Know your units costs of production - banker
INCREASINGLY, the most important financial detail for dairy farmers’ borrowing proposals will be a knowledge of their projected unit costs of production over, say, five years, taking into account the new investment.
That was the message from HSBC head of agriculture Pat Tomlinson, who, given the current turmoil in global banking, was surprisingly upbeat about prospects for farmer borrowing and the availability of funds – from his own bank at least.
But even before the credit crunch, the reality of funding farm investment was that banks were having to take a closer look at the risk element of any new lending proposition – and the prospective borrower – and adjust rates accordingly.
Looking at prospects for the dairy industry, Mr Tomlinson urged all stages of the supply chain to work towards changing the structure of the market and away from the current scenario of an imbalance of power between producers and buyers, away from an obsession with historical rather than projected costs data and ‘just-in-time’ price increases. And because we were behind some international competitors in exploiting world market opportunities, we must get away from the quota-driven mentality of containing production, rather exploring global markets for additional production.
Mr Tomlinson said it was clear from the bank’s own figures that being in the top fifth of producers was inevitably a worthwhile goal – this sector was invariably profitable through thick and thin.
But making your costings available for ‘public’ dissection was a dangerous road to be going down and he questioned the future price negotiating strength of those producers whose buyers had full knowledge of their costs.
He urged milk producers not to rely simply on evidence of cost increases as their sole negotiating tool on milk price, suggesting instead that contracts, devised by farmer-owned co-ops and based around end-use, offered the strongest position – again reflecting the need for a change in market structure.