26 January 1996

Falling confidence puts question over value of milk quota

By Philip Clarke

DECLINING confidence in the long-term future of milk quotas has led to a fundamental shift in the market-place.

A new study from the Royal Agricultural College, Cirencester, and Bruton Knowles National Quota Exchange shows how the average annual cost of purchased quota, written off over 10 years, has been well within the extra margin over purchased feed (MOPF) available.

And since 1986/87, when leasing was introduced, its lease cost has closely matched that annual purchase cost right up to 1993/94.

"But in 1994/95 leasing costs simply took off to end up well above earning capacity," says report author, James Jones. Even in 1995/96, when leasing returned to more affordable levels (12p/ litre), it was still above the equivalent purchase cost based on a 10-year write off (see graph.)

In fact, leasing values are now closer to the annual cost of bought quota based on a five-year write-off period.

"We may have witnessed a shift representing a weakening in confidence in the longer-term value of quota," says Dr Jones. The report also notes that leasing-out quota has yielded a return of between 13% and 22% on its capital value in the past two seasons, well above what it could have earned in a building society or bank account.

Other factors affecting the market include the quality and timeliness of information from the Intervention Board on national milk output, the weather, legal uncertainties and the tax system.

In particular, the 1995 Budget decision to cut the qualifying age for retirement relief from capital gains tax from 55 to 50 could lead to more quota coming on to the market.

But the main determinant of value is confidence. The report shows how the price of quota dropped markedly between 1991 and 1993 during the run-up to the MacSharry CAP reforms. Values then took off in late 1994 after deregulation of the milk market.

"The current scheme is due to terminate in the year 2000," says co-author, Tony Carver. "As the date of expiry draws closer, there is an increasing likelihood that the level of confidence will ease, causing prices to fall in the same way as they did before the extension of the scheme from Apr 1, 1993." &#42