10 May 2002

Dairy sector set for more contracting?

By Andrew Shirley

CONTRACT farming arrangements could become more widespread in the dairy sector if quota leasing prices remain low, says one farm business consultant.

Although common in the arable sector, such agreements have been used sparingly by milk producers. Helen Evans, of Staffs-based Kite Consulting, says this is partly because the returns from leasing quota have made contracting a less attractive option.

But now leasing values are more unpredictable alternative schemes could be the better option.

She reckons a contracting agreement would suit landowners thinking of retiring who want to realise the value tied up in their dairy units, but no longer want to be involved in the day-to-day running.

Mrs Evans has just put a 15-year contracting deal, with a September start date, on the market. Centred around Ladybank Dairy, near Credenhill, Hereford, the scheme will cover a 450-head herd run over 212ha (525 acres) utilising a newly built 22:44 herringbone parlour.

The structure of the agreement will be similar to an arable contract where the landowner receives an annual first charge for the provision of the land, buildings and quota.

Mrs Evans is wary of estimating the rates payable. "People will have to tender, but the figure we have in mind will allow somebody to make a profit based on 450 cows yielding 8000 litres a year with an average milk price of 18p/litre."

She concedes that the milk price may well fall below this level, but says the size of the unit should allow good profits to be made when prices are higher while riding out any period of lower returns. Profits would be provisionally split on a 20/80 basis in favour of the contractor, although the consultant says there could be some flexibility.

Any potential contractor would have to add an extra 150 cows to the farms current herd to reach the estimated threshold, as well as sourcing about 1.7m litres of quota to boost the holdings existing 2.37m litre allocation.

For this reason, Mrs Evans thinks the deal will appeal to dairy farmers with their own land and quota who are already milking around 150 cows and are looking to expand, but dont have sufficient capital to invest.

"You can spend up to £4000 a cow to set up a new unit, but this way you get a much better return on your capital. A figure of 10% would not be unrealistic."

The launch has received the backing of milk quota broker George Paton, of Webb Paton, who believes there should be plenty of demand.

"I have clients who would be interested. There are more people in the industry wanting to expand than leave."

Mr Paton seems to be correct. After only a few days on the market there have already been plenty of enquiries, says Mrs Evans. &#42

Helen Evans: Contracting arrangements might suit dairy farmers wishing to retire.