Lessons from Bangers and Mash
UK pig farmers have seen prices drop by 30% in the last six months and potato growers see price fluctuations of 50% from season to season, but now milk producers are meeting a similar challenge. Pat Tomlinson, from the Albert Goodman agricultural team, looks at agricultural price volatility and what we can learn from ‘bangers and mash’.
The first thing to recognise is that volatility is part of a normal economic cycle. The key is to understand what stage the cycle is at, how long it may take to change, and to take the appropriate management decisions. That means making investment decisions – and critically paying for them – when times are good, as opposed to making the decision in good times and deferring the payment (by HP) to the bad times. If the investment is of a scale to require longer term repayment, the debt should be so structured to allow repayment holidays in times of low/no profit and extra repayments in times of good profits. Generally, there is no room in the pig or potato sectors for anything other than excellent technical performance and while many dairy farmers are producing fantastic physical results, there are many who have taken their eyes off the ‘margin over feed’ ball.
With excellent performance comes necessary investment in new technologies to deliver increasing efficiency, productivity and competitiveness. Volatile milk prices do not mean zero investment, they mean carefully planned, justified and timed decisions. The only legitimate justification is that the investment will reduce the cost of producing every litre of milk (not just the extra litres). That brings us back to my favourite management tool – costs of production. Most pig and potato producers know how much it costs to produce a kilo of pigmeat or a tonne of potatoes – dairy farmers are beginning to embrace this approach.
Every cost must be understood in the same units as the price received. Pig and potato producers are used to huge variations in the amount of cash both generated and needed throughout the price cycle. They know in bad times cashflow will be negative and they make sure they proactively plan how much cash will be needed to survive the price slump. Finally, and perhaps the most worrying point, is both pig and potato growers have been guilty of believing prices will have to go up because UK processors need product to fill their factories. The sad reality is because of global competition, processors have not been able to increase farmer prices and instead taken the decision to close their factories. The lesson is not to rely on the market to increase prices any faster than simple reliable economics dictate it will. If a farmer cannot be convinced that will happen and/or cannot afford to wait, the sooner he stops producing, and thus losing money, the better. But individual farmers and families also have huge emotional challenges to face and I in no way want to belittle that aspect.
Original article featured in Dairy Farmer Magazine. Download here. If you’d like to discuss agricultural price volatility , or your cost of getting work done, please don’t hesitate to contact our expert agricultural team.