Dairy update

     

    Bad debt risk

    While bank lending to farmers has generally remained strong during the lending squeeze, this is not true of lending to those businesses which farmers supply.  

    In addition, market volatility is putting extra pressure on manufacturers and processors. While risk can change quickly, a review of accounts is a good place to start particularly if all the related businesses are also taken into account.  It takes only minutes to inspect accounts held at Company House and chase back ownership.

    It is also worth noting that, at present, even an improving net worth may not be a reliable guide as the business might effectively be insolvent.  Bad debt insurance can still sometimes be obtained and might be worth considering,

    Price ratios of milk to milk products
    Milk price is key to dairy profitability. Examination of Defra and AHDB data shows that the farmgate milk price, including bonuses, is more strongly related to the wholesale cheese price (mild or mature) than the wholesale butter, skimmed milk powder (SMP), or cream prices.

    This is not surprising if the argument is accepted that the cheese sector is in most direct conflict with other European milk producers and that when profitable additional milk is purchased putting pressure on the milk price and forcing other buyers to respond to protect their supply.

    Graph 4. The relationship between milk and cheese price

    An interesting area is the ratio between the farmgate milk and wholesale cheese prices. The distribution of returns follows a pattern and any deviation from the average would suggest that the milk price is under pressure. 

    We have calculated the ratio as farmgate milk price in £/1000 litres divided by wholesale mature cheddar cheese price (£/tonne). When the ratio is at the high end of its normal range it is likely that cheese manufacture is becoming relatively unprofitable and pressure will be to reduce production or milk price. 

    As at the end of January 2012 the ratio was towards the top of its normal range (see graph 5), although the ratio had started to fall as a result of a small decline in the price of milk.  Unless global cheese prices rise it looks as though price of milk will fall as demand reduces.

    Graph 5- Misdistribution of ratios between milk and cheese prices.

    Key Points

    • Farmers should remain vigilant to the potential risk on buyer bad debt to their income streams 
    • Milk prices may ease back if demand from cheese manufacturers weakens.  
     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786