Worldwide prices have increased by 63 per cent since the lows of May 2016, due to a reduction in world milk supplies. In response to these price movements, global production began to grow again during the first half of 2017. Meanwhile, IFCN says world demand for dairy produce has not yet recovered to previous levels, though import demand has grown in some key regions, including China.
One of the consequences of the prolonged downturn in global milk prices was the proportion of UK dairy enterprises unable to cover cash costs of production almost doubled between 2016 and 2017 to reach 40 per cent of those analysed. The number of herds able to remain profitable throughout the downturn, without the use of other income streams such as Basic Payments, was less than 20 per cent. This was compounded by dairy farms also being subject to rising costs of production.
Although the immediate cash-flow situation on most farms will have improved since March off the back of higher milk prices, the long-term impact of the severe downturn is still being felt by many. A reduction in the investment on farm, an extension of credit from suppliers and increased borrowings will all take time to unravel. Farmers need an extended period of profitability to reverse the impacts from the last couple of years.
The average debt for UK dairy farmers now stands at about £2,500 per cow, equal to 36p per litre (ppl) or roughly £0.5m for a typical 200cow herd. The situation is bleaker in New Zealand where debts average a hefty £4,000 per cow, or 86ppl, while those in Denmark and the Netherlands carry an eye-watering burden of debt averaging between £6,000 and £7,000 per cow.
Of course average debt is just that, and conceals a wide range between those that don’t borrow a penny and those that are “up to their necks”. One also has to remember that those who own their farms could well have land worth in excess of £1.5m for a 200-cow herd, as well as other assets like livestock and machinery that could be worth another £0.3m or more. Assets of around £1.8m or more puts average borrowings of £0.5m in context. As interest rates currently stand these levels of debt in the UK are sustainable, but what shockwaves lie ahead post-Brexit?
The squeeze on milk prices has not surprisingly led to a number of Scottish producers giving up milking, and there are now only 924 dairy herds left in Scotland – the lowest number since records began in 1903 and a reduction of 33 since January this year. Having said that, latest statistics from the Scottish Dairy Cattle Association also reveal that in the last six months the number of dairy cows in Scotland has increased by 2,622 to 175,928. That’s the highest total since 1997 and the average herd size of 191 cows is also the highest in history. In other words, the more efficient are expanding, and there are also some new ones planning to start production before the end of the year.
I hope those new entrants have good contracts in place with their milk buyers, as that seems to me to be one of the main ingredients to success.
Some producers have the good fortune to have “direct supply” contracts where they supply a supermarket through their processor at enhanced prices that can make a huge difference to the bottom line.
In the recent downturn those with direct supply contracts were being paid around 30ppl, while others were paid less than 20ppl. That difference in price equates to a difference of around £150,000 per annum in income for a herd producing 1.5m litres annually. In other words, a farmer on one side of the fence can be paid £150,000 more per year for producing the same milk from the same size and type of dairy enterprise as his neighbour on the other side of the fence. That isn’t right and has to stop.
For those who have a good contract and have decided to borrow to expand, or even set up a new venture I offer the following piece of advice. I borrowed extensively as a young man to develop my badly-run down, rented hill farm and learned the hard way that banks can be ruthless and show no mercy when things go wrong, as they often do.
Source: Herald Scotland