Selling agents around the country who handle the sale of land will be acutely aware that there is a welcome injection of confidence in the agricultural land market at the moment. One of the primary factors driving this renewed confidence is farmers who are planning for future expansion, in particular dairy farmers. The question I have been asked is: Will the abolition of milk quotas in 2015 change the pattern of ownership of agricultural land in Ireland?
There is no hard and fast answer to this question. Why? Because we do not know what format the abolition of milk quotas will take (if any). Under a quota-free regime, it would be difficult to envisage a situation whereby every dairy farmer in the country would be permitted to produce as much milk as resources physically allow. Remember that the rest of Europe will also be eager to increase milk production. Willingness among producers will be in abundance, but access to markets and processing capacity will ultimately dictate supply.
We have already witnessed a somewhat carefree attitude by some Irish dairy farmers over the past three to four years, when they doubled – and in some cases trebled – milk output beyond their quota boundaries. Such a move has led to a superlevy situation for the 2011/2012 milk year, with Ireland estimated to be 0.69% over quota. Many farmers got away with this in the past, but a superlevy fine in the region of €11 million is expected this year, which ultimately farmers will have to endure.
It’s clear that the drive to expand and increase output is not lacking among dairy farmers, but how would current milk processing facilities cope with a 50% increase in supply? The cost of building a new plant or expanding an existing processing plant has to be borne by somebody. I think it would be naive to believe that the processing plants would absorb all the cost.
In New Zealand, dairy farmers have to buy a certain number of co-op shares before they can supply milk. The number of shares acquired dictates the volume of milk that a farmer can supply. It’s clearly not a ‘free-for-all’ situation. Commercialism could lead to far more restriction than quotas.
A new challenge
It will be a new challenge and experience for Irish dairy farmers to operate under a quota-free regime. They will have to compete at a global level and will be more vulnerable to price fluctuations. In 2009, the majority of Irish dairy farmers found themselves in a situation they hadn’t experienced for a long number of years. An oversupply of dairy products around the world caused the price of milk to fall below 20c/litre in Ireland. This, coupled with the appalling weather that year, saw some farmers living on the breadline. Many struggled to survive at 20c/litre. What will the price of milk be post 2015?
The future price of milk, coupled with processing capacity, will ultimately dictate the extent of the expansion that Irish dairy farmers will undertake post 2015. In the event of a price reduction, some businesses deal with this by successfully endeavouring to increase their productivity in a bid to offset a drop in output prices.
But for the majority of the 18,500 dairy farmers in this country, there won’t be the capacity for substantial economy of scale.
The land factor
Milk quota was the limiting factor for expansion. In the future, this is likely to be replaced by access to land and legislative restrictions such as nitrates regulations and carbon constraints. Expansion costs money and if it involves the purchase of land – even at current prices – the capital requirement can multiply significantly.
In 2011, just 0.3% of the total land area of Ireland arrived on the open market. This represents fewer than 50,000 acres annually. It can take two to three generations before land is offered for sale in a particular area. This means that turnover is extremely low and only represents a once in a lifetime opportunity for a proportion of farmers. For the majority, the opportunity to buy land will never arise in their lifetime. So even if each of the 18,500 dairy farmers in the country had the capital in their pockets to acquire land, there wouldn’t be enough offered for sale locally. Dairy farmers need land to either adjoin them or be close by.
Selling with quota
In my view, selling land with milk quota attached hasn’t generated a major premium since 2003/2004. During the peak of 2006, a significant amount of land made €20,000/acre with or without milk quota. Since the recession, limited access to funding has fundamentally affected how much a farmer can afford to pay for land. In some cases, extras such as farm buildings, road frontage, a farmhouse, entitlements and even milk quota (depending on the volume) haven’t had a significant bearing on what a farm makes. They are almost perceived as part of the package at no additional cost.
While the country had been under quota for a number of years, some dairy farmers knowlingly went ahead and over produced without incurring a superlevy fine. Clearly, the acquisition of milk quota to stay within their own boundary wasn’t a priority for these guys.
That is, until now: I believe the superlevy situation this year has opened their eyes, which may influence the price of dairy farms and land in the future. In the past two years, favourable commodity prices have allowed many farmers to get back on their feet and possibly put them in a position to buy land. The notable lift in average prices in certain parts of the country reflects the sharp rise in the demand for land since the start of 2012.
The reality is that few dairy farms tend to come on the market, which makes it difficult to get an accurate indication of price trends. In 2010 and 2011, around 10 dairy farms were offered for sale annually. In 2010, a 135-acre residential holding with 137,000 gallons in north Cork averaged almost €10,200/acre. In 2011, a 79-acre non-residential farm with c.80,000 gallons in Co Meath averaged €9,400/acre. These are not premium prices (there were a couple of exceptions such as €13,500/acre in north Kerry).
Given the stringent criteria to borrow money, only farmers who have strong capacity to repay will be in contention to buy land at the moment. That is unless they have other capital reserves such as funds from the sale of development land or compensation from a compulsory purchase order. A number of dairy farmers around the country, however, find themselves with depleted capital reserves as a result of poor off-farm investment projects that have failed to accumulate a return.
Farmers aren’t the only buyers of land. There are other cash-rich buyers who are beginning to express a serious interest in agricultural land as a ‘safe investment’, which may impact price. Given the strong attachment to land here, there is unlikely to be enough land offered for sale to fuel a massive expansion frenzy in this country – long-term leasing or rental agreements may be the only real options available.
The situation in short
- Processing capacity, access to markets and the future price of milk will dictate milk production levels post 2015.
- Only dairy farmers who have the repayment capacity from farming, or those with other reserves of cash, will be contenders to buy land.
- Only 0.3% of the land area of Ireland was offered for sale in 2011. Limited supply will curtail a major expansion frenzy in this country.
- Long-term leasing or land rental may be the only real options available to some farmers.
- The current CAP proposals are having a significant bearing on the price of conacre.
The CAP proposals are having a clear impact on the price of conacre. The need to have access to land to draw down entitlements coupled with the perception that this year (and subsequent years) might be a reference year, is putting additional pressure on an already tight supply. A significant number of landowners retained their land this year and didn’t make it available for renting. As a result, any land that was rented or leased for the first time this year made a premium, with €250-300/acre paid in some regions. Apart from the CAP proposals, the requirement to meet the nitrates regulations, coupled with the desire to expand – especially among dairy farmers – is also adding to the drive for conacre. Conacre may be the only route to expansion for some farmers but the exorbitant prices paid here could be prohibitive.
Efficiency is key
In the meantime, farmers can undertake a certain amount of expansion at minimal cost using the resources they have, by increasing cow numbers, expanding the milking parlour/cubicle shed, harvesting more silage, etc. However, once a farmer starts increasing numbers to 120 cows or more, extra labour is required, and this can significantly erode the profit margin. Ultimately, profit for the dairy farmer will be determined by the price of milk post 2015 and the costs of production. I believe, however, that we must not lose sight of the importance of the family farm. The family farm has supported and provided a decent living for farming families for generations. Scale and expansion does not always lead to more profit and a better quality of life.
Given that Ireland has an abundance of one of the cheapest (grazed grass is three times cheaper than cereals) and most nutritious energy sources in the world, Irish dairy farmers are in an advantageous position to compete with the best milk producers around the world. Efficiency will be the key.