Credit crunch lessons

Does anyone have a savings account at Icesave? Hopefully not! In case you have missed the headlines Icesave was, until recently, one of the highest paying internet banks. Now it has gone bust, and many of those savings are potentially lost. So what has this to do with the milk market?

It is a good example that the highest rewards and the best returns do come with an element of risk. When volatile times come around the effect of increased risk can rear its ugly head. Financial investments may be taking the headlines, but the same issue is true for milk contracts.

Since deregulation it has been a well known fact that the co-ops have paid the lowest milk price, but they have also had the lowest risk profile. Not one co-op member has ever lost a milk cheque. Direct suppliers have received more, but sometimes cheques have not appeared and a significant amount of money has been lost. The direct supplier’s future has also been more unpredictable – witness what happened to Nestle suppliers when they were transferred to First Milk or when suppliers were left unpaid by Longslow Dairies.

Currently milk prices are facing a very volatile period, although the milk supply shortage in Great Britain should help insulate us from the full effects. As always, some farmers will be tempted to leave their current buyer in search of higher prices. These will include small “niche” operators, or those involved in spot market milk brokering.

Kite can, of course, advise clients on their choice of milk buyer but we will never tell a client definitively whom they should supply. In the current climate we do advise that the element of risk should be taken extremely seriously and built into the decision making process. Like investors, some farmers will accept a higher risk profile which some of the smaller buyers and brokerage firms undoubtedly have over “the big guns”. Other farmers who are more risk averse should align themselves with long term partners for security, sustainability and peace of mind. Currently the issues to consider in determining risk include:

• Exposure to poor credit lines - As credit remains tight will some companies be under pressure because customers cannot pay on time?
• Inter-company politics – Brokerage firms are not necessarily the most popular. Would a company buy from them if they did not have to? What would happen if they stopped?
• Imported milk – What effect will this have on brokerage values?
• The effect of the credit crunch – How are middle ground milk sellers faring having to pay high prices to farmers, but being up against supermarkets discounted milk brands on the high street?
• Currency - Is playing havoc with world market prices. The $ has appreciated by 14% since July with 4% in the first 10 days of October alone while the £ has lost 14% of its value to the € since July. In current markets these trends could quickly reverse.

We have seen in financial markets how big mistakes can be made by poor judgements over risk. If you are thinking of moving buyer during these uncertain, volatile times then our advice is to determine your risk and return profile, find a quality buyer that matches it and who has a good contract. Find out as much as you can about the challenges and pressures facing their market, what their payment terms and conditions are and determine how that fits with your business objectives.