Cows & Money: January 2017

Dodd & Co Dairy Bulletin


Happy new year and welcome to our latest edition of Cows & Money.

Having never attended the Oxford Farming Conference I followed last week’s political session via the livestream and twitter! I was interested to see what Andrea Leadsom might reveal about the future of UK agriculture after Brexit. I, like many other commentators, was disappointed! She hid behind a promise of a green paper on future agricultural support.

Whilst all the talk is of subsidy, it is clear that tariffs and currency will play the biggest part in UK agriculture after we leave the EU. As a net importer you would think tariffs would benefit dairy farmers. The political will to embrace free trade and cheap imports, however, looks unstoppable. So who will be providing our butter and cheese in future; ourselves, the EU or New Zealand and the USA?

Dairy Bulletin Header

Who knew before the referendum that tariffs on New Zealand butter were €700 tonne for in quota imports and €1,896 tonne for out of quota imports! We currently import cheese from Ireland and butter from Holland on a large scale. If tariffs stop these sources, would we source Anchor butter from NZ again? We must consider what free trade might mean to dairy farmers.

Dairy figures for 2015/16 on the whole didn’t look too bad. Admittedly there was a wide range of milk prices depending on who you were selling milk to. We have summarised the numbers below, and compared them to 14/15, and expected 16/17 and 17/18 figures.

Whilst most of the milk price rise has been driven by worldwide drops in milk production and shortages it has been helped in the UK by a weakening of sterling following the Brexit decision. Although there has been a recent rally that has seen it strengthen against the euro by 5% as I write this, clearly shows no one has any clue what the longer term implications are!

From our perspective the changing landscape looks like it will bring tax reform and changes that may not have been contemplated previously.

Whatever happens, the next few years look like they will be filled with twists and turns. I hope you find the following interesting.

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What will free trade mean?

Whilst not a definitive explanation, (and as we’re not economists it should probably carry a health warning,) what can we expect once we leave the EU?

We know that dairy farmers in the EU have been heavily supported historically, with intervention buying keeping farm gate prices high. This was supported by subsidising exports to third countries using Export Restitutions because we produced too much milk! Over the last ten years this has been reduced. Intervention prices have been reduced significantly, in the case of skimmed milk powder (SMP) to €1,698 or about $1,800 tonne, and export restitutions have been reduced to zero. The net effect of this is that as long as the SMP price is above the intervention floor we are trading at world prices, (see table 1). We haven’t quite hit the same depths as Oceania recently, (SMP prices dropped to €1300/tonne at the GDT’ low point, 25% lower than EU intervention), but on the whole we have followed world pricing.

The same could be said for butter, which has seen the intervention price reduced to €2,217 or $2,325 tonne. You can see from table 2 that we have haven’t followed prices as closely but have generally followed Oceania. The US has had high internal butter prices and high tariffs to protect against imports; the EU have done the same but haven’t seen the same high prices.

Table 1. Skimmed Milk Prices 2001-2016 US$


Source: AHDB Dairy / USDA

Table 2. Butter prices 2001-2016 US$ 


Source: AHDB Dairy / USDA

At present the UK is not self sufficient in cheese, butter or yoghurts. If we have reciprocal tariffs with the EU for these products then it is likely we will need to either produce more in the UK or import from other parts of the world. This is why the Irish with their cheese exports to the UK and Arla with butter imports are worried about Brexit. There is an opportunity to produce these products in the UK, but will processors exploit it?

Should the UK champion free trade we might have to accept that milk prices for non-liquid milk will be determined on a global scale. If butter prices are $4,000 tonne and SMP $3,000 tonne (5 & 10 year averages) this should deliver a milk price in the region of 30ppl at current exchange rates, but note any strengthening of sterling will reduce this.


Where will all this leave dairy profitability?

The outcome of the 2015/16 year was pretty miserable for those not on aligned contracts or with the middle tier processors. The average figures from our database show that most dairy businesses lost money! In fact, falling milk prices in the early part of this year will mean that many suffer another difficult period in 2016/17.

The figures in table 3 show the final figures prepared by Dodd & Co and our estimate of 2016/17 and 2017/18 performance. Obviously for estimate read guesswork; we can measure our accuracy later this year!

Table 3. Dairy profitability


As you can see, we expect that costs of production will rise on the back of rising milk prices, primarily driven by feed, fertiliser and fuel costs on the back of weaker currency. We also expect to see a big increase in farm repairs as some discretionary spending in the last few years has been postponed, and expect higher labour charges as farmers draw a bit more for themselves but also use more paid labour to reduce workload.

What is clear is that it looks unlikely that the average dairy business will rebuild much of the capital base eroded during the last two years unless milk prices reach 30ppl.


Will Brexit bring forward tax modernisation?

There is much discussion in accounting circles about possible changes to the tax system, with business rates (not a big issue for farmers) and National Insurance (NI) being the big talking points. The first is a talking point as online retailers and Airbnb don’t pay them, and NI is topical as many people now have several jobs or are self employed meaning they contribute significantly less NI. Both of these taxes raise a lot of money, some £148 billion at the last count!

45106394 - united kingdom exit from europe relative imageThere has also been recent comment about pensions, with some commentators suggesting that radical reform of tax relief is on its way as the government has removed pensions from its list of tax advantaged savings! With losses in 2016/17 expected by many dairy businesses there may not be an opportunity to pay into pensions anyway.

We already know that we can now average farm profits for 2016/17 back over five years. Given the expected losses in 2016/17 and that the first year will be the disastrous 2012/13 year this might allow many dairy businesses to claim back tax from the bumper 2013/14 and 2014/15 tax years! Needless to say we will be looking at how best to minimise all of our clients’ tax liabilities.

The government have talked about improving productivity since Brexit and the use of capital allowances to stimulate investment to improve productivity may be on the cards. With Annual Investment Allowances available on plant & machinery this might not help, but extending relief to farm buildings and infrastructure such as roads, underpasses and reservoirs might provide an incentive to modernise some systems. We’ll see what happens in the budget on 8th March!

If you have any queries on any of the above please contact Rob Hitch on 01228 530913, email him at or tweet him @Rob__Hitch.


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