29 May 1998

Quota prices are vulnerable

LEASED quota prices are edging upwards, but may slip back to more affordable levels soon.

Typical auction values are now 7p/litre for 4% butterfat quota, and producers need to calculate carefully whether they can make money at that level, says Neil Adams of consultants Axient.

Unlike some brokers (Business, May 15), he suspects the market may weaken.

"Although April milk production was slightly ahead of the Intervention Board quota profile, it was 30m litres down on last year. The surplus represents less than one five-hundredth of the annual milk quota available. It would take a mean statistician to show this as a significant trend."

Several other points suggest prices will fade, he adds.

&#8226 Milk quota leasing price fell continuously last year between June and Nov 11.

&#8226 Dairy farmers will receive £450m less for their milk this quota year.

&#8226 Milk price could fall further.

&#8226 Total leased quota has increased year on year. Nearly 10% of all milk is produced against leased quota, and the trend is likely to continue.

Quota looks expensive at the moment, Mr Adams reckons. The effective milk price (that left after deducting lease cost from the milk price) is 12.1p, assuming a milk price of 18.6p and a lease price of 6.5p. "In 1990, the milk price was 19.2p and leasing was 5.93p which gives an EMP of 13.27p/litre."

Lincs-based Charles Holt Consultancy also advises producers to watch the costs. Charles Holt calculates the break-even value for leased quota is 7.3p/litre for those seeking to increase yield a cow, at a milk price of 18.3p/litre.

The figure includes 10.3p/litre extra concentrate cost, 1p/litre for extra sundries and labour, and slightly reduced forage variable costs.

For those taking on more cows, break-even is just 6.5p/litre, assuming a 2.3p/litre cow cost, extra concentrate at 3.4p/litre, extra forage variable cost of 1.1p/litre, and labour and other costs.

"Prices ought to have peaked," says Mr Holt. "A lot of consultants have been advising their clients to increase milk production or get out. But for some producers 6.5-7p/litre is pretty marginal. Dont be whistled up into paying silly money and making a loss."

Once milk output peaks, prices will start to come back, he maintains. "It could easily be June. And talk of drought or further milk price falls could also help drive the market the other way."

&#8226 A wide spread of payments (over 6p/litre), nearly twice that seen in last months table, separates the "high" and "low" payers in this months Milk Price Review as seasonality payments kick in.

Prices are down across almost all contracts, but those with heavy seasonal deductions show particularly low prices. However, the gap will close when those same companies pay more for reduced summer milk supplies. &#42