June 2009 Archives

Most arable farmers have a pretty good idea what their production costs are - or at least they should, given the massive effort made by the press and other farming organisations over the years, encouraging them to keep a detailed record of such things.

Plenty have taken this on board with regards to their own businesses, knowing exactly how much they spend on inputs and machinery each season. And some farmers go further and make regular comparisons with their neighbours through group costing arrangements and benchmarking.

But when it comes to international comparisons, most farmers, it seems, are just floundering, as is made clear in a recent survey carried out by consultants Bidwells at Cereals 2009.

Their Global Cost of Production Challenge listed six grain producing countries - Canada, Brazil, the UK, Romania, Russia and Australia - and farmers were invited to rank them according to the cost of producing a tonne of wheat.

I can't remember exactly how I placed them when I visited the Bidwells' stand at Cereals, but I'm pretty sure I put Brazil as one of the cheapest and the UK as one of the more expensive....

First day back from a week's holiday and, as ever, the first task is to wade through around 300 emails, sorting out the wheat from the chaff.

And, as might be expected, the pile of "chaff" eclipses the rather small offering of wheat - which itself is mostly made up of low-grade feed material.

But there are a few emails in there having what might be described as "milling potential", worthy of further investigation and comment.

The first relates to the news that Milk Link is stepping forward to offer a new contract to the remaining 143 dairy farmers still supplying Dairy Farmers of Britain for a loss-making 10p/litre.

Until now, these farmers have been unable to find a new buyer because their herds have been too small or too remote to appeal. This new contract, which will pay 18p/litre with a three month notice period, will give them crucial breathing space while they reassess their future in dairying.

I've commented before in this blog about how the industry has really pulled together at this time of crisis. This move by Milk Link is another example of the sector looking beyond short-term profit towards long term sustainability...

By Paul Spackman

We seem to have had a run of surveys over the past couple of weeks - from Defra's farm rent figures to DairyCo's farmer intentions survey. The latest comes from our friends at the NFU who have found that one in four farmers feel the credit crunch will significantly affect their business - up from one in six last December.

OK, so the sample size wasn't huge - 179 farmers filled in the online survey - but it's probably a timely reminder that now is not the time for complacency.

It's hardly surprising that farmers are starting to feel, or at least worry more about the effects of the recession. Whether it's the tighter availability of credit from the banks, shifting exchange rates affecting the value of agricultural products and inputs, or reduced consumer spending on organic, or premium cuts of meat, one way or another, agriculture will be affected.

Many people understandably thought farmers would be sheltered from the worst of the downturn, but I doubt anyone really believed we would be immune from its impact - especially when you consider the depth and severity has been likened to the dark days of the 1930's recession. The longer the latest recession goes on, the more people it's likely to affect...

By Paul Spackman

Anyone who bought their new season fertiliser early this summer will be forgiven for sitting back with a slight feeling of smugness this week, after GrowHow announced a £4/t increase in its October price and hinted that more rises could be on the cards. It's a far cry from the massive price jumps witnessed last year, but it's an increase nonetheless.

Higher gas prices going into winter were blamed for the rise, but cynics will also suspect the market fundamentals of supply and demand are also playing a part.

GrowHow, Yara and distributors say they have seen strong demand for fertiliser at the 'attractive' summer prices - which started at £178/t for June.

As a result, much of the early tonnage has already been sold, prompting some to speculate that fertiliser manufacturers have restricted the amount available...

A Devon farmer contacted me on Wednesday concerning an article I'd written a few weeks ago about EU plans to allow the early payment of SFPs.

The measure had been suggested by EU farm commissioner Mariann Fischer Boel at the May agriculture council to help farmers - especially dairy farmers - through the recession.

The Devon farmer told me he had contacted the RPA to see if it was planning to take advantage of this offer, which would see 70% of the SFP paid out in October.

He was especially keen to find out, as his bank manager was on his case about loan repayments and he needed to convince him there would be some money on the way soon.

Initially the RPA denied all knowledge of any such provision from Brussels. It then checked further and came back to the Devon farmer saying that, as far as it was concerned, there had been no changes to any of the rules, and it was "business as usual"....

I'm not usually prone to gloominess, but you could be forgiven for thinking otherwise judging by some of my more recent blog postings.

"Meltdown in the dairy industry", "alarm bells for sheep producers", "drop in grain futures prices" - the run of story lines has, I admit, been somewhat downbeat.

Imagine my relief then today to receive the Organisation for Economic Co-operation and Development's Agricultural Outlook 2009-2018 report, painting a far brighter picture of the sector's medium term prospects!

"Agriculture is showing more resilience to the global economic crisis than other industries," it says. "Falls in agricultural prices are likely to be moderate as long as the economic recovery begins within two to three years."

For the next ten years, the OECD suggests that arable crop prices will be 10-20% higher in real terms that in the past ten years. Vegetable oils will be 30% higher, while butter will average 12% more from 2009-2018......

What a difference a year makes!

This time in 2008 the annual Farmer Intentions Survey from DairyCo - gauging the views of almost 1000 milk producers in the UK - spoke of a "positive change in the mood of British dairy farmers" and "encouraging levels of positivity".

At the time, 37% said they were planning to increase milk production in 2008/09, while the number who expected to quit in the next two years had halved to just 7%.

The high prices dairy farmers were receiving at the time had underpinned this resurgent optimism, though even then DairyCo was warning that the situation was "fragile".

And so it has proved to be. The sharp decline in dairy commodity prices in 2008, which has now filtered through to farmers milk cheques, combined with rising input costs, has led to a radical reversal in this year's Farmer Intentions Survey.

The latest document shows that just 18% of producers now plan to increase output, while the number looking to quit the industry has shot up to 13%......

The latest UK weekly Market Survey from AHDB Meat Services takes a slightly one-sided view of the impact of the recession on meat sales.

The focus is very much on consumer spending, with the report suggesting "the credit crunch appears to have had a limited effect on total household expenditure on meat".

Aggregate data shows that consumers spent some £6.9bn on all fresh and frozen meat in the 12-months to 17 May - almost 9% more than in the corresponding period of 2008.

Sales growth was consistent across all categories, with pork and poultry up 9%, beef up 8% and lamb up 4%.

To be fair, the report does refer to the switching that has been going on between red and white meats as the recession bites, and the "well-documented trend towards cheaper cuts".

But it fails to mention that these rises are entirely down to price increases and it seems to gloss over the fact that, in volume terms, sales have declined across all categories....

A number of positives have emerged this week, painting a more bullish picture for grain producers as the new season approaches.

While spot and futures prices in the UK softened a bit during the course of the week, the International Grains Council conference in London on Tuesday suggested the market fundamentals were for a tighter trade in 2009/10.

IGC executive director Etsuo Kitihara predicted a 3% drop in global coarse grains production, while consumption was set to rise, driven in particular by growing demand for maize for ethanol production.

"The international price for grain has increased strongly since March," he said, pointing to supply concerns, stronger export demand, the weaker US dollar and increases in other commodities, notably oil.

Similar messages emerged at the Cereals 2009 event mid-week. Bidwells head of farm management David Cousins said forward prices were strengthening on the back of concerns about the global harvest. "We believe commodity prices will continue to strengthen in 2009/10"....

In a week of unhappy news in the dairy sector, it's a relief to see at least one positive result emerge from the gloom.

This week's "financials" from farmer co-op Milk Link just go to show what can be achieved by a dairy business with the right management, the right portfolio and the right, integrated structure.

The list of positives is a long one. Turnover was up 5%. But turnover per litre was up 13%, showing how extra value has been added to members' milk.

Earnings before interest, tax, depreciation and amortisation (EBITDA) was actually down 6% to £28.7m, though this reflected the higher milk price paid to members (up 4p to 25.6p/litre) and the need for less profit to be retained as bank debt fell.

Meanwhile, operating costs were down 2.3% to £81.7m at a time when input costs such as labour, fuel and power were increasing rapidly. And profit before taxation was up 13% to over £10m....

Farmers have a reputation for being pretty poor at co-operating. All too often they prefer to operate in isolation rather than pooling resources and sharing information.

At Farmers Weekly we want to see that change - especially when it comes to sharing data on input prices.

That's why we have joined forces with the NFU to re-launch the Inputs Price Monitor at this week's Cereals 2009 - an on-line survey that enables farmers to anonymously declare how much they are paying for things like red diesel, ammonium nitrate and glyphosate.

This information will then be analysed each month and compiled into a report that the whole industry can benefit from.

It's really easy to use. Simply log onto www.fwi.co.uk/nfu-IPM or even better click on this link, which takes you through to the live survey form where you can start entering your data. It takes just 10 minutes.

We know there is a strong demand for this sort of information......

The fall out from the Dairy Farmers of Britain collapse continues, with feedback from the weekend's meetings between farmers and the receiver giving just a taste of the real anger that is out there.

There is dismay that the company kept its members in the dark about its problems for so long, frustration that it over-paid for past investments and criticism at the lack of a proper exit strategy.

Most of all, there is anger that the company continued to accept milk throughout May knowing it could not pay for it.

There is also shock at the overall level of debt that has been built up. The receiver has revealed that around £100m is outstanding - most of it to HSBC bank.

Even the bank is unlikely to get all its money back once those parts of the business that can be sold have been sold. The chances of anyone else seeing a penny are non-existent.

Against this gloomy background, however, there have been one or two chinks of light.....

An amazing statistic was brought to my attention the other day.

According to research by the National Farm Research Unit in Suffolk, an estimated 7% of farmers have elected to receive their single farm payments in euros this year.

The press release accompanying the research findings suggests this is a pretty low figure, pointing to the fact that "farmers are experts in farming and not necessarily experts in finance or currency exchange".

To my mind, however, 7% is a remarkably high figure. Last year just 700 or so farmers elected to receive their SFPs in euros - that's equivalent to about 0.7% of the farming population as opposed to 7% this year.

It goes to show that many farmers have responded to the strong messages coming out from foreign exchange specialists, and supported by this blog, that pre-booking euro exchange rates while the pound was weak could be a good idea....

The collapse of Dairy Farmers of Britain is sad news indeed, but has been on the cards for a long time.

Farmers Weekly flagged it up in early-November - but the company's management insisted then it was "business as usual" and DFB would hit its targets.

This was followed by news of a 2p/litre retrospective price cut at the end of November, the resignation of the then chairman and the announcement of a radical restructuring plan. This set alarm bells ringing once more.

Another price cut followed in February, then the announcement that DFB had appointed PriceWaterhouseCoopers to find a new owner, then a rejection by members of a refinancing plan to convert their loanstock into shares. More alarm bells.

Finally, in late April, former chief executive Andrew Cooksey stood down, but only after another 2.2p/litre price cut to members. It also emerged that DFB had lost its contract to supply liquid milk to The Co-Op.......

Arable farmers will be heading to next week's Cereals event with an extra spring in their step, following news that wheat prices have reached a season high of £114/t and fertiliser prices are almost half last year's level.

But, while they will be surrounded by lots of shiny kit and permanently smiling salesmen, they should not be tempted into reckless spending on the expectation of better margins.

Hopefully the fertiliser price will have some more stability about it this season, but grain prices remain as volatile as ever.

The recent surge in ex-farm prices has been primarily caused by the "bull run" in the Chicago futures market.

This has been driven by three things - the weakening in the value of the dollar, the reappearance of commodity speculators and the weather. All three are fickle entities.

On the currency side of things, the weakening dollar is perhaps overdue and may well be sustainable. But while this is good news for US grain exporters, it makes the job of exporting UK and EU grain that bit harder.....

A few years ago I was interviewed in Dublin by RTE radio, along with journalists from Scotland and Northern Ireland, as to which system of single farm payment was the best.

The Scottish journalist said he was convinced the Scottish system was. Payments were based on historic receipts, but with a national envelope to target specific aid to suckler beef producers in the hills.

The Northern Irish journalist reckoned his department's "static hybrid" model worked better, with 80% of the SFP based on historic receipts and 20% based on a flat rate area aid element.

Clearly the interviewer expected me to then extol the virtues of the English "dynamic hybrid" model - with historic and flat rate payments changing each year until the historic element was phased out altogether.

I did not. I actually said I thought the Welsh system was best - basing the new SFP entirely on what each farmer had received in the historic reference period, no bells or whistles attached.

The view I held then was that anything else would lead to a redistribution of aid at a time when an entirely new system was being introduced. This would have added complexity and caused even more tension in the early stages.....

Fertiliser manufacturers have a lot of work to do to win back any farmer affection, but the new £175/t price tag for ammonium nitrate may go some way to starting the process.

Relations between the two groups took a battering last year as many farmers bought early under threat that prices would go higher, only to find values dropping sharply towards the end of the season.

At the annual GrowHow conference in mid-May all the talk was of a new season price of close to £200 "plus or minus a tenner".

But it has emerged today that spot purchases on Nitram are available at £175/t, with a £2 carry per month to August.

Yara has yet to declare its price for ammonium nitrate, but is almost certain to match the GrowHow price.

At £175/t, domestic AN is at least competitive on unit value and efficiency with imported urea, which is currently quoted at £225/t. But with the pound continuing to strengthen against the dollar, that value could drop lower....