Wednesday, March 31, 2010

The Banks got too big to fail, and government is too bloated to diet

Each political party says public expenditure must be reduced, but nobody knows how or where to start. 

 Government is the biggest business in the UK. It employs more than half the workforce. Add in sub-contractors, businesses and organisations dependent on grants, subsidies and other public funds, and you have a huge part of the economy. None have any desire to be down-sized. The situation has gone way past the tipping point for serious government downsizing to happen. There are too many people 'on benefits'. Government is self-protective, and more interested in self preservation and enlargement than efficiency.
      Take agriculture -  government administration today is a significant proportion of the total expense needed to do the job of growing crops and raising livestock. We have a few front line staff driving tractors and combines being inspected, administered, measured, monitored by an army of people - not so different to the Health Service. Each of these inspectors is there for a good reason, and have been added piecemeal in response to legislation.
      The interesting question is - is this the fate other large organisations? Do supermarkets have an increasing army of back office staff - people checking that the people doing the work are doing it correctly? An army to supervise the suppliers, to deal with compliance in all its guises? 

Tuesday, March 23, 2010

Why a 1p / litre price reduction can cause real hardship to milk producers

A penny a litre doesn't seem like too much to make a fuss of, but in milk production today every penny counts. The cost of keeping cows rises, as tractor fuel gets more expensive, wages improve, rules and regulations get tougher.

For more than a decade farmers have been earning nothing from milking their cows. They have been living off the farmhouse B B they run, the mobile phone mast  on their land, the 4x4 circuit or paintball activities they've developed, the shooting rights or caravan site and off-farm earnings driving a lorry, or their wife, son and daughter going out to work. Plus their Single Farm Payment entitlement.

Cows are a habit, and a tradition which is hard to change. It's a long term, a life-time job for many in the business. It's very easy to become so absorbed with the job, which as everyone knows starts at around 5.00am every morning of the year, that the income is secondary to getting the bulk tank filled, cooled and ready for collection. Giving up the cows is life-changing - it's as hard as marriage break down. Selling up is a public admission of defeat, not a rational business decision. So farmers will keep plodding on, with hope in their heart that things will improve.

And, for a while, they did. Two years ago the numbers of dairymen throwing in the towel was becoming a worry to the people whose job it is to have milk on the shelves - the supermarkets. So some buyers decided it would be valuable to have specific contracts with individual farmers. If the supply got tight these farmers would allow the shelves to be stocked.

ASDA has been supplied by a dairy business called Arla (Arla Foods Milk Partnership) who collect, process and bottle ASDA milk throughout the country. The company is in some ways unusual in having a single supplier. Sainsbury, for example, uses both Robert Wiseman and Dairy Crest, and it is their flirtation with Arla which may have caused the present upset. While welcoming Arla as a supplier, Sainsbury reduced the business they did with Dairy Crest, who then are on the warpath for more contracts, and it is just possible they have got a foot in the door at ASDA at a price the supermarket could not refuse.

It's all fair in love and war, but the poor chap at the end of the chain, the man who is married to his cows and gets up at 5.00 every morning, is, as always, the loser.

What can be done? Milk contracts are fabulously skewed towards the buyer, despite the new regulations  The free market might provide consumers with low cost milk at present, but only as long as farmers are prepared to do the job for nothing.

Maybe farmers should all be planning to create super dairy farms, like the 8,000 cow farm factory planned in Lincs.  There's little evidence to suggest that herds of this size really have the economies of scale to produce milk at much lower a cost than the smaller herds we have at present. Dairy farming in the UK is pretty efficient, by any standards. The one advantage the mega-farm has is in transport costs, which are out of the farmers control, but there some useful ways of improving this.

Let's hope we'll continue to see cows grazing the fields in the summer months, and have milk from British meadows on the shelves, rather than milk from Poland, Latvia and other countries.

Wednesday, March 17, 2010

Farm income comes from Brussels SFP payment

The new UK farming income figures have been released which shows the industry ticking over nicely at £4.07bn, or a satisfactory £21,000 a farmer. Macro figures like this matter, as global planners of economic policy in London, Brussels, Davos or New York can only grasp the headlines without rooting too deeply into the details. Which seems, from their news release, to be how DEFRA would like it to be. 
The TIFF (Total Income From Farming) figure has been broadened over the years to include any income that finds its way into a farmhouse, including B+B, industrial lets, mobile phone masts, and more - 'anything which cannot be separated from the agricultural business'. 
Take a fractionally deeper look at the £4bn and you'll see it includes a Single Farm Payment (SFP) payment of £3.6bn which comes from Brussels. Strip this payment, which is not seen or considered as a subsidy, but a reward for managing the glorious British countryside, and the income from actually producing crops and livestock looks meagre indeed. With less than half a million coming from actual farming, it's clear that many farmers are operating at a loss and would have been better off not farming but simply taking the SFP. The reasons for not simply packing up, selling the cows and doing as little as is compatible with getting the Farm Payments are not so complex. There's the omni-present optimism that the next year is the one where corners are turned and profits made. There's a lack of trust in politicians, who are the people sustaining the valuable payment, and a suspicion that it may be drastically reduced. There's also the long term nature of the business, which means that starting back in either livestock or even crops is something that takes not months, but often years.  
The official farm income figures contrast with the up-beat message from Defra ministers and indeed the farming unions themselves who have all subscribed to the call for increased production in order to feed the burgeoning world population which, as we all know, is due to reach 9 billion in a decades time. But would increasing production, getting more intensive, add to existing losses?
Slicing into costs can be a sustainable way of righting the profit-loss see-saw. Remembering that machinery makes up a high proportion of fixed costs, any efforts to reduce these can be financially very useful. So reducing the replacement of machinery and running older kit, modifying existing fixed equipment, adapting used and maybe redundant machinery are useful ways to reduce capital spending. Cutting inputs such as fertiliser, feed and others will generally have greater consequences on output. 
Review the latest cost cutting ideas here: