Farmers are not alone in being caught in a squeeze between huge rises in input costs and inadequate increases in the returns available for the end products.
Merchants who supply animal feed and other inputs used on farms are facing a credit crisis as prices escalate, particularly for feedingstuffs. The simple fact is that more money is required to finance the normal tonnage of feed that is 'owed for' by the customers, because prices per tonne are up by around £50.
If the banks don't extend the overdraft facilities of the farmers or of the merchants, then the 'normal' tonnage of feed cannot be funded and, therefore, can't be supplied while higher prices prevail.
Merchants have been advised to take control of their funding requirements by limiting the amount of credit they give to customers. This leaves farmers with very few options: either seek a bigger overdraft or cut the size of their business.
Downsizing is also being suggested as an option for the merchants; not much of an option for anyone attempting to build a business, nor for an economy that is supposed to be looking to agriculture for growth.
Irish Farmers Journal enquiries indicate that this conundrum goes along the feed supply chain to the animal feed compounders, and it may well go to the importers and the grain traders too.
One feed mill operator contacted by the Irish Farmers Journal this week estimated that compounders in Northern Ireland will require an extra £20m of working capital to run their businesses this winter at the same capacity as last year if prices of straight feed ingredients don't come down. This is based on slightly over two million tonnes of feed produced and an average of two and a half months credit period before the feed is paid for.
There is currently no sign that banks will extend extra borrowing facilities to the compounders; they are being told to limit the credit they give to the merchants and farmers to whom they supply feed.
It was bluntly stated to the Irish Farmers Journal that the wise option for compounders this winter seems to be to 'shrink' their business rather than try to sell more feed. Some feed companies are asking themselves: 'do we want to sell more tonnage this autumn/winter?' and finding that the most business efficient answer is 'no'.
Due to the unfavourable weather, the demand for animal feeds is running ahead of normal and this means that raw materials booked in advance are insufficient to cover the needs of the usual customers of each compound feed manufacturer. Apart from the working capital requirement or the credit problem, every extra tonne of feed that they deliver requires extra raw materials bought on the 'spot market'.
With the 'spot' prices currently around £20 per tonne higher than the 'book' prices of feed raw materials 'forward bought', extra sales can only make money for the compounders if they are made at higher prices - and if payment is secured early.
Sales people for the big compounders are being advised that they cannot afford to let credit slip and that taking on new business can only be considered if 'debtor days' are brought down with it. That means customers who will pay promptly.
If prices don't come down, then the need for credit to finance the industry will increase further until end prices for farm products rise.
The only real solution is higher prices for the produce from the farms to enable payments to be made for inputs without a need for extra borrowing.
Supermarkets, processors and politicians need to realise this need and the urgency of higher prices for producers.
A best estimate of the extra cost of Northern Ireland animal feed inputs over the year ahead is £160m, based on slightly over two million tonnes of feed used in 2011 and the anticipated price rise of between £70 and £80 per tonne. Around £80m of that would be for cattle feed and the other half for pigs and poultry. This is money that farmers have to find if the agri-food industry is to be maintained at its current level.
We are already seeing some serious culling of sows and cows as individual producers 'bite the bullet' to keep their own business cash flow in line. Compounders in NI reckon that they required £26m extra working capital to fund the local animal feed businesses in 2011.
With rising prices over the past three years, the feed millers have already gone to their bankers to negotiate additional borrowing to get them through their working capital requirements when applying 'normal' credit terms with their customers. Now it seems that the banks are questioning the amount of credit given by the feed suppliers and merchants are being advised to think carefully about continuing lines of credit.
Something's got to give.
Source: Argentine Beef Packers S.A.
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