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Oliver McEntyre, national agriculture specialist at Barclays
rice pressures have never been more prevalent in the dairy sector than they are currently. With local forces also at play within global markets, both the focus on production levels and the cost of production is more intense than ever before. Volatility appears to be the watchword for UK agriculture in 2015 and it’s currently appearing in the markets to a greater degree than we have seen historically, as movements and fluctuations become more rapid and pronounced.
P At present, it looks like
it’s here to stay, so how do businesses combat it? Perhaps as an industry we should replace the word volatility with long-termism. Instead of reacting in the short term to the fickle nature of the market, should producers be taking a long-term view of the sector? While many prices are currently depressed, history shows us they won’t stay that way, as a volatile market produces peaks in farm gate prices, as well as troughs. Surviving in such a long-term market is about making cash in the good times and using it wisely. Those who survive the lean times are those with enough fat on their back to tide them over until times of plenty. The scale of milk price to producers at the farm gate is
BENCHMARKING IN A VOLATILE INDUSTRY
wide and varied, matched only by the differences in cost of production for a litre of milk across UK dairy units. From high input high output systems to low input milk from grass systems, large herds to smaller ones, from the uplands to the lowlands, the cost of production reaches towards 20p/litre in some cases.
While low input systems are generally seen to be the lowest cost for producing a litre of milk, there are producers of all types, sizes and locations and the cost of production varies widely. The root cause of the cost of production variation can simply be down to the history and the current circumstances of the individual farming business. For some, high gearing means that finance costs are more than the next farm, for others, a lack of family involvement in the farm may mean labour costs are a contributing factor to the cost of producing a litre of milk. Within a volatile, price taking, market place, it’s vital to focus continually on costs – in the good times as well as the bad. A lack of focus when times are good can lead to even deeper problems when markets dip, as is illustrated by the old phrase ‘it’s amazing how much money you can lose when the price is good’. There is a clear need for those involved in the dairy sector in the future to have this
focus and maximise the good times to weather the storm when prices take a dip. Lessons can be learned from other industries. Paying down debt, investing in infrastructure to give greater efficiency or just keeping hold of cash generated can all provide protection from volatile markets. From within agriculture itself, producers can learn from the pig industry, which has been dealing with market volatility for decades and sadly, one where only the fittest have survived. It’s a simple fact; those with a lower cost of production feel the impact of volatility later than those businesses that have higher costs of production. Likewise, and perhaps more importantly, they also feel the benefit of the green shoots of a recovering market far earlier, putting them in a better position to capitalise on the improving price while others are still waiting to turn cash positive. However, areas which are
efficient cannot be easily identified unless a business investigates and measures itself against the rest of the industry. This could also mean that those areas where a business could improve will remain hidden from the management – leaving them powerless to do anything about it. Benchmarking is a key tool for many industries.
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