Demand in milk and prices

Arla Foods have announced yet another milk price reduction with their UK standard price per litre dropping by a penny to 19.12 pence. This is well below the cost of production for almost all farmers and does not bode well for the coming months.

The market continues to be impacted by the global imbalance between milk supply and demand.  Commodity stocks are high and the market is extremely competitive which is continuing to generate further downward pressure on prices.

Arla Foods Farmer Board director Johnnie Russell said: “Recent data suggests that the global growth in milk production is levelling off, which may lead to volumes stabilising later in the year.  However, it is too early to predict whether this trend will continue over the coming months.”

This potential change in sentiment is reflected in the New Zealand co-op Fonterra’s forecast for the coming year where it raised its predicted price to 14.6p/litre.  But this remains a pitifully low price. Only two years ago Fonterra was paying farmers 29p/litre.

Fonterra’s very modest optimism is not based on an increase in demand for milk but rather on the expectation that farmers will start cutting production across the world due to the poor returns.

This optimism was reflected in the Global Dairy Trade auction which saw prices rise by 2.6 per cent - the third increase in four sales.  But despite this, prices remain stubbornly low with no consistent pattern of sustained price rises.

Having said that, the Dutch dairy board has also raised its official prices for butter, milk powder and cheese for the first time in over a year which lends support to Fonterra’s cautious optimism.

However with EU milk production 7.2 per cent higher on the year in the first quarter of 2016 and world production also up 3.9 per cent over the equivalent period it is clear that something dramatic is needed to rebalance supply and demand.

The hope is that the rate of increase in production will moderate if not fall and this is reflected in the EU’s milk market observatory board’s prediction that EU production is expected to rise by only 1.4 per cent over the whole year.

But it does not take a genius to work out that if demand does not also pick up by at least that amount, there is limited hope of a serious increase in milk price for at least the rest of 2016.

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

Milk price wars

Milk prices are falling fast in the face of sharp falls in world market prices for a variety of dairy products and on the home front supermarket milk price wars are not helping either.

The big four milk processors have all announced milk price cuts for September and October which will result in many farmers receiving less than 30p per litre with those unfortunate enough to be supplying First Milk, seeing prices dropping as low as 25.1p per litre.

Prices on the online Global Dairy Trade auction run by the New Zealand based co-op, Fonterra fell again on 2nd September by 6% which means that average price has dropped by 45% since the market peaked in February this year.

Why the world markets should experience such peaks and troughs in prices has always puzzles me but in simplistic terms, I suspect as prices fall, so too will world production as some farmers cease production while those that continue will probably not try to push their cows with expensive feed stuffs to produce that extra litre because the profit is not there.

As a consequence there will come a time when world supplies reach a level that demand will start to push prices back up, but increasing milk production is not that easy. One can feed cows with concentrates but if you want to increase cow numbers, it takes at least 2.5 years from birth to bring a heifer in to the production herd.

This is obviously a significant time lag and I suspect it is this lag which is a contributory factor to the very unhelpful oscillation in dairy commodity prices because once the cows are in the herd producing milk, one cannot “turn them off” which then contributes to the oversupply and downturn in milk prices.

I am sure there are also many other contributory factors to world markets prices but what seems inevitable at present is that milk prices are on the slide and our dairy farmers will have to brace themselves for some tougher months to come which will no doubt result in some farmers exiting the industry.

This is obviously a sad prospect but it is a trend that has been ongoing for as long as I can remember. For instance in 1995 there were 28,093 producers in England and Wales but by the end of 2013 there were only 10,581. This represents a 62% fall in producer numbers over that period and it seems likely that with the latest round of milk price cuts, the rate that producers will leave the industry will increase, at least in the short term.

However, as with many clouds there may be a silver lining for those that survive because with an ever increasing share of the market, there should be the prospect of making more money when the markets do return to more profitable levels. The big question is how long that will take and how much pain businesses are prepared to take in the interim.  

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

Farm borrowings increase by almost 9%

Latest figures released by the Bank of England indicate that Farm borrowings have increased by almost 9% in the year to April 2014, reaching a new record high of £15.2bn. Farm borrowing has also risen in the last two year; by 10% to April 2012 and 9% to April 2013.

The question is whether this is a sign of a sector under pressure causing cash flow difficulties or whether it is a sign of confidence giving rise to new investment; my guess is that it is a bit of both.

Livestock farmers, particularly beef fattening units, will be struggling at present and they may well find their finances are being stretched as beef prices have plummeted in recent months. These farmers will be increasing their level of indebtedness because of the difficult market.

On the other hand many dairy farmers, who have seen good milk prices over the last year, may be investing in their farms with cautious confidence in the future.

There is no doubt we are seeing a lot of interest from farmers who are looking to borrow money to purchase land. However, the problem is that land is changing hands at prices of up to £10,000 per acre or more and even at historically low interest rates, the annual cost per acre of this borrowing can be eye-watering and it is significantly higher than the rental value of the land.

As a general rule banks are keen to lend money to farmers, not least because the value of agricultural land has more than doubled since 2007. However they are also very conscious that borrowings must be affordable and this is often the stumbling block for some farmers who may be capital asset rich but whose profits may be very modest indeed.

Having said that, there are some very good lending rates available in the market at present. For example the specialist “farmer’s” bank, the Agricultural Mortgage Corporation (AMC) is currently offering 0.8% off their standard lending rates for certain qualifying capital investments on farms.

The AMC is able to fund this discount because of money they have secured from the European Investment Bank. The idea is to encourage farmers to develop farm improvement projects, examples of which include new or improved crop storage and processing facilities, livestock housing, parlours, farm shops and other diversifications as well as wind turbines and solar panels.

If anyone is interested in looking at the availability of this funding for a project they may have in mind they are invited to contact me for free initial advice.

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

Market trends for the price of farm commodities

Looking at market trends for the price of farm commodities when compared to a year ago does not make for particularly happy reading. The Farmers Weekly magazine publishes these figures each week and when compared to the prices achieved a year ago most commodities are significantly down.

I have written about beef prices before which have fallen sharply. The price quoted in the Farmers Weekly for last week was 345p per Kg deadweight which is down 50p per Kg on the price achieved this time last year although in this area I am reliably informed that one would struggle to achieve 325p per kg in this area. This indicates that the price being achieved for beef across the country varies significantly and we do not seem to be well placed in this area to achieve the highest prices.

These low prices have stimulated the Farmers For Action (FFA) group to launch protests at meat processing plants in the Midlands where there is concern about the amount of Polish beef being imported and processed in this country.

However, it is not only beef which has seen prices fall in the last year. Arable crops have also dropped sharply in value with Winter Wheat down from £180/tonne to £147/tonne and oilseed rape down from £380/tonne to £268/tonne. At today’s prices, profit margins for arable farmers are likely to be squeezed hard although on the reverse side of this particular coin, this should mean the cost of cereal based feed stuffs for livestock will fall.

In contrast lamb prices have remained steady while milk prices are well ahead of those being achieved this time last year but the trend in milk price is now distinctly downwards as the industry is hit by a number of milk purchasers cutting their farmgate milk prices.

For example, Dairy Crest has cut its liquid milk price by 1.25p/litre from July and Arla has dropped it direct-supplier price by 1.5p/litre. Similarly, earlier last week First Milk reduced its manufacturing contract price by 1.15p/litre.

All these price cuts have come on the back of falling world dairy commodity prices where Fonterra’s Global Trade Auction saw prices fall by 4.2% on 3rd June which is the eighth drop in a row for these auctions. Having said that, cheddar cheese prices rose by 8% and skimmed milk powder by 2.1% and so although milk prices are falling sharply at present there is hope they will stabilise and not fall to the desperately low prices which were witnessed two years ago which forced farmers to take direct action, blockading milk processing plants across the country including here in Somerset.

So what can we read in to all these “tea leaves” – well probably not a great deal other than the fact that markets do go up and down and farmers are exposed to the vaguaries of world markets now more than they have been at any time since the end of the Second World War. Therefore in order to survive, successful farmers will always need to keep their costs under control so as to make money in the good times and survive the hard times because market volatility is most definitely here to stay.

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