A world of possibilities

Transcription

1 Issue 5 December 2013 A wrld f pssibilities The Defra Dairy Supply Chain Frum has set ut its visin fr hw the British dairy sectr might lk like in the future. It is an ambitius plan, but supprted by all key industry stakehlders, and revlves arund eliminating the trade deficit f the UK dairy sectr by It will invlve all three pillars f scial, ecnmic and envirnmental sustainability, and nt least, grwing ur share f bth dmestic and internatinal markets. An expanding British dairy sectr is in all f ur interests and smething we wuld supprt and encurage. As the UK s leading dairy value chain cnsultancy and a subsidiary f the wrld s leading dairy genetics cmpany, we clearly have a strng interest in a vibrant UK and dairy sectr, althugh ur business these days als takes us t Nrth & Latin America, Asia, the Middle East & Africa and the Oceania regin t. As with all plans, setting the visin is maybe the easy bit. Actually implementing the changes needed is mre challenging. In this issue f Prmar Insight, we lk at sme f the cnditins needed t bring abut the changes being talked abut acrss the supply chain. And we believe there might well be plenty f transferable lessns here fr ther parts f UK agriculture and fd, if nt further afield t. Can the UK significantly increase milk utput in a wrld f pprtunity? In the last decade, glbal dairy prductin has increased by 2.1% per year and the OECD expects glbal dairy prductin t cntinue this trend and increase by billin litres in the next decade. Mst f the increase will be frm develping cuntries, but 25%, r 38 billin litres, is still expected t cme frm develped cuntries, like the UK. In the last thirty years, the vlume f milk prduced in the UK has declined by ne quarter. Over this perid, the number f herds in the UK has declined by tw thirds and the number f cws has fallen by 45%, albeit ffset t sme extent by yield increases f arund 50%. On this basis, stagnating is prbably the mst accurate descriptin f the UK dairy industry. Hw did we g frm Surce: MMB, MDC, DairyC 1 UK Milk Prductin, (millin litres) being an industry leading the way t ne nw lagging behind? Perhaps mre imprtantly, hw shuld the industry address the glbal pprtunities ahead? In the decade preceding the intrductin f EU milk qutas, frm 1974 t 1984, prductin in the UK increased at the rate f 1.4% per year. It peaked at 16.7 billin litres in the early 1980s. Prductin in 2012 was 13 billin litres, which is 24% lwer than peak prductin and equivalent t three mnths utput. A Cmpany

2 The 1970 s saw an increase in the numbers f farmers starting up in dairying which partially ffset the decline in prducer numbers. New entrants came frm a beef r sheep backgrund, with sme als switching frm arable prductin. The grwth in dairy farms was als helped by the prvisin f generus expansin grants that were available at the time. This picture has significantly altered. There are far fewer new entrants t dairying, either frm successrs t the family farm r frm entrepreneurs and farms,like ther frms f industry are increasingly specialised enterprises that cannt always easily transitin frm ne frm f prductin t anther. With qutas due t be ablished in 2015, we have cnsidered, as ne ptential scenari, the cnditins that wuld be required in rder t enable farmers t increase prductin back t pre quta levels. Fr a number f mnths nw, there has been talk f the prspect f an increase in milk prductin, perhaps as much as an additinal 2-4 billin litres. This has been met with brad plitical and industry stakehlder apprval. But fr this t happen there wuld need t be significant investment at farm level, in prcessing and markets wuld need t be develped. But it is smething f a chicken and egg scenari (which cmes first?). N prcessr can invest speculatively t increase factry capacity unless the milk supply they need is available. Farmers will bviusly be nervus abut expanding, unless they are cnfident that milk returns are sustainable. S where will grwth cme frm? Prducing the extra milk - mre herds, cws r yield? Prducing an extra 2-4 billin litres is a significant challenge, requiring ttal UK utput t increase by arund 30%. Inevitably, sme f this extra utput can be prduced frm existing farms carrying mre cws and increasing yields per cw, but this will nt be sufficient t prduce all the extra milk. In the freseeable future, we d nt believe that yield per cw will mve ahead at anything mre than the increases in genetic merit (0.3% per year). The size f existing herds will cntinue t increase, but up t nw, the ttal UK herd has stagnated as increases in average herd size has been ffset by the fall in the number f herds. Sme farmers will cntinue t exit the industry, particularly thse with pr ecnmic perfrmance r where there is n successr. With a cntinuing utflw f prducers, it will require thse remaining t expand significantly, r fr there t be new entrants prepared t set up new units. It is the impact f new prducers that will meet a significant prprtin f the ttal suggested increase. One path t achieve grwth f arund an additinal tw billin litres wuld be t have 500 mre herds each with 500 cws yielding 8,000 litres per cw. We culd prduce anther 2 billin litres with many ther permutatins f herds, cws and yields, but t keep this discussin manageable, we leave these alternatives fr future debate and cncentrate n this scenari. Setting up brand new units may seem ptimistic t many UK prducers, but it is precisely what is happening elsewhere, with hundreds f millins f US$ being invested int large scale herds arund the glbe.

3 Making it happen Any new entrant r individual embarking n expansin in an industry will nly succeed if their technical perfrmance and cst cntrl is as gd as the best players already in the industry. A new system can incrprate the mst up t date technlgy and design criteria t achieve high levels f efficiency and a cmpetitive advantage ver lder facilities. The level f return is determined by market returns and the verall level f csts. The tp 25% f Prmar FBA csted herds achieved an perating prfit in 2012 f arund 800 per cw r just ver 9 pence per litre, with a milk price clse t 30 pence per litre. Operating prfit is the amunt f incme left after deducting perating csts. It excludes subsidy incme and is available t cver the csts f finance, depreciatin, rents and taxatin as well as leaving a reward fr the investr. Prfit levels were reduced significantly in 2013 due t a cmbinatin f pr weather and high feed csts amngst ther factrs. In ur analysis (Table 1), we have evaluated the returns fr a large 500 cw dairy unit acrss a range f perating prfit levels frm 8 t 12 pence per litre. Table 1 Ptential Returns frm a 500 Cw Dairy Unit We estimate 3 millin wuld be needed t prvide the infrastructure fr 500 cws n a greenfield site. The ttal amunt required hwever culd be up t 50% higher r lwer than this depending n the specificatin and system chsen by the investr. Taking int accunt the csts f the develpment, we have estimated that a 500 cw herd prducing an perating prfit f 10 pence per litre wuld generate a return n capital f 3.6%, if the cst f land is included. If the cst f land is excluded, then a return f up t 12% wuld be achievable. We have excluded any CAP supprt r envirnmental payments frm these calculatins. The key questin becmes is this level f return sufficiently attractive t entice farmers, r anyne else fr that matter, t invest? Per Cw Per Herd Natinal (+500 herds) Cws ,000 Litres 8 4 millin 2 billin Operating Prfit Per cw Per herd Natinal 8ppl , millin 10ppl , millin 12ppl , millin Capital Expenditure Per cw Per herd ( millin) Natinal ( billin) Land 14, Cws & Stck 1, Buildings 6, Machinery Are these levels f return attractive? Our experience f wrking in ther parts f the wrld, such as the US, India, China, Chile and sme parts f the EU, tells us that farmers and investrs are prepared t risk their capital fr these returns. Their cnfidence is bsted by a belief that returns fr dairy prducts will cntinue t increase, as will the value f the assets they invest in, particularly land. Cnfidence is the lifebld f investment. It emerges when the perceived upside f a risky venture utweighs the dwnside. Ultimately, it is their wn inner mindset and an ability t stretch themselves t mve frward which separates thse wh can expand and want t frm thse wh can expand but d nt want t. Ttal Capex 22, Ttal Capex (excluding land) 8, Return n Capital Including land Excluding land At 8ppl Operating Prfit 2.9% 8.0% At 10 ppl Operating Prfit 3.6% 10.0% At 12 ppl Operating Prfit 4.3% 11.9%

4 What next fr UK dairy farmers? We have recently carried ut in-depth interviews with large dairy farmers acrss the UK abut their attitudes and cncerns. These are businesses with mre than 500 cws. We identified that the mst pressing cncern fr these businesses relates t recruitment, retentin and emplyment f staff. Perhaps we shuldn t be surprised. As businesses get bigger, emplyees have t take n mre respnsibility. Managers are likely t spend mre time supervising and mtivating their teams and less time literally getting their hands dirty. Sme peple shy away frm this and prefer t be in the thick f things. We bserved thugh, that the best managers quickly learn that letting g f practical farming tasks is essential, hwever much they liked ding them, if they want t grw their business. Develping a larger business requires a shift in emphasis in hw managers spend their time frm being task fcussed twards being leadership fcussed. Hw d peple develp this skill? In ur survey f large farms, we fund that netwrking with ther like minded farmers, and belnging t a discussin grup were cmmn attributes. We als fund that in many cases, farming was a secnd career r the individual had bradened their experience acrss several farming businesses. We wuld summarise this by saying these individuals typically are utward lking, inquisitive and invest time and mney int imprving their wn skills and thse f their emplyees. The expansin f the UK dairy farming sectr will therefre be determined by investrs and farmers with a fcus n business excellence. In particular, we see these businesses: Investing in a way that delivers highly efficient prductin alng the entire supply chain Operating in the tp quartile f prducers in terms f efficiency and perating prfit Allcating a greater prprtin f time twards managing and leading the business frward Investing in training themselves and their staff in rder t build the cmmitment f the team and t cntinually imprve perfrmance at all levels Taking an extremely practive stance n animal welfare, caring fr the envirnment and health and safety Fully engaged and respnsive t the demands f the supply chain Willing t wrk cllabratively with suppliers and ther farmers in rder t imprve perfrmance Using risk management tls in rder t achieve incme stability. These tls are likely t be used in bth input buying and t achieve milk price stability

5 What next fr prcessrs? One thing is fr sure. Any increase in milk prductin must be aligned t sustainable market demand, as an versupply scenari will nly weaken the farmgate milk price. The lifting f EU qutas in 2015 als brings the prspect f further internatinal market pprtunities t the fre. What is clear is that if prductin were t increase between 2-4 billin litres per annum it is vital that there is the prcess capability t handle this extra vlume. There needs t be the right capacity in the right places and investment will prbably be necessary in bth mdernisatin r expansin f existing plants and the develpment f new facilities. This will require the prcessing sectr and the farming sectr t wrk clsely tgether t ensure the supply chain is as efficient as pssible. The questin f whether we are missing ut in the UK n internatinal pprtunities is an nging area fr debate. Sme UK cmpanies have been highly successful in develping exprts, but this takes enrmus time, effrt and cmmitment. Exprts are nt fr the in and uter r the shrt termer There is invariably talk f Asia as a ptential market where UK cmpanies shuld be expliting the huge grwth being seen in this part f the wrld. This is true and while favurable cnsumer demgraphic changes and relatively high milk prices supprt the argument, we will need mre than excellent grass t make an in-rad in t these markets. Asia is a big place - where are we talking abut in particular? A deep understanding f these markets is needed in rder t be successful. Cmpetitin is fierce frm lcal suppliers, but these markets are als highly cntested by the established internatinal players in the glbal dairy markets frm NZ, Australia, the US, the Netherlands, Denmark, Germany and Ireland. Fr example, Ireland s future plans fr the develpment f their industry is based firmly n a clear strategy t expand prductin pst quta by as much 50% and exprt it - mainly t emerging markets in Africa, the Middle East and Asia. This has already started t happen with Glanbia investing 126 millin t cnvert 1.6 billin litres f milk int dairy ingredients at its new facility in the Suth East f Ireland. There is a danger f als becming preccupied by the emerging markets and ignring excellent pprtunities clser t hme. Western Eurpe is still hme t arund 500 millin relatively affluent cnsumers, with well defined supply chains and rutes t market. In ur wn dmestic UK market, there have never been s many ways f getting dairy fd prducts t cnsumers. There is a real sense f majr players in bth the prcessing and retail sectrs lking t get clser t suppliers than ever befre in rder t ensure security f supply and satisfy the buy British desire. Opprtunities abund fr thse wh want t take advantage f them. The fact that the UK imprts mre cheese than it prduces and culd easily utilise 2 billin litres f milk by replacing just 50% f these imprts with hme prduced milk is a glaring example. Fr mre details cntact: David Cke Directr david.cke@genusplc.cm Phne: +44 (0) A wrld f pprtunity A wrld f pprtunity? Abslutely. But there is als a massive challenge ahead fr UK dairy farmers and prcessrs alike. An extra 2 billin, let alne 4 billin litres in the UK may lk sme way ff, but we have learnt t never say never and a gd number f the key market indicatrs pint t the pprtunity in a way nt seen befre. A prductin increase f this magnitude fllwing, as it des, a prlnged perid f cntractin will nt happen vernight. But it ffers a huge pprtunity t grw the industry t cmpete glbally. It will require innvative thinking and peple prepared t cmmit t new ideas and appraches in bth farming and prcessing. The industry as a whle must decide hw quickly it wants t grasp the pprtunity. Key t success will be a hly trinity f excellent leadership skills fr farm businesses; genuine understanding f markets, custmers and cnsumer behaviur (be they in Cheshire, Cumbria and Crnwall r in Chile r China), and clse cllabratin and cmmitment frm farmers and prcessrs. Farming Fd & Drink Envirnment Public sectr Trade assciatins and levy bards Private agri business Published by: Prmar Internatinal, Alpha Building, Lndn Rad, Stapeley, Nantwich, Cheshire, CW5 7JW. Tel Fax