The views represented are those of the author. The author is not responsible for any actions taken as a result of reading this information.
Current Situation
In April, milk production was down by 70 million litres compared to last year. Production was actually higher than in March 2004. Butterfats were 0.1 % higher than last year.
These figures have lead to some suggestions that the UK will not meet quota again this year or in subsequent years and so there will be no need for extra quota.
What might have caused the production in April to drop?
- A later turnout than last year with some herds only out in early May
- A follow on from reduced output from farms over quota in the previous quota year. Examples are increased culling or drying cows off early
- Farmers changing their calving patterns from last year as a result of initiatives on seasonality pricing and DFOB telling farmers to stop mating cows.
- A big rise in concentrate prices especially for farms on a contract finishing in April.
It is very early to say if quota will be reached by the end of the year at this stage. Many farms are currently making excellent silages so this should stimulate production. On the other hand there are many farm sales planned with producers ceasing milk production. These farms probably only sell 75% of their herd with the rest being culled. This can lead to a decline in dairy cow numbers.
What to do?
Obviously you will be aware of the single farm payment SFP. MDC Datum web site has a detailed chart showing payments. Future entitlements are based on quota held at the end of this quota year. Table 1 shows our estimate of the value of these payments based on farms in England.
Table 1 Future value of SFP
| Year | Dairy Payment ppl | % Contribution to SFP | ppl SFP | Modulated @ 10% | Net Present Valve @ 5% (NPV) |
| 2005 |
1.7
|
90%
|
1.53
|
1.38
|
1.38
|
| 2006 |
2.56
|
85%
|
2.17
|
1.96
|
1.78
|
| 2007 |
2.56
|
70%
|
1.80
|
1.61
|
1.40
|
| 2008 |
2.56
|
55%
|
1.41
|
1.27
|
1.04
|
| 2009 |
2.56
|
40%
|
1.00
|
0.90
|
0.70
|
| 2010 |
2.56
|
25%
|
0.64
|
0.58
|
0.43
|
| 2011 |
2.56
|
10%
|
0.26
|
0.23
|
0.16
|
| Totals |
8.81
|
7.9
|
6.9
|
This shows that quota held will attract a total payment of 7.9 ppl up to the end of the historical payments. Some of these will come in later years so we have calculated the NPV using a figure of 5%. This shows these payments to be worth 6.9 ppl in 2005.
If we assume quota is 13ppl ( 20/05/04) then the net price for quota after deducting the NPV is 6.1ppl. At 6 % interest this will be a total cost, including capital and interest, of 1.055ppl over seven years. This represents “your licence to produce milk”
If quota has no value because the national quota is not reached then you have “wasted” this money. On the other hand the peace of mind knowing you have secured quota possibly until 2014 maybe will justify the gamble. It is worth remembering that you will receive a payment between Dec and June 2005 of 0.8ppl. For a two million litre quota this is £16,000. This is enough to buy 226,295 litres of quota at the net price of 6.1 ppl.
Summary
Quota purchase now will give the entitlements outlined above and provide a basis for future business development. If the farm business is looking to expand in the near future then there is an opportunity to secure quota at a realistic price. The future milk price is being talked down but will this happen ?
- Milk prices in the USA are over 22ppl as a result of similar trading conditions as the UK. This represents a 75% increase in price
- Dairy companies have to be concerned about supply if the drop in production continues
- Remember that the historic dairy payment is in addition to the price you receive from your milk buyer For example in2006, if milk price stays at say 19.5 ppl, then you will receive 19.5 plus 1.96 equals 21.46 ppl.
If you are a dairy farmer looking to expand in the future then you have to evaluate the options re quota. Each farm will have differing circumstances but set some realistic prices for quota purchase or lease. Do not forget that quota last year ranged from 9.7 ppl to 36 ppl. Can your business stand the risk of having to purchase quota at the top end of the scale?