Milk quota unease pushes up value of short-term leases
By Philip Clarke
MILK quota lease and sale values are heading in opposite directions, as producers look for short-term cover rather than long-term investments.
"Ive never seen anything like it since quotas started trading in 1985," says Tony Carver of brokers Carver Knowles. "Its a reflection of the financial clamp on most dairy businesses. Producers are going for the minimum outlay solution – leasing – even though in the long run this may not be the least cost option."
Lack of confidence in what will happen to quotas when the current regulations come to an end in 2000 is also denting sales values which are quoted at 34p-35p/litre for 4%.
A survey by consultants Laurence Gould at the South West Dairy Event showed that 78% of farmers believe quotas will be gone within the next five to eight years, despite the fact Agenda 2000 proposals in Brussels call for their retention at least until 2006.
Further price pressure is anticipated by ADAS specialist Mark Bray. "Intervention Board figures show that sales volumes so far this season are 17% down on last year when, if anything, we expected them to be up." Given the numbers now going out of business, and the fact they have to sell the quota to get retirement relief, more quota is expected to come on to market in the next few weeks.
In contrast, leasing values have held firm. This week 4% butterfat lots were fetching 8.2p-8.4p/litre, fully 2p/litre more than at the start of the milk year. This is also the same price quota was trading at a year ago, when milk prices were 2.5p/litre higher.
Against this background, Jonathan Smith of Bruton Knowles National Quota Exchange believes permanent transfer to be the better option, even after allowing for the tax advantages of leasing. Last weeks interest rate cut should certainly help the cost of long-term finance for those with a more bullish view on the future for quotas.
George Paton of quota agent Lovedays believes some producers have already woken up to this, reporting growing interest in the purchase option at the start of the week. Written off over eight years, quota bought at 35p/litre would cost 7.5p/litre, he says. "I just dont understand the enthusiasm to lease in the mid-8p region when there is still 40% of the market to be done."
• Recent milk production figures have had little effect on quota markets. Even though September milk output was 5m litres (0.4%) below quota, the cumulative surplus increased to 17m litres (0.2%) following a big correction to the August figures. Output is still running 96m litres behind year ago levels. *