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Potter's View: "It cannot keep coming back to farmers expecting them to fund a shortfall"

This month, Ian Potter questions whether the latest intentions survey does more harm than good, wonders whether we are ready for the end of quotas, and finally casts a rule over First Milk’s performance.

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The results of DairyCo’s latest annual farmer intentions survey for 2015 were once again released at the dairy breakout session of the AHDB’s annual Outlook conference in Westminster.


This year’s survey has one headline worthy of cross examination. From a survey of 850 GB farmers a staggering onethird plan to increase milk production during the next two years.


Assuming they do as they say, DairyCo’s survey translates to an eye watering 6% increase in national production. As DairyCo pointed out, the ambition to increase production comes on the back of a record production year.


I have no doubt the 6% figure has been accurately crunched by DairyCo’s bean counters, but does the message best serve its dairy farmer levy payers who pay around £7.3 million to fund it? My question is this: will processors and retailers see the figure and think there are no long-term concerns over the effect the current low milk price is having on farmer confidence, and that whatever happens the milk will still flow?


The message could result in retailers and food service customers taking the attitude it doesn’t matter what they pay, there will never be a shortage. The detail of the survey, in that it was done in December before milk price cuts had really hit milk cheques, will be lost.


Milk prices for most have headed further south since December, so surely it’s a sensible idea to do an up-to-date poll immediately prior to the conference slot to check whether prices or new developments (such as the reality of the ending of quotas and the certainty of A and B production limits and for some A, B and C) have dented ambitions.


Nevertheless it’s useful to have an annual confidence barometer, plus farmers’ thoughts as to their future investment and production plans. But the results do need handling with care, even if recent survey intentions covering planned production have been way off the mark when compared to actuals.


By the time you read this article there will only be a few days left until March 31, and the ending of 31 years of milk quotas. During that time the UK has paid wholesale super levy in 15 years, with the most being paid in March 1996 when the levy rate was 31.43ppl and the total paid was £44 million – an amount boosted more by the introduction of the butterfat adjustment because we actually only exceeded our national quota by 1%.


Since March 2004 the UK has been under its wholesale quota for the past 11 consecutive years, during which time our quota has increased by more than one billion litres. The total wholesale super levy paid amounts to £235 million, and including that paid by producer-retailers gives a grand total of £276 million. From April 1 it’s a free market for 28 EU countries and, inevitably, the boom to bust and back again pendulum will prevail.


The drastic producer haircut by First Milk in January to reduce its debt is still prompting numerous emails. Not only was it a deferral, until further notice, of monthly member milk cheques plus a back-dated conversion of milk revenue into capital contributions, it was also a tax blow to producers. For those First Milk members who pay income tax (and I accept they could be in a minority today), the capital contribution is treated as net of tax. That means a 40% tax payer has to earn 3.3ppl before tax to pay the 2ppl capital contribution.


The next news from First Milk simply has to be good, and will hopefully confirm business conditions have improved. It has to show its balance sheet has been rebuilt on a solid and sustainable foundation. It also surely has to offload loss-making ventures, possibly including recent acquisitions, in order to reduce its debt further, as well as cutting its own costs further and deeper like Arla did recently (with 100 job cuts). It cannot keep coming back to farmers expecting them to fund a shortfall accruing from its situation/poor selling/lack of business competence.


If its outlook does not improve in the next six months it could easily find itself in another iffy situation, especially if selective recruitment from others coincided with another run of member confidence. I know the company doesn’t need reminding its recent decisions have pushed several loyal members over the edge financially, mentally and in terms of family relationships.


The last thing anyone wants is another DFOB, United Milk or Amelca. Good honest hard-working dairy farmers who are members of a co-op should demand the same calibre of professionalism as expected from managers in PLC and private dairy businesses.


But it’s not just First Milk members who have taken a kicking. One farmer has had his milk contract renewed on the condition he sells 500 of cows. If he doesn’t then he has no milk buyer. He appears to be one of a number who took a short term view and switched from a long term secure contract which paid an okay price into what looked like a straightforward, but higher priced one. These were mainly offered by brokers, of course. Many of those farmers are now in a worse pickle than First Milk people.


In my opinion, too many dairy companies, brokers and farmers have all their eggs in one basket. That brings risk compared to those companies with diverse outlets and globally traded products or brands. Whether we like it or not, it will not be anything connected to our much loved/hated liquid market which will push farmgate milk prices up.


Such a change will be instigated by those processors exposed to global markets, and the liquid processors will be like sheep following them. Fingers crossed the GDT auction continues to rise, especially if it’s boosted by a lift in the Russian ban and China starting to buy again – because they have to and will. The question is when!


Ian Potter

Ian is a specialist milk quota and entitlement broker. Comments please to ianpotter@ipaquotas.co.uk

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