helping crops grow well and producing record harvests for many, which was just as well because crop prices tumbled.  

To put this in to context, the value of feed wheat has fallen from around £130/tonne a year ago to around £105/t just before Christmas. This is a drop of nearly 20 per cent and with costs of production running at around £130/t it is not difficult to do the maths. 

In the livestock sector, sheep farmers had a particularly difficult year as lamb prices fell away sharply in the spring and summer with many lambs being sold at around £60/head compared to  £80-£90/head the year before.  This has led to very challenging times which still remain with lamb prices now about 50p per kg lower than a year ago.

Beef prices became more stable in 2015 but that followed big price falls in 2014 and so some respite was welcome. But even so prices have eased with finished cattle prices currently down around 15p/kg compared to this time last year.

However, the headline grabbing news has been the sustained and dramatic fall in milk price which is keeping many dairy farmers under pressure.  In this area we are luckier than some as very few of our farmers are signed up with the worst hit milk purchasers such as First Milk where their producers are receiving not much more than 17p/litre.  

Even so, many of our local farmers are receiving only around 22 or 23p/litre which is well below the average cost of production, resulting in widespread financial problems.

But, unlike other agricultural sectors where the value of the product being produced is similar for most farmers in that sector, the price dairy farmers are paid for their milk varies widely, being dependent on the milk supply contract any particular farmer has been able to secure.  As a result there are dairy farmers on supermarket aligned contracts who are still receiving around 30p/litre which is almost twice as much as those on the worst contracts.  

This means that the fortunes of two seemingly similar neighbouring dairy farmers can vary widely but in reality the majority are not on the best contracts and are suffering badly.  Unfortunately there is little sign that prices will improve dramatically in the short to medium term and so the gloomy theme of 2015 seems likely to continue in 2016.  

The only ray of sunshine is the fall in other costs of production such as feed and fuel bills, but in many ways these simply reflect the worldwide fall in commodity prices across the board which are the main reason farmers around the world are feeling the pinch.

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

Retailers to pay more for milk

Pressure is mounting on retailers who have started to offer to buy milk from processors at an increased price but it is unclear how much this will impact on the price paid by processors to farmers.

ASDA has committed to paying 28p/litre to their milk supplier Arla although because Arla is a co-operative I believe the increase in price will be pooled across all 13,500 farmer members throughout Europe, not just British farmers which would dilute the benefit of this rise here in the UK.

NFU president Meurig Raymond said: “The NFU has been lobbying tirelessly for Asda to recognise the plight of the dairy industry so we are pleased that Asda has moved to support farmers in their hour of need.

“It is clear from Asda that this commitment is to support the UK dairy industry at a time of crisis. It is now important that Arla ensures this is delivered to British farmers on the ground, with immediate effect.

Aldi and Lidl have also made new commitments to pay processors 28p/litre while Morrisons will pay 26p/litre for milk before processing costs.

The Morrisons move followed the retailer’s previous announcement that it was preparing to launch this new brand giving customers the option to pay an extra 10p/litre more for it on the basis the extra 10p/litre would go back to the farm.

Again the detail as to how these new pricing plans will work is not entirely clear. But it is certain that the pressure put on retailers by farmers taking direct action and by talks behind the scenes between farming leaders in the NFU and other organisations is having some effect on the liquid milk market at least.


However, liquid milk is only one part of the dairy market. About half the milk produced in this country is processed into other products such as butter and cheese and farmers supplying milk to cheese processors for example will be unaffected by these developments.

So there is much more work to be done to help our dairy farmers across all sectors but there is no magic bullet which can insulate UK dairy farmers from the disastrously low world dairy commodity markets which are showing no sign of improvement.

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

Milk prices continue to drop

As milk price continues to fall I was not surprised to learn that almost five per cent of dairy farmers in England and Wales have left the industry in the last 12 months leaving only 9,777 in production compared with 10,225 a year ago.

With little prospect of an increase in price on the horizon this trend is likely to continue, although I suspect the profile of the farmers leaving the industry will probably be closely correlated with the buyer to whom they are selling their milk.

This is because the gap between the price being paid on the best and worst milk contracts has widened vastly over the last year. Those farmers supplying milk to purchasers whose price reflects  the fall in world market prices have found the value of their milk plummet.  

In contrast those farmers who are lucky enough to have secured a contract with one of the big supermarkets, where the price being paid is usually linked in some way to the cost of production, have found their milk price has remained relatively firm.  For example the Dairy Crest Sainsbury contract is offering around 30.4p per litre in July compared with 19p from First Milk, a farmer owned co-op.

However, farmers on the premium supermarket contracts must not be complacent because Tesco has written to the 650 farmers in its Tesco Sustainable Dairy Group saying major industry changes have forced them to rethink their contracts.  Exactly what this will mean is not yet clear but it seems inevitable that Tesco will be looking to address the gap between the premium price they are paying for their milk and the cut price deals they are offering on the shelves as a result of fierce competition in the retail sector.

Other supermarkets which run similar programmes to Tesco such as Waitrose and Sainsbury’s have told Farmer’s Weekly that they have no plans to review their contracts.  Similarly, M&S have publicly announced their intention to continue with their Milk Pledge to pay a fair price to farmers covering their cost of production.

Tesco is feeling the pinch and looking to save costs wherever it can.  Reviewing their milk contract is an obvious target because they can secure milk from the wider market place at significantly less than they are currently paying their farmers.  


However, Tesco need to appreciate that they must treat their supply chain fairly and even if the contract is reviewed, it must still reward their suppliers appropriately for the high standards of welfare and hygiene Tesco demands, on which I am sure they will not want to compromise.

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

Milk prices... why so low?

I was sad to learn that Mark Oliver, the chairman of the NFU’s South West dairy board has announced he is selling his herd and quitting agriculture.

Mr Oliver explained he could not see a future in the industry having seen his milk price drop from 33-34 pence per litre a year ago to 25 pence today with further cuts in prospect.

I suspect Mr Oliver will not be alone in making this decision in the coming months. With milk currently trading on the spot market at prices as low as 12 pence per litre, the future does not look great except for those on the most lucrative supermarket contracts where the annual average milk price is still in excess of 30 pence per litre.

The current crisis in the dairy sector is accentuating the huge breadth of performance in the industry. For example, the Milk Price League Table for April published by the Agriculture and Horticulture Development Board (AHDB) shows the top annual milk price is offered under the Muller Wiseman Dairies Tesco contract at 31.88 pence per litre while the lowest price under the First Milk Liquid A contract at 19.56 pence per litre.

Similarly there is a huge gap in performance between the best and the worst farms. Again figures published by AHDB show the full economic cost of production for the top 25 per cent of farmers is around 26.5 pence per litre with the bottom 25 per cent being around 36.2 pence.

Therefore, even on the very best milk contract, the worst performing dairy farmers will be losing more than four pence per litre and if they were on the worst contract they would be losing nearly 17 pence on every litre of milk they produce. There can be no long term future for such businesses.

In contrast farmers in the top 25 per cent will still be making money on the best milk contracts, although in most cases even these farmers will struggle to break even.

So, more than ever, dairy farmers need to keep a very close eye on their production costs and where possible get on to the best milk supply contracts. But sadly there will be no future for the bottom 25 per cent of dairy farmers unless they can seriously improve their technical performance.  

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

Wish there was something positive to say...

I wish there was something positive to say in the world of agriculture but today farmers are under pressure across all sectors.

This will undoubtedly put severe strain on some farming businesses where the squeeze on cash flow is going to be a problem in the coming months.

Wheat, milk and lamb prices are now down 32, 26 and 17 per cent respectively compared to this time last year.

Meanwhile, although finished beef cattle prices have only fallen by around five per cent, many beef rearing units are really struggling. This is because they rely on making a margin between the price of the young cattle they buy and the price of the finished product, but this spring they have found the price of young cattle has been very strong, leaving them badly exposed to potential losses if the finished beef price does not rise significantly.

The whole situation is further compounded by the Rural Payments Agency (RPA) making a pretty good hash of introducing the new Basic Payment Scheme (BPS) through which farmers receive support payments from the EU.

In the past farmers have become used to receiving these payments in early December but agricultural consultants Andersons are suggesting farmers should not budget to receive this year’s payment until March 2016.

In contrast the RPA chief executive Mark Grimshaw said he would be very disappointed if most claims under the BPS were not paid out by the end of January. Obviously the sooner such payments are made, the better, but even if payments are made by late January this will still be two months later than in the recent past which will put pressure on many businesses.

That is not to say all farmers are struggling and in the milk sector in particular some farmers are still on favourable contracts and are being paid a reasonable price for their milk. In these circumstances good profits can still be made but the gap between the best and the worst milk contracts has widened enormously with the result that some will be losing large sums of money very fast indeed.

However, excluding the lucky few, most farmers are experiencing very challenging times and with the pound remaining strong on the foreign exchange markets this is making our exports less competitive and imports comparatively cheap, which is not helping any of the agricultural produce prices in this country.

Farmers are set for challenging times ahead and at present there are no obvious bright spots on the horizon.  

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