Hold on to cash until quota price drops

By FWi Staff

MILK producers should wait for leased quota prices to fall from current unjustified levels before parting with their cash, says Charles Holt of the Farm Consultancy Group.

Latest milk-production figures, and poor-quality grass and silage stockscould mean the UK will be hard-pressed to make quota this year, he suggested.

That, and the continuing exodus from the dairy industry, will soon put pressure on quota values: “Intervention Board data to the end of July shows production this quota year is down by 140 million 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 above this Julys level, yet we ended up only 50m litres over quota.”

The quota leasing price of 7.4ppl for average butterfat is only 2p below last years level, while the price has fallen over 3.5p, he points out. Last year, leased quota values fell by about 2.5ppl 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 6ppl, 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 should now be looking to boost production in the forthcoming months, sending us over quota and lending to another large super-levy bill.”

He reports 4.06% butterfat quota trading at 8ppl, 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 7.5ppl suggests a sale value of 60p litre, compared with the current 36ppl for 4% butterfat.

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