Increased Pressures for Dairy Farmers
There have been various articles in the press over the weekend highlighting the difficulties faced by dairy farmers. Milk prices have remained under pressure as the supermarkets continue to use milk as a loss leader. The global market also remains depressed as the sanctions against Russia over the Ukraine have resulted in Russia not importing any dairy products from the EU, consumption in China has reduced and at the same time oil producing countries are also reducing consumption. It does not appear that there is any prospect of prices increasing in the short term. Inevitably this has put pressure on UK milk producers, last year surprisingly we saw an increase in domestic production as farmers sought to increase revenues by increasing herd size. This has put more pressure on milk prices but maintained cattle prices for those farmers exiting the industry.
Whilst lenders have been keen to support dairy farmers it will not be possible for them to fund the ongoing losses indefinitely. Currently average milk prices are around 21-24p and production costs are typically estimated at between 25p to 30p per litre. The position is further complicated by some uncertainty over the current state of the agricultural property market which has lost some of its momentum. The possibility of a Brexit and its impact on the Central Agricultural Policy will make selling land more difficult. A recent survey published by one of the leading agricultural surveyors is forecasting a 4% reduction in land values over the next 5 years. However recent experience suggests that smaller weaker agricultural properties are already trading at significantly lower values than were expected a year ago.
Some press commentators are suggesting that as many as 20% of the UK’s current 10,000 dairy farmers could be forced to close in the next year, last year it is estimated that 4% exited the industry which has already seen 50% of dairy farmers leaving the industry over the last decade.
We are seeing some farmers selling small parcels of land which will enable them to continue trading but of course this could well impact on the lenders security position if the proceeds are not allocated to a reduction in loans. Lenders will need to carefully monitor all their agricultural lending in particular their exposure to the dairy sector.
Should enforcement action be necessary it is imperative that matters are handled in a sensitive way given the impact on the farmer. Matters are frequently complicated by TB regulations and other animal welfare issues that might be caused as a result of a lack of funding. There may be situations where other creditors are enforcing their rights against a borrower and you might be forced to make an appointment to take control and achieve an orderly realisation of assets. We have considerable experience of dealing with these issues and have strong relationships with agricultural experts who are familiar with what is required in these situations.
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