20 November 1998

WHY DAIRYING WILL SURVIVE

Planning for a successful

future was the topic at a

recent Cirencester

conference. Jessica Buss

reports on challenges ahead

FARM incomes have dropped dramatically since they peaked in 1995, but farming businesses will survive because UK farms still show a strong balance sheet, and half of all farms do not borrow money.

Speaking at a dairy profitability workshop at the Royal Agricultural College, Cirencester, Midland Bank agricultural manager Simon Breakes said no other businesses could match UK farms on balance sheet strength of over 80% equity.

Borrowing, from banks and the Agricultural Mortgage Corporation, is low, having peaked at £8250m in 1993 and has decreased slightly since. "Thats equivalent to the cost of the Channel Tunnel," he said.

These strengths will allow milk producers to acclimatise to changes in price, even though profit and net worth will decline next year. Incomes are likely to fall to 1990 levels, added Mr Breakes.

"But dairy farmers must know their break-even price/litre of milk. I know producers that can produce milk, live, pay tax and re-invest at a break-even price of 16p a litre – but there are not many of them."

Despite prices falling by up to 6p a litre, he believes producers will survive and the fall in producer numbers will remain low. Axient Farm Business Solutions predicts 4-5% of current producers will quit milk production by 2006. Prices for inputs are bottoming out, and the milk price to concentrate ratio is good providing scope to increase output.

"Producers should continue to strive to improve genetics, physical and financial performance. In most businesses there is scope to do so," said Mr Breakes.

Quota prices for leasing or buying are unlikely to follow logical financial sense. Its best to calculate which suits each business. Take into account any possible tax savings through leasing, and the opportunities for cheap borrowing over longer periods for purchases, but without leaving the business at high risk such as by leasing over 20% of annual quota needs, he added.

"Many younger producers leasing quota would love quota to go overnight. They are efficient but cannot afford quota." However, he believed some form of quota would remain after 2006.

He also suggested producers could do more to secure their own future. Firstly, producers should amalgamate milk marketing groups to form fewer, larger groups – possibly 10 or less, he added. They should also consider milk processing options.

No other business can match UK farms on balance sheet strength of over 80% equity, delegates heard.