February 2009 Archives

A fascinating website was brought to my attention earlier this week, namely smartfarmer.co.uk - the domain of farm accountant Ian Spincer.

The article I was reading was a detailed Q&A looking at how to go about pre-booking euros, to lock this year's single farm payment into today's favourable exchange rates. That is something I have written about myself in recent weeks, both in Farmers Weekly and on this blog. Apparently, it's triggered quite a reaction.

But the main reason the article caught my eye was that, half way through, smartfarmer makes reference to "Philip Clarke's excellent business blog for Farmers Weekly".

Well, I'm as susceptible to flattery as the next man, so in the spirit of mutual admiration, I'd like to highlight another article on the smartfarmer website - something he calls "Mad Idea Number One".

Apparently, smartfarmer has sold something on eBay every day for a whole year. From an old baler, to a concrete Valentines card (?), to a pair of ear tag pliers - everything has been sold for a price (presumably a very low price in the case of the Valentine's card).

At the end of the year, as well as having a tidier house, smartfarmer has also ended up with a pile of cash.

Part two of his plan is.....

As if by magic, news has emerged this week that Sainsbury's is in the process of setting up a Cheese Development Group, and will soon be signing up selected dairy farmers to supply it with all its own label Cheddar.

The deal is being put together in partnership with dairy co-op Milk Link, and extends the principle of a dedicated supply chain that has already been established in the liquid milk sector.

The move comes just a week after the NFU launched its Survival Plan for British Dairying. One of the key action points in that document was for "retailers to establish direct, dedicated relationships with dairy farmers supplying British own label cheese lines".

Fortuitous indeed then that Sainsbury's chief executive Justin King should announce just one week later, and in the presence of NFU president Peter Kendall, that he was doing exactly that.

Whether orchestrated or not, (of course it was!), the development is a welcome one, with clear advantages for both parties.

For farmers it gives them a louder voice in the supply chain, an opportunity to share knowledge and improve efficiency, and a chance to explain their problems direct to the end buyer.

For the retailer, it gives them.........

With the main lambing season just around the corner, many sheep producers will be wondering what the year has in store for their businesses.

Certainly the past few months have been buoyant times. Deadweight prices reached a historic high in 2008, at an average , yes, average value of almost 300p/kg dw. And since then they have continued upwards, to a current level of 375p/kg dw.

Recent analysis by industry body EBLEX suggests these values will not be sustainable. But it is still confident 2009 will be another good year for finished lamb, with a significant reduction in supplies and continued export growth.

There is little carryover of hoggets going into the new lamb season and, perhaps more significantly, the availability of New Zealand product is likely to be more limited, following a 15% contraction in their sheep flock.

There are also structural problems affecting the UK sheep business, in particular the shortage of skilled labour.

So, despite 2008's strong prices, the national flock is still expected to shrink by 3% this year. Even if lambing rates rise and carcasses get bigger, total domestic production is set to fall.

With an eye to future expansion, there may also be a reduction.....

Speaking at the recent NFU annual conference, respected analyst Klaus Schumacher of Toepfer International said the grain market was "delicately poised" and any major weather problem could well see prices return to 2007 levels.

Clearly there has been little sign of that this week, as grain prices dropped worldwide on the back of falling demand, large amounts of old crop still to shift and devaluation of the Russian rouble. Further strengthening of sterling against the euro also magnified these impacts in the UK, resulting in a £5-£6/tonne drop in ex-farm values.

But Dr Schumacher's concerns remain valid and certainly there is a lot more "upside" to the market than "downside" as 2009 unfolds.

This is reinforced in a recent blog by US analyst Eric deCarbonnel which has been brought to my attention. Entitled "Catastrophic Fall in 2009 Global Food Production" the article points to the serious droughts that are currently affecting many key food producing countries.

China, which produces 18% of the world's grain, is suffering the worst drought in 50 years, while Australia has not had it so bad for over 100 years, he says. In the USA, California, Texas, Carolina and Florida are facing drought "of historic proportions", while most of South America.......

There was standing room only at the dairy breakout session at this week's NFU conference in Birmingham as the union set out its Survival Plan for British Dairying.

Chief dairy adviser Hayley Campbell-Gibbons spelt out the background, reeling off facts and figures to demonstrate the crisis the sector is facing.

NFU dairy board chairman Gwyn Jones then outlined the plan itself, presenting a long list of action points for each player in the supply chain.

Farmers were told to get more efficient, processors to offer proper contracts, retailers to promote the Red Tractor, government to cut red tape and banks to keep lending money to farmers - and cheaply!

But, however desirable all this might be, how achievable is it? A sign of the enormity of the task that lies ahead emerged straight away in the Q&A session.

One young farmer from Shropshire questioned why there had been so little progress in getting the NFU's milk contract up and running. Not one buyer had adopted the template, despite over a year of trying.

Mr Jones said farmers themselves were to blame as none had seized the initiative.....

Listening to the keynote speeches at this morning's session of the NFU's annual conference in Birmingham, it was easy to believe that farming is immune from the recession.

DEFRA secretary Hilary Benn quoted recent official statistics which showed that agriculture was the only sector of the economy not to have contracted over the past three months.

And NFU president Peter Kendall was even bold enough to suggest that farming could lead the whole economy out of recession.

There is no doubt that British farming is fairing better than most sectors at the moment.

But Mr Kendall went on to list a catalogue of short-term issues that continue to blight the industry. Bovine TB, GM crops (or lack of), falling R&D funding, misleading product labelling, electronic identification of sheep and, above all, environmental set-aside - all have the potential to stifle agricultural productivity.

But, while all these points were highly valid, it was two other longer term issues that really stood out....

Like London busses, it seems, reports into the state of the British dairy sector come along in threes.

Last week it was the excellent report from levy board body DairyCo into the Factors Affecting Milk Supply which, as the name suggested, looked at the factors affecting the supply of milk.

Today industry body Dairy UK is releasing its White Paper 2009 which takes a broader look at the state of the industry, covering issues such as farmer confidence, dairy market trends, CAP reform, nutrition and the environment.

 And next week, the NFU will launch its Survival Plan for British Dairying, examining the problems facing the sector, looking at examples of good practice and making suggestions on how to build confidence and boost supplies.

But why have these reports all arrived now?

The simple answer is that everyone is so worried by what is happening to the dairy sector overall. Margins are tight, confidence is falling and new investment is almost non-existent.

But above all, it is the erosion of the milk supply base that is the greatest concern, with recent price falls likely to speed up the rate at which farmers leave the industry.

Already liquid milk is being imported from neighbouring countries because.......

Beef producers have plenty to be cheerful about - at least they do according to the latest market briefing from industry body EBLEX.

Following a year of firm prices in 2008 - when slaughter cattle averaged 260p/kg dw - it looks like more of the same for 2009. Certainly things have got off to a good start, with R4L cattle currently fetching about 290p/kg dw.

Against this more buoyant picture, it is therefore disappointing to see the meat supply chain falling out over the issue of who should pay for BSE testing in older cattle.

The abattoirs say that, since government is no longer willing to pick up the tab and their margins are tight, then farmers should pay a share. Furthermore, they are now insisting that this should also be deducted from cattle sold through live auction marts.

But the marts say it's not for them to pass on the abattoirs' costs, while many farmers say they should not be charged at all.

My view is that this cost should never have been imposed on the industry in the first place. BSE testing is a public health matter and, as such, should be picked up by government.

But, given that government has washed its hands of the matter, it's understandable that abattoirs should want farmers to pay a share....

The USA has a long history of slagging off the EU over the amount it spends on farm support.

And at face value, the farming spend "over here" does tend to dwarf the farming spend "over there". The common agricultural policy costs taxpayers about $50bn a year, whereas the farming component of the US Farm Bill comes to about £18bn.

But when you consider that the EU has something like 11m farmers compared with the USA's 2 million, the figures take on a somewhat different complexion.

A quick prod at the calculator and we discover that the average US farmer actually gets double the level of subsidy of his EU counterpart - $9000 per capita compared with $4500 per capita in Europe.

Of course you can prove anything with statistics. It all depends what you measure the subsidy spend against. Area of land? Number of taxpayers? Share of gross domestic product? All give a very different result.

More important is how that money is spent. Increasingly, the EU has been redirecting its farm support towards non-trade distorting payments. Over 90% of single farm payments are now fully de-coupled, while rural development payments sit comfortably in the WTO's "green box".

But it's a different story in the USA....

Another Monetary Policy Committee meeting, another interest rate cut - it's becoming a familiar story. But the media take on it seems to have changed.

Up until now, these cuts have been applauded by the media and the business community, who see them as stimulating to the economy.

Lower interest rates encourage people to spend rather than save, (at least, they might if the banks and building societies passed them on), and they ease the burden of debt on small businesses.

This last point is certainly not lost on farmers who are currently facing near-record levels of borrowing.

But the emphasis seems to have shifted in the media this time, and all the talk is about the damage the cuts are doing to savers, who ironically have less to spend as their incomes dive. This could actually damage the economy, they say.

Personally, I'm not too fussed either way. And that's because.....

With the Rural Payments Agency due to send out this year's single farm payment forms (SP5s) in the next few weeks, farmers will once again have to choose whether to receive their subsidy cheques in pounds or euros.

Most will stick with what they know and tick the box that says "sterling". But they could be missing a trick.

  Take a look at last year's payments. Had a farmer opted for sterling then, his SFP would have been calculated using the exchange rate prevailing on 30 September, 2008, ie 79p/euro. A €10,000 payment from Brussels would have translated into a £7900 deposit in his sterling bank account.

But had he opted for euros, and then waited until the end of December to change them, he could have got a market rate of 98p/euro and converted his €10,000 into £9800 - almost £2000 more.

Of course, such "skilled" dealing would require the possession of a top-of-the-range crystal ball and is not "of the real world".

But a scheme being touted by foreign exchange brokers World First suggests that...

DairyCo's latest document on "Factors Affecting Milk Supply" is a worthy tome, outlining in 28 pages just why the UK's milk supply is at a 30-year low.

Falling numbers of dairy cows, insufficient replacements, bovine TB, declining cow fertility, a slowdown in average milk yield, large numbers of retiring dairy farmers, problems with accessing labour - all have played their part in cutting milk output.

But the most worrying aspect has to be lack of producer confidence to invest for the future, suggesting that this downward trend is set to continue.

It's easy to see why. The report notes that dairy farmers have only made an economic profit in one of the last six years, making expansion almost impossible.

There was some increase in overall confidence levels in early 2008 as milk prices strengthened. But this was very fragile and, as producer prices have started to fall again and input costs have risen, there is renewed reluctance to invest.

The report does suggest a solution, calling for improved communication along the supply chain and, above all, fairer milk contracts "to provide dairy farmers with the confidence to expand".