Farmers looking for a new milk buyer because of dissatisfaction with their current buyer’s prices have been urged to put risk at the top of their decision-making list.
Rising farm gate prices twinned with the credit crunch, which is resulting in ‘FreshnLo’-type milk discounting, means many dairy companies are faced with “one of the most vicious cost:price squeezes” in recent times, according to Kite Consulting‘s John Allen.
And this added to the risk profile at a time when dairy commodity prices are already highly volatile, he said. “We have seen in financial markets how big mistakes can be made by poor judgements over risk.
“If a farmer is thinking of moving buyer during these uncertain, volatile times then our advice is to determine the risk and return profile he is happy with find a quality buyer that matches it and who has a good contract find out as much as you can about the challenges and pressures facing their market what their payment terms and conditions are and determine how that fits with your business objectives.”
Risk profiles could change quickly according to several factors, such as milk volume, world markets, currency and politics, Mr Allen continued. “Currently the highest risk buyers include milk brokers and small liquid dairies who have to pay a competitive milk price to attract the milk, but which are faced with unprecedented high street pressures, and those who put products on very volatile world markets.”
Mr Allen defined medium-risk buyers as those in the very volatile and unpredictable commodity sector and whose product portfolio and quality differentiation was not insulated against base commodity substitutes.
Low-risk buyers, he said, were those with a range of products and market outlets, or who had dedicated outlets for high demand products, such as liquid milk, branded cheese and high quality own label suppliers.
“I’m not saying don’t supply high-risk buyers, as some of them can counter their pressures through lower overheads, first class service and through a very loyal customer base,” he said. “I’m simply saying farmers should consider the risk profile. Like investors, some farmers will accept a higher risk profile, while other farmers are more risk averse.”
According to Mr Allen, there are five key issues to consider when determining risk:
- Exposure to poor credit lines: As credit remains tight some companies may be under pressure because customers cannot pay on time
- Inter-company politics: Brokerage firms are not necessarily the most popular, and politics between a company and its suppliers can affect the decision to buy from a broker or not. Would a company buy from them, if they didn’t have to? And what would happen if they stopped?
- Imported milk: What effect will this have on brokerage values?
- The effect of the credit crunch: How are middle ground milk sellers faring having to pay high prices to farmers, but being up against Tesco‘s discounted milk brands on the high street?
- Currency is playing havoc with world market prices. The dollar has appreciated by 14% since July, with 4% in the first 10 days of October alone, while the pound has lost 14% of its value to the euro since July. In current markets these trends could quickly reverse.
“Savers looking for the best return have failed to consider risk in recent times, and have got their fingers burnt,” Mr Allen said. “I don’t want farmers to make the same mistake.
“Recent events in the world, with the near collapse of the whole financial system, have shown that anything could happen. Farmers should consider that in their choice of buyers. They could jump out of what they see is a pretty cold frying pan, price-wise, into a pretty hot fire, risk-wise.”