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The coronavirus pandemic is hitting the South West’s dairy farmers harder than anticipated. 

At the start of this unprecedented health and financial crisis, many people thought that the farming industry would be, in the main, insulated from major market upheaval. However, as the situation continues to unfold, many dairy farmers are facing significant challenges. These stem from a number of factors, including a significant reduction in demand for milk at a time of year when production is at its highest.

In press reports, NFU President Minette Batters has said that one in three dairy farmers has been “severely impacted” by the crisis. She has revealed that she expects an announcement of a support package for dairy farmers, which could take the form of a hardship payment, later this week.

Those farms that sell a range of products to the large dairies face less risk than those that rely on marketing milk to the hospitality and service sector. It is, however, important for all farmers to consider what they can do to protect their businesses against the financial impact of the crisis. 

A drop in spot milk price

The market value of milk, known in the sector as spot milk price, has fallen to very low levels. It is currently valued at around 12p per litre, compared with an average of 28p per litre.  Under many contracts supply over contracts will over supply. For many any milk that is produced in excess of contracted litres is paid at ‘spot price’. Spot prices will also affect the negotiations on price at the next contract agreement stage.

The loss of retail and hospitality markets

Given the increasing popularity of cappuccinos and lattes, drinks made in cafes, on average, include much more milk than coffee that is drunk at home. In normal times, the retail and hospitality sector takes a significant proportion of milk produced in the UK. Those dairy farms that supply the service industry are being hit particularly hard.

A short-term oversupply of milk

This crisis is impacting dairy farmers at the time of year when prices are always under pressure due to seasonal production. 

In May, the highest milk production month, milk production in the UK is usually 17 percent higher than in October, which is the lowest production month. By July, the supply is generally much closer to the annual monthly average. That means, dairy farmers are being hit by the coronavirus crisis at a time when they are dealing with a short-term oversupply of milk.

Rising feed costs

Animal feed costs are affected by world trade. While fuel prices have fallen, impacting positively on the amount of maize going into ethanol plants, global trade in proteins has been hit by logistics and volatile markets. From national costings for dairy farms dairy concentrate prices in February were £10/t higher than the 5 year average. 

There is pressure on prices to come down as a weakening world demand has brought surplus stocks to market. However compound feeds at the present time appear to be holding

The weather has also impacted on feed issues for dairy farms. Grass growth has started after a slow start but rain is now desperately needed to ensure dairy farms have a good supply of fresh grass.

Actions for dairy farmers to consider

Because each farm is being affected in a different way by the pandemic, the actions we are recommending dairy farmers should take depend very much on their individual circumstances. However, there are key consideration, depending whether or not your farm currently has capital projects underway. 

Stable dairy farms with no capital projects underway

For these farms, this is likely to be a relatively short-term issue and farmers should focus on some key issues.

  1. Look at cash flow – What impact would having two-thirds of your usual milk cheque have on cash through the next six months? 
  2. Postpone any non-urgent work. Building projects can be delayed for 12 months.
  3. Produce an as accurate as possible milk prediction for production in the next 12 months. Having done that look at the cash impact a 3ppl drop in milk price would have on cashflow.
  4. Producing more milk in these circumstances is unlikely to help. It is more important to drive efficiency, which means considering whether the best use is being made of grass.

Farms that are in middle of capital spending projects

Farmers who have been investing in capital projects are likely to have budgeted for an increase in production to help cover the costs.  The crisis presents particular challenges so the following should be considered.

  1. Keep your bank informed by providing a properly drawn-up budget or, if a budget has already been provided, update it with realistic expectations of cashflow.
  2. Talk to your dairy and ask if they will they still take extra milk production.
  3. For many milk production above a ‘quota’ level will be paid for at a much lower price and it is important to know what price will be received for the milk. For some, budgets will have been drawn up on the basis of buying in extra cows to increase output. These purchases may need to be delayed, as buying in cows at a time of very low milk prices does not help, and is a drain on cash in the first few months
  4. Review all of your loan repayments. Having a capital repayment holiday can help keep cash on track. This will need to be done with your bank’s involvement.
  5. Consider production costs and whether it is really worth pushing for that extra 500 litres per cow in these difficult markets. Perhaps driving the efficient utilisation of grass would be better.
  6. Is there any stock on farm that could be sold (assuming a market can be found)?
  7. Keep talking to your feed suppliers. Make sure feed usage is efficient, even if that means not producing those extra marginal litres. Remember, as the price of milk drops, those marginal litres will become even more marginal.

Whatever steps are taken it is crucial to keep your suppliers and key business contacts up to date with what is happening. Some farmers are still struggling to repay debt incurred during the last financial crisis. Talk to your suppliers and have a plan. After all, the best decisions are made with best information.

Our Agricultural Consultancy team is here to support you during these unprecedented times. If you have any queries or need any advice, please do not hesitate to contact me or your local Thomas Westcott representative.