Banks will back the dairy sector

Cormac McKervey from Ulster bank
Cormac McKervey from Ulster bank

The results of this week’s Global Dairy Trade (GDT) auction in New Zealand are deeply disappointing, according to Ulster Bank agriculture manager Cormac McKervey.

“Prices have fallen by a further 10.7% since the beginning of July,” he said.

“We thought the markets might have bottomed out, given the results of the previous auction a fortnight ago. But this has not proven to be the case. In reality we are now looking at a milk price of below 20.0 pence per litre being the norm for the next couple of months.”

McKervey confirmed that all of the main milk buyers had committed to paying a bonus during the upcoming autumn months.

“But this will just about match the increase in production costs incurred by farmers at that time of the year,” he added.

“The reality is that every milk producer must scrutinise every aspect of his or her business over the coming weeks. This should allow them to identify where costs can be cut and improved efficiency levels secured.”

But McKervey also recognises that steps of this nature alone will not be enough to prevent many dairy farming businesses from racking up significant losses.

“And we will be there to support the many milk producers who, we recognise, did not cause the market-related problems that currently confront the industry.”

He pointed out that the banks’ preferred response to the envisaged indebtedness crisis will be to offer a mix of enhanced overdrafts and putting existing loans on an interest only payment basis for an agreed period of time.

“The bank and farmer may agree to an increased overdraft, capital repayment holiday or a mixture of both,” he said.

“Interest only loans can revert to capital and interest once markets and milk price have normalised. We also recognise that many farmers will have to sort out extended credit arrangements which they may have previously agreed with suppliers, once milk prices start to strengthen again.”

But the Ulster Bank representative stressed the absolute priority for farmers to come well-armed with facts and figures when they meet their bank managers.

“Managers will want to see a thoroughly appraised cash flow projection for the next six to nine months. In addition, farmers need to continually assess what spend is necessary to help deliver further cost savings or improve income and what spend can be deferred until things improve,” he added.

McKervey confirmed that there are many farmers who haven’t borrowed money in years and who are now in circumstances they never envisaged would happen.

“I would appeal to them to contact their managers and not to be afraid of asking for support. All farmers should prepare a cash flow to assess money in and money out. This will show the funding gap over the next 6-9 months and then we can discuss how that funding gap can be filled.”

McKervey also made it very clear that the banks can do nothing to ameliorate the impact of finance agreements entered into by farmers with other institutions.

Meanwhile, the Ulster Farmers’ Union convened a meeting of dairy stakeholders, in response to this week’s GDT results. Organisations in attendance included the banks, dairy processors, CAFRE and DARD. According to industry data, dairy farming in Northern Ireland is around £0.5 million a day worse off than it was this time last year.

“The grave nature of this situation has been further illustrated by the latest GDT auction in New Zealand, which saw Whole Milk Powder fall by 13.1%,” said the Union’s dairy chairman Jonathan Moore.

“Whole Milk Powder is now worth 50 per cent less than what it was in June last year. Coupled with further falls in the Dutch Dairy Board commodity prices this makes an already worrying situation even more critical.”

At the meeting stakeholders offered their own perspectives on how they see matters unfolding with a consensus that in the months ahead, all players within the dairy sector will face difficulties, especially from a cash flow perspective.

Moore said that a UK-wide meeting of Agriculture Ministers must now take place, in order to discuss the difficulties facing the dairy sector.

“A specifically convened conference will also be held at the end of August or early September here in Northern Ireland.

“The aim of the event will be to look at primary production and ways by which we can address cash flow concerns and ensure that our local dairy industry gets through these very testing times.

“We would also urge the UK Agriculture Ministers to meet to discuss the dairy market situation and collectively call upon the Commission to review Intervention price levels. Failure to do so will have dire consequences for farm businesses.”