Give dairying a break

Give dairying a break

Hardly a day goes by without more depressing news for the dairy industry. There are lots of reasons quoted for the low price including unusually favourable global and UK production conditions raising production above trend, slowing demand in China, sanctions in Russia, relatively strong sterling against the euro and everyone’s favourite, unfair supermarket practices.

 

It is not easy even for the traditional supermarkets. Success has been achieved in the past through increasing subtle quality distinctions to attract customers. This model is now under threat from low price supermarkets with global buying power. In the long term it is vital for a supermarket to ensure the supply of liquid milk, since if there is nothing to sell there is no profit. However, to have a secure supply and to also pay a premium the supermarket needs to see a clear benefit.

There are two important aspects to this situation:

1. It is unlikely that we will see a combination of so many conditions conspiring together again to have such an extreme impact (although there will always be some threats as all businesses face). In fact the New Zealand dairy auction that sets the global price benchmark has shown an increase in price over the last two auctions.

2. The reasons for the low prices are all outside the producer’s control. There is little anyone can do to stimulate Chinese demand or otherwise increase world prices and it is perhaps rather naive to expect any buyer to pay more than it has to, to secure supply. In fact many people do not have the means to pay more.

Low profitability is not a reflection of an individual’s dairying expertise but an external influence. The number of UK producers has fallen by more than 50% in the last 20 years making it clear that external factors are to blame for the squeeze. There is absolutely no loss of face to cease dairying and many people in all industries have had to deal with similar issues in the past.

However, this does not mean that a passive approach will be sufficient. There are a number of specific actions to help determine optimum strategy:

1. If a loss is expected quantify it. A cash flow and trading budget done well will indicate the scale of any loss and while it is unlikely to be spot on it will provide a good indication of the outcome. Best of all you may be able to do something to avoid the loss before it has been made and in doing so preserve hard earned cash. You might withstand a loss but it may not be worth it if future profits are also likely to be modest.

2. It is unlikely that tweaking the detail will help. The chances are that massive effort has already been put into nutrition and animal health (for example) and a further tweak is unlikely to solve the problem. Similarly any political change introduced or processor investment is likely to have only a modest impact.

3. Consider the future not just the present. Most businesses compete with others in the industry and dairying is no different. What is your advantage over your neighbour? Realistically is the farm going to be competitive in five years’ time?

4. Running a family business is not just about the money but without profit options are fewer and action may eventually be imposed. There is a risk that where action is imposed value may evaporate. The next generation may not appreciate a business providing an ever lower standard of living. They would probably be much happier to secure other skills even if the farm ultimately proves the favourite option.

5. Finding new opportunities to make a living are not always easy – but dairy farming is hard work and something new can also be rewarding. There are often funding opportunities to help with new ventures or with training

6. It is possible to come back in to dairying following exit if the global situation improves. If a decision is made to stop dairying don’t ignore the possibility of preserving the investment and starting again in two or three years time.

Dairying in the UK has a great future but it is not for everyone. If profits are acceptable at present and there is no looming problem it may be a good time to plan the next major structural change to ensure a healthy future. Planning needs to go well beyond the farm gate to ensure distinct products that are less subject to price pressure, an efficient supply chain and a mutually beneficial contract. Good sale contracts mean that the farmer and processor are in the same boat neither can press on without the other.

 
 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973