For those dairy farmers who lived through the volatile milk quota market of the 80s and 90s, the early demand for cover in the first few weeks of the final milk year before quotas are abolished in March 2015 was a reminder of days gone by. In the 80s and 90s the UK was regularly going over quota, and all milk purchasers required that their farmers held enough quota to cover their deliveries, as the dreaded EU levy would be applied first to the milk purchaser, who would then pass this on to their farmers who had the quota shortfall. The withholding of milk cheques was common practice.
However those dairy farmers who only started milking in the last 10 years may well find this situation bewildering, as the UK has not really come close to hitting quota and incurring a levy since 2004, and since then owning quota has almost been a “take it or leave it” option. The UK has been well under national quota, which has also increased by 1% every year for the past 5 years to the 15.3 billion litres it is today. However the provisional total annual production figure for the 2013/14 milk year published on 7th April was just under 13.67 billion, despite a poor start to the milk year, and this was upgraded on the 8th May to almost 13.68 billion, still before butterfat adjustment. Assuming there will be a butterfat adjustment of approx. +138 million litres, this will take UK production to over 13.8 billion, which is less than 1.5 billion litres under national quota (approx. 11%). In addition there is no extra 1% allocation of quota this year. The production figure for April 2014 was 1,277.1 million litres, which is a huge 14.87% up on production in April 2013. If, however unlikely it is, this increased production level continued for the remainder of the milk year, the UK would be over quota.
Dairy farmers without sufficient quota should see printed on their monthly milk statement what their levy would be if the UK does go over quota. In some cases those figures are quite terrifying, and those farmers who have not topped up their quota regularly as their production increased are realising that, as the monthly production towards the end of the last milk year was at always at least 10% more than the same month the year before, if this trend continues there is a chance that they might need quota. There is talk of milk buyer reps mentioning the 5% rule (i.e. they would stop paying a dairy farmer once they had made deliveries more than 5% over quota held) at the farm gate, and this is probably what pushed some over-exposed dairy farmers to try and source quota as soon as possible in the 2014/15 milk year, which saw the price rise briefly to 2 pence per litre, a ten times increase from only weeks before.
Another aspect of the recent milk quota activity is the renewed interest in leasing. Purchased quota is a capital asset, and as such cannot be offset against income. Therefore depending on their situation it may suit some farmers better to be able to offset the cost of leasing in quota against income. Leasing out also suits those dairy farmers who still believe there is a chance the EU politicians will realise very quickly after March 2015 that abolishing a very effective way of controlling milk production across the EU was a bad idea. They believe there is a chance (however remote) that politicians may decide to re-allocate milk quota to those producers who held it when it was abolished. When leasing out quota you still get the income, but you retain the asset on your books. It may also be a way for a dairy farmer who wishes to retain the capital loss on their books to still make something from surplus quota, without selling it. As the price for selling and leasing, at the moment, is the same in this final year, those with surplus quota have this choice.
Reports of sales at 2ppl in the first week of April brought large amounts of quota to the market, and we are now in a situation where there is a plentiful supply, and the price dropped to as low as 0.3 pence per litre, but at the time of writing (13th May) prices are creeping up again, now at 0.4 pence per litre, for both leasing and sales.
