UK JT Issue 10 – Forum Questions
Q. Please tell us a little about your background, what areas you specialise in and your strengths as a consultancy business?
A. Andersons specialises in the provision of business advice to farmers and growers throughout the UK. I personally have worked in Andersons for over 20 years and a significant proportion of my clients are dairy farmers. As advisors, we focus on business issues and particularly concentrate on profitable farming and farming systems.
Q. Dairying has become very volatile and challenging in recent years, should our members expect this trend to continue and how do you forecast the industry in the short and long term?
A. Absolutely! We at Andersons are convinced that volatility is here to stay and both output prices and input costs will fluctuate substantially over time. Whether a future downturn will be as bad for dairy farmers generally as it was between 2014 – 2016, we are not so certain, this will depend on the milk supply and demand balance, plus exchange rates.
Therefore, all farmers need to be prepared for continuing volatility, it is a function of the market place that prices will rise and fall, particularly if one is selling into commodity markets. In order to mitigate the risks, farming businesses need the lowest cost of production and to ensure that they can make good profits in 8 out of every 10 years.
Q. What can Jersey farmers do to minimise the impact of falling milk prices at the farmgate?
A. Jersey farmers in particular are well placed to maximise the value of their milk contract, this we believe is a priority for all dairy farmers as future prices are likely to be dictated by the quality of milk, not just the volume produced.
Jersey producers on a Jersey milk contract did not experience the same downturn in 2014 – 2016 as other dairy farmers and this has to be a strength for the future. Managing milk supply versus demand will be a key consideration. Some dairy farmers may consider getting closer to the market place and selling either direct or to more secure markets and/or consider longer term contracts for milk pricing which are now becoming available.
Q. Will interest rates be a consideration for farmers in the future and should this limit expansion and investment?
A. Interest rates should not be seen as a restriction on investment if the proposals for development of the business are worthwhile, cost effective and likely to deliver higher profits. In fact there has never been a better time to invest in the farming business to reduce cost and improve returns, with relatively low interest rates as of now.
Investment decisions should be driven, by the strength of the proposals. If they are marginal or not going to deliver improved returns they are not worthwhile, if they genuinely contribute to additional profit and there is sufficient “buffer” built in to cover for risk, whether that is interest rate rises, milk price reductions or input cost increases, investment should be seen as a positive.
Protection against interest rate rises should be given consideration when investment decisions are being undertaken and finance secured. We are seeing many farmers generally with higher levels of borrowing and/or those undertaking substantial investments giving consideration to fixing a proportion of their debt. Typical rates are in the region of 3-3.5 % for long term money at present.
There are pros and cons to fixing funds and all issues need to be understood before making long-term commitments. For those clients who have weighed up the options and decided to opt for interest rate protection, we would generally suggest fixing a proportion of borrowing, somewhere between 30% and 70% of the total debt, with the remainder left on variable rates. Individuals need to consider their own attitude to risk before taking any fixed rate products or indeed considering investment decisions.
Q. How often should farmers revisit their business plans and models – is this important or just a paper exercise?
A. The financial plan is a crucial aspect of all good managers’ business planning. Too few farmers prepare a plan on a regular basis, monitor the plan and review performance . We often find that the simple act of preparing a plan encourages clients to reflect on their business and its future direction.
Generally, most of our clients do have a financial plan, we visit that plan at least once a year or more often if circumstances dictate, to understand the implications of the current farming policy and likely financial performance. This is important, not only from the farmer’s own perspective to understand their expected returns, the risks to the farming business and the finance requirements, but also when liaising with finance providers to give a clearer understanding of the business working capital requirements.
Q. Is diversification or direct selling something Jersey milk producers in particular should consider when they produce such a value added high quality product?
A. All farmers need to decide whether they are commodity producers i.e. volume at least cost, or whether they should get closer to the market place and start selling direct or at least further up the supply chain. In our experience, it is more difficult to sell direct and requires a really good understanding of the market place, the costs of production to process milk and a “thumping good” marketing strategy. However, for those brave enough to take these steps, there is an opportunity to secure more of the total value of milk, than they currently receive as sellers at the farmgate.
Q. How does a farmer decide whether to increase inputs and outputs or go to a lower input and lower output system?
A. The first part of the answer to this question is how well is the existing system performing? Is the business sufficiently profitable and how efficiently is the milk being produced?
Without question, we find that the most profitable dairy production systems are those which have an emphasis on milk produced from grazed grass and forage. We see milk producers on relatively high output systems with low costs of production, principally down to the fact that they are excellent grassland farmers and are achieving milk yields in the region of 3,000 litres per cow, from grass and forage. Equally, we have clients producing as low as 4,000 litres per cow per annum, again very efficiently with high yields from forage and both systems can be profitable.
As a generalisation, there is a move to production from grazed grass and lower cost systems. For those considering grass based systems, the layout of the farm is crucial. Ideally, the grazing platform would be in a ring fence with the buildings broadly in the middle of the farm. Access and infrastructure to support this e.g. tracks and fencing etc. may well be required. For those with fragmented farms, spread over a wide geographic area implementing effective forage based systems can be difficult.
Q. If you can offer our members one piece of business advice what would it be?
A. Be positive. There is a good future out there for milk producers who can produce at low cost, sell into more specialist markets, understand their expected business profitability and take decisive action to change, if that is what is required.