March 2009 Archives

Apologies to all non-dairy farmers, but this week's blog kicks off with another offering from the milk sector, with two big issues coming to the fore.

The first is the new milk price from Tesco, with the UK's leading retailer confirming that it is cutting payments to its Sustainable Development Group members by 1.3p/litre from 1 April.

Of course any price cut is unwelcome. But at least Tesco is honouring its commitment to tie its milk price to the cost of production - estimated at 26.93p/litre by consultants Promar.

And within that calculation is a 3.5p/litre provision for unpaid family labour, meaning that, in theory, a 1m litre unit should be able to make drawings of £35,000.

Tesco is often viewed as a "trend setter" within the milk sector, with other buyers expected to follow its lead. But that role is now in doubt. For a start, its price only relates to the liquid sector and already Wiseman and Dairy Crest have said they are leaving their April prices unchanged.

If anything, it is the cheese price that is really setting the trend at the moment, with mature Cheddar currently worth under £3000/t, compared with the £3300-£3400 it was fetching for most of last year.

Cheesemaker Wyke Farms is the latest buyer to announce a cut, taking 1.3p/litre off its April price. That comes on top of the 0.7p/litre cut imposed in January and 1.5p/litre cut in February and takes its average price down to about 24p/litre.

Assuming milk producers supplying cheese plants have a cost of production similar to those supplying Tesco, it will not be long before many are once again in a loss-making situation.

The other big issue, of course, is.......

As ever, it's been all go in the dairy sector this week - and that's without sight of the new Tesco milk price, which it now seems will not see the light of day until early next week.

Today's news has been dominated by the announcement that Dairy Crest is to end its 18-year joint venture with French dairy group Yoplait, selling its 49% stake for a cool £63.5m. That is three years before the joint venture - under which DC distributes products like Petits Filous, Frubes and Yop in the UK - was due to end.

The company says this is "part of its strategy to focus on core brands owned outright". The more likely reason is that DC needs to get on top of its debt.

The company substantially increased its level of borrowings with the purchase of French spreads business St Hubert from Uniq in January 2007.

Viewed as a good deal at the time, the City has become more jittery about companies with high levels of debt. Even though DC's borrowings were still within the "net debt to earnings" ratio of 3.5:1 permitted by its bankers, the share price has suffered.

The joint venture with Yoplait has also been doing less well than in the past, with sales of added value dairy products hit by the recession and...

As the pound continues to bumble along "in the low 90s", more and more farmers are looking to pre-book the rate at which they convert their single farm payments from euros to sterling.

The idea was first brought to light in an article we ran in Farmers Weekly on 6 February in conjunction with foreign exchange broker World First. That described how it is possible to elect to receive the SFP in euros, then book a forward contract to lock in the exchange rate.

If that was done using today's rate of 93p/euro, that would guarantee an 18% premium over last year's SFP, which used a rate of just 79p/euro.

Initially the World First scheme was met with scepticism. The Farmers Union of Wales put out a press statement urging farmers not to be drawn into "speculating on currency fluctuations".

Despite this conservative advice, interest in the idea has grown rapidly. World First told me this week it has had around 250 farmer enquiries as a result of the original article and 60% of these have been converted into firm bookings. "We've been able to secure increases of up to 18% over last year's SFP for a significant number of our clients," said the company's Chris Birts.

Land agent Strutt & Parker also reports "more and more enquiries" about hedging the exchange rate, while foreign exchange company Moneycorp has noticed "a considerable increase in calls from farmers".

There are various ways in which these companies operate......

It's not often one finds anything positive about farming in The Economist magazine - normally its editorial is reserved for slagging off any kind of market intervention, especially when it involves paying "immoral subsidies" to "feather bedded farmers".

So it was refreshing to find an upbeat perspective in the magazine's Business section this week, pointing to the essential role agriculture plays in feeding a fast growing world population and the good investment opportunities that are available.

The emphasis is very much on how agriculture is holding up, despite the recession. Even though prices are down from their 2007/08 peaks, they are still 30-50% above the 10-year average, and that bubble is not about to burst, it says.

The single biggest cause is growing demand in poor countries as people eat more food - especially protein. In China in particular, milk consumption has grown seven fold in the past decade, while poultry consumption is 60% up and beef 30% higher.

Rising incomes and population in developing countries could increase demand for protein by more than 5% for years to come, says the magazine. But expanding food supply at the same rate will be difficult because of land constraints and, as a result, agriculture will have to become more productive.

This positive long-term outlook for farming......

No one would doubt that dairy farmers are feeling the cold chill of recession - especially in Northern Ireland where prices are well below the cost of production.

Dairy farmers on the GB mainland are not having it easy either, with milk cheques shrinking while their feed and fertiliser bills stay obstinately high.

It is therefore gratifying to see some signs that world and EU dairy markets, if not exactly bouncing back, are at least starting to stabilise.

An important indicator came earlier this month, when New Zealand's Fonterra recorded a 17% increase in its auction price for whole milk powder, signalling a better balance between supply and demand.

Intervention purchasing also seems to have been working well in Europe since its introduction at the start of the month, putting a floor in the butter and SMP markets. All 30,000t of butter allowed was accepted in the first four days of March, and this week the EU Commission accepted another 6715t under its first tender - albeit at a slightly reduced price.

There are also signs that some key world suppliers are now cutting back on milk production, with output falling in the USA and South America. Most EU member states are also likely to fall below quota this milk year.

But what will this mean for UK milk prices?

An interesting e-mail made it through the corporate spam filters to arrive in my Inbox this morning.

Together with a chance to buy a year's supply of Viagra and an interesting investment opportunity in Nigeria, there was an e-mail from IllicitEncounters.com - "the UK's largest and longest running extra-marital dating site".

Having been married for less than a year, I was not about to avail of their services. (Give it time, I hear you say!)

But I was intrigued by their claim that people having extra-marital affairs in the UK spend around £60m a year on cut flowers.

Apparently that amounts to over 2.5% of the £2.2bn fresh cut flower market, with men who take mistresses spending an average £120 a year on flowers. That compares with just £41 for those who are not having affairs.

How can they possibly know this? And who is it who is actually having all these affairs and spending all this money on flowers?

According to IllicitEncounters.com representative Sara Hartley, it is typically "high-powered businessmen with a great deal of expendable income". So that presumably rules out most farmers....

This week's "Prospects" report from the EU Commission has a familiar twang to it:

"Agriculture is better placed than most other sectors of the economy to deal with the current recession, but it is far from immune," it says.

"In the short term, all farmers are likely to feel the pinch, though dairy and livestock producers will feel it most.

"Arable farmers will be affected too, as shrinking livestock numbers lead to lower demand for animal feed.

"But after a difficult 2009, things should start to pick up, as the world emerges from recession, population growth kicks in, demand for biofuel recovers and climate change creates supply pressures."

These messages have been doing the rounds for some time. Anyone who went to the Oxford Farming Conference, the Sentry Farming conference or the NFU's annual conference (or, heaven forbid, all three!) will be more than familiar with the arguments.

But just because the predictions are made often....

"Better late than never" has to be the reaction to recent news that Brussels is slapping punitive countervailing duties on imports of US biodiesel which have been dumped on the EU market for over two years.

The so-called "splash and dash" scheme has been a cunning one. By adding just a "splash" of mineral diesel to biodiesel, US companies have been able to claim up to $300/t in tax credits from the government. This so called B99 biodiesel, (99% biodiesel, 1% mineral diesel), has then been eligible for export, picking up further subsidies on arrival in the EU.

To make matters even worse, the scam was open to biodiesel made in places like Indonesia and Argentina, which was shipped to the US, blended with mineral diesel, and then moved on to the EU market. This practice, at least, was outlawed by Congress last October.

But the bulk of the trade has been in the form of US-produced biodiesel from companies like Archer Daniels Midland and Cargill, which have large-scale outlets within the EU.

It is estimated that, since the scam was introduced in early 2007, sales of US biodiesel to the EU have grown from less than 100,000t a year to over 1.5m tonnes in 2008. That is almost 20% of the market in just two years.

This is hardly surprising when....

By Paul Spackman

In stark contrast to the situation this time last year, fertiliser prices fell again this week, with domestic AN now £140/t below its November 2008 peak.

It'll be welcome news to those who heeded the advice of the NFU last year to hold off buying until the spring, but comes all too late for the majority of arable farmers who bought supplies earlier last year. As frustrating as it may be to see the price now falling, it's a classic example of the "volatility" in world markets that so many commentators talk about.

The question now is what will happen when the new buying season opens? I for one can't see many farmers rushing out to secure supplies, particularly not those who got caught out this season.

Our management matters farmer in Oxfordshire is one of those people. He paid £300-350/t for this season's fertiliser - bought last summer - and has had to sit back and watch the price fall ever since. Normally his fertiliser's in the barn by harvest, but this year he reckons that waiting should pay off.

Whether delaying fertiliser purchase is the right decision remains to be seen....

By Paul Spackman

Farm incomes are up, so farm workers should be paid more. That's the clear message that trade union Unison has put out to its members on the back of DEFRA's Total Income From Farming figures released last month, which showed a 46% uplift in farm incomes last year, compared with 2007.

On the face of that evidence alone, you might think they've got a point...especially if you're a farm worker on the minimum wage rate. But, let's not be too hasty.

There's no denying that 2008 was a much better year for farming; cereal prices in the first half of the year were well up, the meat trade was picking up nicely and even milk prices were reasonably high. But, and it's quite a big but; a lot's changed since then....

By Paul Spackman (deputy business editor)

In the absence of Mr Clarke this week (who is currently skiing somewhere in southern France!) today's blog posting has fallen to me.

And what better subject to grab people's attention than biofuels. The whole subject came in for plenty of criticism last year, largely prompted by record commodity prices and ongoing sustainability concerns - not to mention the well-worn 'food versus fuel' debate.

But it appears we may have turned a corner. Commodity prices have come back considerably from this time last year, biofuels have given way to recession headlines in the wider media and DEFRA has recently set out its ambitions for the expansion of anaerobic digestion.

According to the Renewable Energy Association, there are just 15 biogas plants operating in the UK, but it's hoped this can be increased to 1000 over the next three years. But if this bold target is to be met, the government must be prepared to put its money where its mouth is...

Grain markets have had another lacklustre week, with ex-farm feed wheat dropping below the £100/ t mark for the first time this year.

The Farmers Weekly price on Wednesday, collected from merchants in 13 different regions of the UK, came to just under £99/t, with barley lower still at £88/t.

There is no doubt that the large volume of old crop, both in the UK and in the rest of the world, continues to weigh heavy on the market.

The word from grain traders is that it is proving hard to shift British wheat to export outlets as it is being undercut by non-EU competitors. As one merchant explained, the price of Black Sea grain delivered to Spain is about the same as the price of UK grain loaded onto a vessel in Tilbury.

But other factors have come into play this week, with the markets buffeted by wider global events. The drop in world share values at the start of the week sent Chicago grain futures lower, which was followed by the MATIF in France and the LIFFE in London.

Exchange rate movements haven't helped either, with sterling continuing its gradual improvement against the euro. And the recent Australian harvest has given a bigger boost to world supplies than once looked likely.

Given the drop in prices, farmers have been sitting tight, getting on with land work rather than trying to sell the rest of their 2008 crop.

But what should they do now?.....

It's that time of year again - when the dreaded Single Payment Scheme application form drops through the letter box.

As ever, the temptation will be to put it to one side and wait for a spare moment - possibly sometime in May - before checking it through and sending it back to the RPA.

That of course is entirely the wrong thing to do! Leaving it to the last minute is a recipe for disaster, almost inviting mistakes to creep in and incurring totally unnecessary late delivery penalties.

As in the past, this year's forms are pre-populated with last year's details, which should provide the basis for the application. But where changes have occurred - for example in field use or field boundaries or the number of entitlements - these need to be accounted for.

There are other more general changes that the RPA is highlighting this year that affect everyone. These include:
• Set-aside entitlements have now been converted into normal entitlements
• National reserve entitlements have also been converted into normal entitlements
• Land used to grow permanent crops and short rotation coppice can now be used to activate entitlements

As ever, accuracy and attention to detail are the name of the game. Among the most common mistakes are....

With fertiliser prices staying stubbornly high, farmers are quite rightly questioning how much N, P and K they should be using, or indeed whether they should be using any at all.

It is therefore heartening to hear that, for over a third of UK arable ground there is no need for any phosphate at all this year, and for a quarter of the area no need for any potash either.

The figures come from precision farming company SOYL, which has analysed and mapped over half-a-million hectares using GPS technology.

"The figures reveal a startling potential for growers to save substantially on compound fertiliser application, provided they target their inputs effectively," said a company statement. 

SOYL has been offering its nutrient management service since 1993, so the idea of targeted application is hardly new. But the company is now taking it a step further, offering a Planning With Precision (PWP) programme, designed to help farmers weigh up their fertiliser options.

For example, they can elect to apply a base layer of farmyard manure, and then work out the P and K requirement. Or they can set a total budget, and apply the fertiliser optimally until all the funds are used up.

Alternatively they can.....