Hold on to cash till milk quota price falls
MILK producers should wait for leased quota prices to fall from current unjustified levels before parting with their cash.
Latest milk production figures, coupled with poor quality grass and silage stocks, suggest the UK will be hard-pressed to make quota this year, says Charles Holt of the Farm Consultancy Group.
That, and the continuing exodus from the dairy industry, will soon put pressure on quota values, he maintains. "Intervention Board data to the end of July shows production this quota year is down by 140m litres compared with July 1997. In the 1997/98 year we ended up 115m litres over quota. Production to the end of July 1996 was 62m litres above this Julys level, yet we ended up only 50m litres over quota."
The quota leasing price of 7.4p/litre for average butterfat is only 2p below last years level, while the milk price has fallen over 3.5p, he points out. "Producers should ignore the hype given by lessors agents who are talking up demand."
Last year, leased quota values fell by about 2.5p/litre between August and November, says Mr Holt. "Given this years outlook, a downward correction on quota leasing prices must be due shortly. Even at a leasing price of 6p/litre, the lessor is still getting 15-20% return on his capital."
Jonathan Smith, of Bruton Knowles, notes some commentators suggest lower milk production is simply a case of farmers responding to lower prices paid by the dairies.
"Producers could now be looking to boost production in the forthcoming months, sending us over quota and leading to another large super-levy bill."
He reports 4.06% butterfat quota trading at 8p/litre, which he suspects may be at or near the top. "I cant see the price going a great deal higher, by the time you account for all the other costs in producing a litre of milk."
Sale quota is now good value, he suggests. Assuming quotas have eight years left to run, a lease price of 7.5p/litre suggests a sale value of 60p/litre, compared with the current 36p/litre for 4% butterfat. *