ENTITLEMENTS – 16.04.14 – Market review – End of Season 2014

The entitlement markets for the 2014 Scheme Year saw a great deal of variation, both in respect to price fluctuations and levels of activity throughout the season, particularly in the Non-SDA market.

With the 31st March milk quota transfer and 2nd April entitlement transfer deadlines now passed for another season, we would like to take this opportunity to thank all of you who sent business our way in 2013/2014.  Set out below is an overview of the market for the 2014 Scheme Year, together with some thoughts and predictions as to what the future might hold.

Trade for Non-SDA began almost a month earlier that last season, in August, and prices at this stage were equivalent to approximately one year’s payment (‘face value’) ranging between £190/ha and £210/ha.  Prices rose on an almost vertical ‘curve’ to £290/ha following the announcement on the 31st October 2013 that entitlements in England will be rolled forward into the Basic Payment Scheme.  This rate crept up to £300/ha in the first week of November, where it remained until the final quarter of January 2014, when the market became over-supplied and somewhat stagnant, and purchasers were not willing to agree transfers at this level.  At the same time vendors were reluctant to drop prices in order to achieve sales, somewhat understandably following the high prices seen over New Year, therefore leading to a stalemate.  However, as the number of entitlements on the market continued to build up, the high price became unsustainable and by the first week of February prices had dropped to between £250/ha and £260/ha.  Prices were however somewhat variable with some vendors, particularly those selling entitlements with a 2014 use by date, accepting slightly lower prices.  Likewise some purchasers were happy to pay slightly more than £260/ha at this stage in the season, presumably because, based on the higher prices seen around New Year, they would still be ‘getting a bargain’ in comparison.  The market continued to ‘ebb and flow’ from February until early March, when a second price drop occurred due to the high quantity of entitlements on the market, and purchasers making lower offers in the knowledge that vendors with entitlements due to expire would likely accept.  The fall was initially to between £230 to £210/ha and subsequently to £200/ha, following a window of uncertainty and further fluctuation.  This downward trend led to purchasers entering the marketplace offering well below the market rate, and although some were successful, others were not.  Despite this late demand, prices tailed off in the latter half of March to the 2nd April to between £150/ha and £190/ha.

As usual entitlements not attracting VAT achieved inflated prices compared to the VATable norm throughout most of the season.  However there were periods when non-VAT entitlements were not in demand and those with a 2014 use by date were accepting VATable prices in order to achieve a sale.

The Non-SDA season average price was therefore £220/ha, which is by no means representative of the whole season’s trade.  This surprisingly high average, up 3% from £213/ha last season, is a result of entitlements trading at ‘face value’ prior to October, followed by large price fluctuations for the remainder of the season, with the average being bolstered by inflated prices mid-season and ‘rock bottom’ end of season prices pulling the average down.

This season we saw a similar number of transactions to last year, however the size of individual transfers were larger, with 12.6% more entitlements being transferred this Scheme Year.

SDA trade did not begin as early as Non-SDA, and we were in January 2014 before the first firm offers began to come in.  This meant that these initial negotiations were carried out already in the knowledge that entitlements were due to roll forward into the BPS.  This was reflected in a relatively consistent trading price of approximately £250 to £265/ha, with a relatively short supply of entitlements throughout.  The last weeks of trade saw more dramatic fluctuations, with prices ranging from £240/ha to £270/ha.  The average price per hectare for all transfers we completed this year was £259.26/ha.

The most interesting point of note in this year’s SDA market has been that the price has been far higher than the Non-SDA price despite the lower Single Payment Rate, especially towards the end of the season.  This was likely due to the Non-SDA surplus and it is interesting to compare the SDA and Non-SDA price differential at their peaks in consecutive years, which was circa £270/ha and £300/ha respectively this season, which represents a 10% differential.  In contrast last season’s market saw a differential of 13%, which is very similar, suggesting that had there not been a surplus of Non-SDA entitlements on the market this year, it would have been reasonable for prices to remain around £300/ha, in line with the trend that Non-SDA prices are approximately 10% higher than SDA.  This of course does not take into account the fact that the SDA payment will be brought in line with the Non-SDA payment from 2015, however as this does not affect the 2014 payment it has not had as much impact as was expected on this season’s prices.

Trade in Moorland started in mid-November this year also in the knowledge that entitlements would roll forward.  Trade before the New Year was at £45/ha to £50/ha but this crept up in January to £55/ha.  With supply and demand relatively evenly balanced this price remained a benchmark for negotiations, with late trade ranging from £50/ha to £65/ha.  As transfers continued at these prices there were those who were left disappointed having held out throughout the trading period for last minute ‘deals’ that never materialised.  The average price per hectare for all Moorland transfers we completed this year was £53.26/ha.

The start of the Welsh entitlement market was held up by the relatively late release of the Welsh Assembly Governments (WAG) decisions for the 2015 CAP reform which was published in mid-January.  There was also some uncertainty as to the future opportunities for trade, as transfers of entitlements are now not possible until we prepare for the 2016 claim.  However this did not have a significant impact on trading values, with high value entitlements seeing multiplier’s as high as 1.8 or 1.9 times the value.  Mid-value entitlements had a large spread of multiplier values from 1.2 to 1.6 commonly being achieved, with some low value entitlements selling for multipliers of 0.7. 

It will be interesting to see whether there will be even earlier market activity for the 2015 Scheme Year due to the closure of the initial transfer window on the 19th October 2014.  This window will then reopen at some point in mid-January 2015.  Prices during the earlier part of this trading window will be difficult to predict, and many may wait for the 2014 payment rate to be disclosed in September before trading.  This will hopefully shed further light on how the new CAP budget allocates funds between Pillar 1 and Pillar 2.  Of course 2015 payment rates will still be dependent on the new rate set by Europe, however the mechanism for interpillar transfers will hopefully be much clearer at this stage and make predictions based on a range of potential Basic Payment Scheme rates more accurate.

The RPA provisional production figures for March 2013/14 were released on 7th April and show that UK dairy farmers delivered 1,246.6 million litres of milk in the last month of the milk year, again beating all the monthly production records for March since records began in 1994. This represents a 10.8% increase on the production achieved in March 2013, and continues the trend of increased production month in month out which started in July last year after a poor start in April 2013.  Overall these provisional figures show the UK produced 13.67 billion litres in 2013/14 which is 1.62 billion litres under national quota (15.29 billion litres), with a butterfat average of 4.02%, slightly higher than the 3.97% UK butterfat base. Once adjusted for the butterfat, the total could rise to approx. 13.80 billion litres which would mean the UK was only 1.5 billion litres under for the 2013/14 milk year.

Will production continue increasing at these levels throughout 2014/15?  There is no real reason to expect it will reduce, even if the milk price does drop.  The dairy farmer usually does all he can to ensure his milk cheque is as high as possible, and so the last thing he wants to do when the price drops is to cut production.  We will have to see whether we have the good summer weather again, which resulted in the excellent forage crops that the cows are still being fed even now, and the lower feed prices.  We find more and more dairy farms are moving to the automated self-feed systems, and this is also resulting in higher yields that are not particularly dependant on the grass or the weather.

We have already been contacted by a number of dairy farmers whose production exceeds their quota held by some considerable margin, and although they believe there is only a remote chance of the UK hitting quota in its final year, there is speculation about whether their milk purchasers will carry on paying regardless of quota held, or whether they may decide to only pay their producers for the milk they have quota for.  And the Milk Purchasers may find it difficult to commit not to do this, as if production does come close to UK quota, they will not wish to be exposed to the levy either.

As a result there is already strong demand for quota for 2014/15, both buying and leasing, and we have already agreed one sale at 1ppl, with bids on our books at up to 1.5ppl. Already those buyers who bought at 0.5ppl last year can breathe easy that they did in fact get a bargain.  Some new prospective buyers have already asked whether there will be any producers who will “have to sell” this year, however this situation simply does not apply in the final year.  Everyone loses their quota after 31st March 2015!  Any quota bought in this final year will have to be unused, so it is farmers who went out of milk between 1st April 2013 and 31st March 2014, or there will be some farmers with a surplus who may later in the year choose to lease out rather than sell, which would still suit the farmer concerned with getting cover for the year.  There is however no reason to expect leasing will be any cheaper than buying, as they both only have a shelf life of one year.

And dairy farmers with quota to sell have a tricky decision also. Do they accept the offers now on the table at around the 1.5-2ppl mark, or do they wait and hopefully achieve prices in double figures but risk the entire market collapsing a few months down the line if it becomes clear in a few months that we will not hit quota?   It will only take one month of lower production figures to kill the entire milk quota market for the final year, as each and every month will have to continue to exceed the same month in previous years to continue to threaten to reach the 15.2 billion litres UK quota.  Townsend Chartered Surveyors would always advise splitting their losses in such situations, selling some while there are bids on the table, and saving some to see where the market ends up.

If you would like to discuss your milk quota situation, please contact Julia Clark

Following our introduction in 2013 of entitlement hosting, entitlement hosting’s popularity grew dramatically in the 2014 Scheme Year.  This was likely due to the low Non-SDA prices seen towards the end of the season encouraging potential vendors to hold onto their entitlements and find a host for 2014, with a view to chancing the market next season.  Hosting prices ranged from £45 to £55 per acre (£111.20 to 135.91/ha) throughout the season, with the number of entitlements hosted in 2014 up 36% on 2013.

The introduction of entitlement hosting in 2013 has encouraged many previous naked acre landlords and tenants to host entitlements in 2014 instead, however some have preferred to continue renting in and out naked acres.  From a landlord’s perspective this could be in order to try and preserve their potential eligibility to receive entitlements from the national reserve in 2015, perhaps due to being a new entrant.  Although we do not know the criteria that one will have to fulfil in order to be allocated entitlements from the National Reserve it would be prudent to keep the option open if it seems it might be available.  For a naked acre landlord, entering into a hosting agreement would have meant submitting an SPS claim, which could prejudice their eligibility, therefore making naked acre letting more appealing.  Fundamentally however we do not yet know whether this will have been a wise move until the eligibility criteria becomes clearer, which is expected sometime between October 2014 and April 2015.

For those who did not manage to sell their entitlements, naked acres is the only option left, apart from not activating surplus entitlements in 2014, and should be of particular interest for those whose entitlements expire this year.  As such demand for Non-SDA naked acres is currently strong following the low entitlement prices towards the end of the season and some vendors holding on to their entitlements to sell in time for the 2015 Scheme Year.  This is causing naked acre rental prices to increase.  We are currently agreeing lettings at £50 per acre, however it is likely that we will see prices rise to at least £55 per acre over the next few weeks prior to the 15th May deadline.  2013 saw a range throughout the season between £40 and £60 per acre.