Realistic lease quota bid may ensure survival
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 (see table).
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 Interven-tion 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". *
Genus takeover at VDC
CATTLE breeding and consultancy company, Genus, has won control of veterinary suppliers VDC, following a protracted takeover bid.
Initially bosses of VDC favoured a rival offer from petcare company, Lawrence. Genus then raised its bid from 190p a share to 220p, at which point a third party, veterinary group Dechra, entered the fray.
But fears of a referral to the competition authorities if the Dechra deal went through prompted the VDC board to recommend an increased offer from Genus of 235p to its shareholders. *
Milk production up
MILK production continued to accelerate during May, according to latest figures from the Intervention Board, reaching an estimated 42.8m litres a day, compared with the 41.3m litres a day in April
But this was in line with expectations and the monthly total was just 0.6% over quota, after allowing for a significant drop in butterfats.
The reasons for the "milky" start to the year are two-fold. First, producers already had their feet on the accelerator from the end of last milk year, as they attempted to rectify an under-quota situation.
Second, good grass growing conditions this spring helped dairy herds achieve a 4% yield increase, according to data from NMR.
"Lower milk prices have meant that many farmers are turning to extended grazing, with more milk coming from forage," says Mike Blanshard of NMR.
"Normally higher yields are accompanied by increases in cell counts. But it looks as though more farmers are keeping a keen eye on herd health to make sure they qualify for price bonuses." Average cell counts were the lowest for the past three springs at 171,000 throughout the UK.
But trade sources indicate milk output is now in seasonal decline, leading to increased competition amongst milk buyers and better spot prices. *
Kit sales drop
EQUIPMENT makers are feeling the pinch from the crisis affecting the production end of the dairy industry, suffering a 25% drop in their market in the past two years.
Things are more stable in the spare parts and services end of the business, says Michael Hughes, new managing director of Alfa Laval Agri. But overall the company has seen about a 10% fall in its UK turnover.
Despite this, he remains optimistic about the future. "If you look around the rest of western Europe, a lot of the pain that lies ahead for them has already been taken by the sector here, where farmers have got on with restructuring." This gives UK dairymen one of the lowest costs of production, says Mr Hughes, putting them in a strong position. *
ECONOMIC recession in the dairy sector has claimed another victim, with cattle and quota finance company, Dairywise, calling it a day.
Accountants Grant Thornton has been instructed to wind down the Malvern-based business, with shareholders expected to vote for voluntary liquidation on June 20.
"The dairy industry has been having a very difficult time, leading to a drop in new business to finance," said accountant Duncan Swift. At one time the company was the UKs leading agency for hire purchase of cattle and milk quota to farmers.
About £2m is outstanding, but if this is all repaid – and that may take up to four years – then there should be enough to pay all secured and unsecured creditors. *