Realistic lease quota bid may ensure survival

By FW staff

WITH milk prices hitting new lows, dairy farmers are being urged to be realistic when it comes to bidding for lease quota.

Milk cheques have shrunk by an average of 1p/litre over the past year, says Charles Holt of the Farm Consultancy Group, taking many farmers into a loss-making situation.

“Quota leasing is a huge cost for the industry,” he says. “Faced with a falling milk price, one would imagine lease values would fall as well. In fact, the average lease price is probably slightly higher this year than last, at about 6.6p/litre.

“Last milk year the UK was hardly over quota at all, so lessees probably completely wasted their money when acquiring quota.”

So, at current milk prices, what can producers afford to pay for leasing to at least break-even?

This will depend on the actual income per litre they receive which can vary by up to 5p/litre.

But assuming a return of 18p/litre, then Mr Holt estimates the average break-even lease price to be 6.2p/litre.

This suggests that dairy farmers are still paying too much for their quota.

Whether lease costs fall will be heavily influenced by milk production figures from the Intervention Board over the summer months, coupled with farmer expectations on future output levels.

Availability of quota will also be crucial. Although there is a shortage of cheap quota, Mr Holt anticipates an increasing supply during the summer as more people quit milk production.

“Quota available for leasing has grown year on year,” he says. “In 1996 1.17bn litres were traded, rising to 1.33bn litres in 1998. If there is a mass exodus from the industry output figures will weaken, cancelling out high production this spring.

“These sentiments seem to be prevalent among dairy farmers at the moment and I see only continued weakness in the milk quota market this summer and autumn. The message to lessees is to hold your nerve and not pay over the odds for milk quota.”

Other brokers confirm an inherent weakness in the lease market. Bruton Knowles National Quota Exchange says the higher prices lessors are holding out for “look unlikely to materialise in the short term”. And Swindon-based Lovedays says that, “at last, the market is doing its best to pull the price of milk quota leasing down to a profitable level”.