Outside of the pig sector, overall farmer margins are likely to hold up reasonably well this year despite rocketing input costs, Ulster Bank head of agriculture Cormac McKervey has said.
Speaking at a recent Institute of Agricultural Management event which explored the impact of costs on returns in 2022, McKervey said his prediction was “a gut feel”, pointing out that it is still early in the year to be making an overall assessment.
“The biggest fear is just for general cashflow rather than actual prices,” he said.
With cash tight on many farms at this time of the year, and the likes of fertiliser merchants not in a position to give extended credit, he highlighted potential knock-on implications if farmers use less product.
“Grass is still our cheapest resource. We still need to make good-quality silage, maybe now more than ever,” he suggested.
To help alleviate that, he said Ulster Bank has offered customers the option of increasing their overdraft or taking out a loan to buy fertiliser this spring. The bank’s preference is that farmers take out a loan, to be repaid over the next six months ahead of housing this autumn.
High costs
During his presentation, McKervey also highlighted concerns about cashflow on high-cost dairy farms. In addition, an outbreak of TB can absorb a lot of cash as animals are kept that would otherwise be sold.
“Of all the issues, it [TB] is the single biggest immediate hit on a farm,” said McKervey.
Deposits
Despite the high costs at present, government-backed COVID-19 loans and increased profits in 2021 have contributed to deposits in farmer accounts being the second highest ever at £580m. Farm debt has remained relatively steady at £1.1bn. For those farmers carrying debt, McKervey believes the Bank of England might increase interest rates to 1% in the months ahead, but “there is no indication” of significant rises beyond that level.
Normally, government would react to inflationary pressures by hiking interest rates. “The old tried and tested system won’t work this time around because the government has so much money borrowed, and the general consumer cannot afford increased rates,” he concluded.
Pig sector has taken a ‘thrashing’
No other sector in NI farming could take the thrashing pig farmers have experienced in recent months, and still potentially come out the other side, claimed Cormac McKervey.
He said producers had been sitting on healthy bank balances after a couple of good years, but this is all now gone “just like grains of sand through their hands”. As well as credit from feed merchants, he said that farmers are now being supported by banks via interest only repayments on loans or direct cash into the business. “The majority will [survive], but some won’t trade their way out of it,” he suggested.
Milk price driven by supply and demand
It is not high costs that are driving the price of milk, but tight global supplies, emphasised Dale Farm head of farmer services Neville Graham during his contribution to the Institute of Agricultural Management event.
“Every year you would be looking for growth of 1.5% in the global milk pool to meet increased demand. Last year we saw it drop 1.7%. It has put pressure on volumes right across the globe,” he said.
With big European suppliers such as Germany, France and the Netherlands all down in production, New Zealand looking at a nine-year low, and production also under pressure in Britain, dairy products are in short supply.
Locally, milk output is “holding relatively steady”, said Graham, who added that demand is also holding up, so buyers are buying short, and sellers are selling short. He expects to see more farmgate price increases this spring.
“Hopefully they will keep pace with increase in input costs,” he said.
With commodity markets at prices never seen before, he said that Dale Farm was in negotiation with key customers to ensure that returns reflect the current market.
But a fear within the industry is that global consumers are yet to fully experience the impact of dairy commodity prices, which are now at record levels.
“We believe the global consumer will see these price hikes in May/June time. Will that dampen demand?” he asked.
Given high farm costs, global supply might fall faster than demand.
Also, during previous periods of high dairy prices, consumers substituted for cheaper plant-based alternatives. That cheaper alternative might not exist this time around.
“It is all going to be around the key dynamic of supply and demand,” said Graham.
No option to break fixed milk price scheme
There is no legal basis for Dale Farm to terminate its three-year fixed price scheme which started on 1 January 2021, Neville Graham confirmed at the Institute of Agricultural Management event.
That scheme was the third fixed price deal offered by Dale Farm, with producers on a base of 26p/l from April to September and 29p/l from October to March. However, in recent months input costs have spiralled.
“The ruling is that this does not constitute force majeure – it only kicks in if you cannot supply product or you cannot supply milk,” said Graham. While suppliers could offer up to 30% of their milk to the scheme, it was oversubscribed, with a maximum of 15% subsequently allowed, said Graham, who confirmed that the average across participants is just over 13%.
“All we can do at this point in time is pay the best base price we can on the rest of that milk. Previous schemes have left a margin, but the rule book has been ripped up at this moment in time,” he said.
Cormac McKervey suggested building in some sort of feed price tracker (as exists in poultry) might be an option in future fixed price schemes.
Ukraine war limits grain import options
With Ukraine and Russia accounting for 30% of global wheat exports, and Ukraine the source of 15% of global corn (maize) exports, the war between the two countries has major implications for the local feed trade.
“What it all means is that we are fishing in a smaller pool with added competition,” said NI Grain Trade Association chief executive Gill Gallagher. She said most wheat from the region goes to Africa and the Middle East, but that Ukraine has traditionally supplied the NI market with corn in the January to March period.
With supplies uncertain, sanctions on Russian boats, and substantial damage done to infrastructure in the Black Sea region, it has created significant market volatility. That is not being helped by reports of drought in Argentina hitting soya yields.
“There is a very challenging picture at the moment ahead of us,” she said, adding that ultimately it is the person willing to pay the quoted price that will secure the product.
She also wants more flexibility granted by DAERA around pesticide residues and genetic modification to help open up new global supply options.
Read more
Farm borrowings up by £100m in NI
Breakeven milk price over 39p/l
Outside of the pig sector, overall farmer margins are likely to hold up reasonably well this year despite rocketing input costs, Ulster Bank head of agriculture Cormac McKervey has said.
Speaking at a recent Institute of Agricultural Management event which explored the impact of costs on returns in 2022, McKervey said his prediction was “a gut feel”, pointing out that it is still early in the year to be making an overall assessment.
“The biggest fear is just for general cashflow rather than actual prices,” he said.
With cash tight on many farms at this time of the year, and the likes of fertiliser merchants not in a position to give extended credit, he highlighted potential knock-on implications if farmers use less product.
“Grass is still our cheapest resource. We still need to make good-quality silage, maybe now more than ever,” he suggested.
To help alleviate that, he said Ulster Bank has offered customers the option of increasing their overdraft or taking out a loan to buy fertiliser this spring. The bank’s preference is that farmers take out a loan, to be repaid over the next six months ahead of housing this autumn.
High costs
During his presentation, McKervey also highlighted concerns about cashflow on high-cost dairy farms. In addition, an outbreak of TB can absorb a lot of cash as animals are kept that would otherwise be sold.
“Of all the issues, it [TB] is the single biggest immediate hit on a farm,” said McKervey.
Deposits
Despite the high costs at present, government-backed COVID-19 loans and increased profits in 2021 have contributed to deposits in farmer accounts being the second highest ever at £580m. Farm debt has remained relatively steady at £1.1bn. For those farmers carrying debt, McKervey believes the Bank of England might increase interest rates to 1% in the months ahead, but “there is no indication” of significant rises beyond that level.
Normally, government would react to inflationary pressures by hiking interest rates. “The old tried and tested system won’t work this time around because the government has so much money borrowed, and the general consumer cannot afford increased rates,” he concluded.
Pig sector has taken a ‘thrashing’
No other sector in NI farming could take the thrashing pig farmers have experienced in recent months, and still potentially come out the other side, claimed Cormac McKervey.
He said producers had been sitting on healthy bank balances after a couple of good years, but this is all now gone “just like grains of sand through their hands”. As well as credit from feed merchants, he said that farmers are now being supported by banks via interest only repayments on loans or direct cash into the business. “The majority will [survive], but some won’t trade their way out of it,” he suggested.
Milk price driven by supply and demand
It is not high costs that are driving the price of milk, but tight global supplies, emphasised Dale Farm head of farmer services Neville Graham during his contribution to the Institute of Agricultural Management event.
“Every year you would be looking for growth of 1.5% in the global milk pool to meet increased demand. Last year we saw it drop 1.7%. It has put pressure on volumes right across the globe,” he said.
With big European suppliers such as Germany, France and the Netherlands all down in production, New Zealand looking at a nine-year low, and production also under pressure in Britain, dairy products are in short supply.
Locally, milk output is “holding relatively steady”, said Graham, who added that demand is also holding up, so buyers are buying short, and sellers are selling short. He expects to see more farmgate price increases this spring.
“Hopefully they will keep pace with increase in input costs,” he said.
With commodity markets at prices never seen before, he said that Dale Farm was in negotiation with key customers to ensure that returns reflect the current market.
But a fear within the industry is that global consumers are yet to fully experience the impact of dairy commodity prices, which are now at record levels.
“We believe the global consumer will see these price hikes in May/June time. Will that dampen demand?” he asked.
Given high farm costs, global supply might fall faster than demand.
Also, during previous periods of high dairy prices, consumers substituted for cheaper plant-based alternatives. That cheaper alternative might not exist this time around.
“It is all going to be around the key dynamic of supply and demand,” said Graham.
No option to break fixed milk price scheme
There is no legal basis for Dale Farm to terminate its three-year fixed price scheme which started on 1 January 2021, Neville Graham confirmed at the Institute of Agricultural Management event.
That scheme was the third fixed price deal offered by Dale Farm, with producers on a base of 26p/l from April to September and 29p/l from October to March. However, in recent months input costs have spiralled.
“The ruling is that this does not constitute force majeure – it only kicks in if you cannot supply product or you cannot supply milk,” said Graham. While suppliers could offer up to 30% of their milk to the scheme, it was oversubscribed, with a maximum of 15% subsequently allowed, said Graham, who confirmed that the average across participants is just over 13%.
“All we can do at this point in time is pay the best base price we can on the rest of that milk. Previous schemes have left a margin, but the rule book has been ripped up at this moment in time,” he said.
Cormac McKervey suggested building in some sort of feed price tracker (as exists in poultry) might be an option in future fixed price schemes.
Ukraine war limits grain import options
With Ukraine and Russia accounting for 30% of global wheat exports, and Ukraine the source of 15% of global corn (maize) exports, the war between the two countries has major implications for the local feed trade.
“What it all means is that we are fishing in a smaller pool with added competition,” said NI Grain Trade Association chief executive Gill Gallagher. She said most wheat from the region goes to Africa and the Middle East, but that Ukraine has traditionally supplied the NI market with corn in the January to March period.
With supplies uncertain, sanctions on Russian boats, and substantial damage done to infrastructure in the Black Sea region, it has created significant market volatility. That is not being helped by reports of drought in Argentina hitting soya yields.
“There is a very challenging picture at the moment ahead of us,” she said, adding that ultimately it is the person willing to pay the quoted price that will secure the product.
She also wants more flexibility granted by DAERA around pesticide residues and genetic modification to help open up new global supply options.
Read more
Farm borrowings up by £100m in NI
Breakeven milk price over 39p/l
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