Reference (Dept & No.) Summary Business Case for……………..
- Overview of Growth Request
Dairy farmers have experienced twelve months of exceptional weather conditions which have now combined to seriously threaten profitability and the supply of adequate milk to the Dairy. There is a need to import large quantities of fodder to adequately feed the cattle over the winter months, till the Spring of 2019, an increase in general operational costs and a detrimental effect to fertility rates (which impacts on milk productivity), all caused by adverse weather. The estimated total extra cost to the sector is in the region of £500k. The growth request is for an additional £100k to be allocated to the sector for enhanced government support. This is essential to avoid raising the retail price of milk on the Island.
This report intends to outline the significance of the changing weather patterns and the additional consequential challenges before outlining a proposed remedial plan, to overcome a set of natural circumstances which are beyond the control of Dairy farmers. At the time of writing, all dairy farmers in the Island have been severely affected by the exceptional conditions with the prospect of significant increased costs till the end of the winter.
It is both the recent very hot weather as well as the prolonged wet weather during the last winter which have led to the current exceptional circumstances. In essence, the unusually wet conditions of early Autumn last year meant that cows were housed at the beginning of October, nearly a month earlier than normal, and were on full winter rations till the second half of April, which again was later due to the wet weather conditions; as a result, silage stocks at the end of the winter to ‘buffer’ feed to our cattle in the summer were much lower than normal. With the ensuing very hot summer, grass growth really ground to a halt in July, resulting in a return to virtual winter feeding from late July/early August meaning that cattle are eating the silage and hay, made this year, which was due to be fed from October onwards.
Compounding challenges
Mention has already been made of the rapidly dwindling stocks of winter forage on farms due to lack of grass growth, but this is compounded by the fact that there is virtually no grass to graze or cut which was planted after potatoes due, not just to the very dry conditions but also to the fact the potatoes were planted later than normal because it was so wet. Whilst crops of maize and barley have germinated reasonably well, but will not produce such a heavy yield, grass sown after the seed crop has been lifted, normally in July and early August, will be severely diminished because most of the fields are yet to be dug, again due to the late planting. Dairy farmers have established an intricate working relationship with potato growers over the years, as the area of farmland for farmers has diminished, to the point that between 20 – 40% of winter forage for our cattle is derived from crops grown after potatoes so the legacy of the extraordinary wet winter is having a significant impact as well.
Low profitability within the sector makes it more vulnerable to the adverse economic conditions brought about by exceptional weather conditions. Dairy farms typically operate an operating profit equivalent to 7.5 pence per litre. With increase costs for emergency feed this could reduce to only 4 pence per litre leaving the sector unable to cope with imminent financial and future strategic challenges it faces.
Current support to the dairy sector
The iconic ‘Jersey’ cow plays a critical role in Island life, historically, culturally and economically both at the domestic level and internationally. It provides Islanders with a ‘sense of place’ and has been exported world-wide ensuring that Jersey, the home of the breed, has a high profile in the international community encouraging inward investment, tourism, adding value to Jersey products and effectively helping put Jersey ‘on the map’.
It is because of the special status of the Jersey cow that successive rural economy strategies have supported dairy farming, helping ensure its survival, whilst the island is supplied with high quality local dairy products, thereby adding considerably to our internal food security. Support has been based on financial needs of individual dairy farmers, rather than those of Jersey Dairy which operates as the trading arm of the Jersey Milk Marketing Board (JMMB). This is achieved through the continued provision of the Quality Milk Payment, an abattoir, support for essential dairy services and advice provision.
Additional Costs impact on Dairy Sector
Tanya Colman, from Kite Consulting in the UK, who regularly visits the Island four times a year, was brought to the Island in early August, and helped dairy farmers assess their stocks of forage for the winter and calculated their likely shortfall. From this exercise, there is a current requirement to import up to 600 tonnes of either hay or straw for feeding and a potential additional requirement of 150 tonnes of straw for bedding as cereal crops in the Island are so short this year. Approaches have been made to suppliers in the UK and some forage is already being imported because it is essential to secure stocks now as virtually every European country is short of animal feed due to the weather. Unfortunately, the price is going to rise so farmers are acting collectively to place orders for delivery as soon as possible. Straw is currently trading at between £75 – 80/tonne and hay at between £100 -120/tonne ex farm but with transport costs and all the logistical problems associated with getting a low value, bulky cargo to the Island, the delivered cost currently is approximately £240 per tonne for feed material and £230 per tonne for bedding material: costing an estimated £178,500.
In addition, an increase in compound feeding will need to be made in August, September and October 2018 in order to maintain the milk supply, an extra 420 tonnes of feed needed will cost the industry an estimated £126,000 over and above normal costs.
The extreme weather has also resulted in the requirement for pasture to be reseeded, and added to workload – carting water, moving animals to new grazing more frequently at an estimated additional cost of £57,500.
The total additional cost of feed, bedding and associated work is therefore £362,000.
Fertility Loss
Recent hot weather and resultant changes to the nutritional regime have also impacted on fertility rates within the herd and which has added time to the Calving Index for cattle. For every extra day added to the Calving Index, mild yield will drop (while costs remain constant) at a calculated cost of £16.00 per day.
An extra 10 days added to the Calving Index, brought about by the hot weather, will cost the sector £110,000.
The Dairy sector is therefore currently facing an estimated increase in costs of £472,000.
Climate Challenges 2017/2018
2018 has been especially challenging from a climate perspective, with a late, cold and wet spring (February and March) followed by dry and hot conditions in May, June and July – as illustrated by climate data sourced from Jersey Met.
The impact of climatic conditions has been felt in a number of ways:
- Forage stocks are low due to continued use in autumn 2017/spring 2018
- Turning out to grass in 2018 was delayed because of the cold spring
- 1st cut silage yields were delayed and reduced by the cold weather
- 2nd cut silage yields were reduced by the dry weather
- Expected yields from 2018 forage crops are well below average
- Price of imports (feed and bedding) rising due to Europe wide shortages
With regards to growing crops yet to be harvested, grass, barley and maize are all showing varying degrees of stress and there is no doubt that yields will be below average.
Furthermore, where land resources are shared with Jersey Royal potato production, the delayed potato season coupled with extreme dry conditions after harvest have resulted in a significant reduction of ‘post-potato’ forage. The use of a shared land base between dairy and potato sector has always been a vital component in the efficient management of countryside resources, however this year the benefits of these arrangements have been limited by an unprecedented delay to the planting of the potato crop, particularly seed crops, some of which were not planted until May and will now not be harvested until September. In many fields rye grass after potatoes had failed to germinate, and cereal and maize crops have not grown well.
European Shortages
It should also be noted that forage stocks are in short supply across Europe, with the European Commission commenting that the “ongoing and prolonged drought situation in several EU countries is having a significant impact on the production of arable crops, as well as animal feed which could also have an impact on animal welfare. In addition, the reduction in the level of animal feed is having a particular impact on the income of livestock farmers, as this will increase their input costs if there is a shortage of fodder later in the year.”
Commissioner for Agriculture, Phil Hogan, said: "I am very concerned about these prolonged climatic developments. I have been in contact with a number of ministers from affected countries to discuss the situation and get up-to-date assessments of its impact. The Commission, as always, is ready to support farmers affected by drought using a number of instruments, including higher advance payments, derogations from greening requirements and state aid. The Common Agricultural Policy (CAP) already provides a safety net for farmers who have to deal with unpredictable events. I am encouraging all Member States to look into all possible actions and measures provided for in our legislation."
Whilst Jersey does not benefit from provisions of the CAP, the Island can replicate European measures to support farms in an equivalent manner. Lack of appropriate government support risks leaving our industry at a significant disadvantage compared to UK and European neighbours.
- States Common Strategic Priorities and Department Business Plan Objectives
The States Strategic Plan (SSP) 2015-2018 outlines both the key challenges the Island faces and the Council of Ministers’ five priorities - the ‘must do’s’ that can make the biggest difference to Jersey. The SSP includes eight economic thematic outcomes which focus on all sectors of the economy. In order to meet this and other emerging funding challenges Jersey needs economic growth.
In January 2015 Jersey’s independent Fiscal Policy Panel stated: ‘The challenges of the ageing society and the risks about the future trend rates of economic growth require action now to develop a clear strategy for raising productivity and competitiveness in the Jersey economy in the medium-term’.
The ambition of the Government of Jersey is to achieve environmentally sustainable, productivity-led economic growth, providing rewarding job opportunities and rising living standards across society. It is vitally important with Brexit to provide the opportunity for Jersey agriculture to remain competitive and it is now timely to provide funding to support modernisation of the industry through increased mechanisation, precision agricultural systems etc.
The provision of grants and subsidy through the Island’s rural development programme should aim to incentivise activities that are consistent with business and Government objectives: measures are required to increase productivity, help businesses become more sustainable, meet the demands of domestic and global markets whilst reducing environmental impacts.
In order for the Rural Economy to meet these challenges, financial investment will need to be made -and this to be funded primarily through profitable trading activity. The dairy sector is currently in a transition phase, with all stakeholders having to sign up to the LEAF Marque Standard in 2018, and achieve successful accreditation by the end of 2019. Adherence to the LEAF Marque will raise environmental standards and ensure compliance with best practice and statutory guidelines in all areas of the business. A decline in profitability caused by the extreme climatic conditions experienced over the last twelve months would impact negatively on this transition.
- Options that have been considered
Due to continued low profitability of the sector, it will be not be possible for the industry to absorb the extra costs identified without significant hardship; extra funding needs to be found to enable businesses to continue to function and maintain a level of profitability sufficient for re-investment and ensure long term viability of the sector. This leaves the industry/government the following options:
1. Do nothing – allow profitability in the sector to decline further – not preferred option as will impact negatively on sector transition to LEAF Marque; could lead to business failure; could lead to shortage of milk supply to Island which could result in sector failure.
2. Encourage the JMMB (through trading arm Jersey Dairy) to support producers with an increase of 3.5 pence per litre of milk (which would generate £472,500 in 12 months) and accept this cost will be passed to the consumer. – not preferred option as raising retail price of milk not acceptable politically.
3. Seek emergency government funding for the total level of support required to fund the extra costs for the sector – an extra grant payment of £472,500. – not preferred option due to government budget constraints and lack of input from the sector.
4. Secure additional funding from all stakeholders – Government, JMMB (Jersey Dairy) and Producers each to meet a proportion of increased costs. - preferred option as all stakeholders involved to an acceptable level, supply price of milk can be maintained at current level, sector profitability protected, producers transition to LEAF Marque further supported.
Preferred Option 4
Secure additional funding from all stakeholders – Shared contributions from Government, JMMB (Jersey Dairy) and Producers to meet increased costs.
Contribution Schedule
Jersey Dairy Supplementary Payment £175,000
Producer Contributions £122,000
QMP/RSS Extra Funding (from existing budget) £ 75,000
Contingency Additional Funding £100,000
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To Fund Additional Costs of £472,000
Jersey Dairy Supplementary Payment
Ironically, and indeed fortunately, the hot weather has resulted in improved ice cream sales supplied by Jersey Dairy both in the Island and especially in export markets; coupled with judicious trading in the current financial year, Jersey Dairy is considering the supplementary payment of £75,000 to producers at the end of September (end of financial year) along with an additional £100,000 in December: this will contribute a total of £175,000 towards the additional costs.
Producer Contributions
Producers will absorb a proportion of costs which will inevitably reduce profitability of the sector. Given the Dairy Farm Costings service was demonstrating an operating profitability level of 7.5 pence per litre at the end of March 2018, a contribution of £122,000 from producers will reduce this by about 12%. It is not felt that the industry could sustain a decline in profitability below this point.
Government Support
Support will be paid as a supplementary Quality Milk Payment. The advantages are that the delivery mechanism already exists, will be easy to administer, and will ensure support is distributed evenly across the sector as all dairy businesses are facing increased costs as a result of the weather.
A total fund of £175,000 will be required for the shortfall to be met, effectively government matching the direct contribution of the JMMB. A total of £75,000 to be paid from existing budget allocations (under 2018 QMP and RSS funding), a further £100,000 to be raised by way of an additional funding request.
(It should be noted that the main beneficiary of support paid to the dairy sector is, in fact, the consumer, who benefits from a reduced milk retail price. Without government support, the retail price of milk will have to increase.)
- Successful outcome
QMP Drought Relief paid and sector maintains at least current level of profitability and businesses achieve LEAF Marque Accreditation by end 2019.
Milk supply to Jersey Dairy maintained at sustainable level, in line with budgeted demand, export markets which have been recently developed continue to be supplied.
Retail price of milk does not increase.
- Financial Analysis – costs to main department and any other departments
Revenue | One-Off Costs (£) |
2018 | Inflation | 2019 | Inflation | 2020 | Inflation |
| | 100,000 | | | | | |
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Revenue | Recurring Annual Costs (£) |
2018 | Inflation | 2019 | Inflation | 2020 | Inflation |
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- Staff Requirement
Description of New Posts | No of FTEs |
2018 | 2019 | 2020 |
| | 0 | 0 | 0 |
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The project will be delivered within the existing FTE
- Impact of NOT progressing the Growth request
Retail price of milk will have to be increased to pay for extra costs incurred by industry.
With two dairy units ceasing to trade this year (due to retirement), and a further two next year, the sector will be challenged to maintain an adequate milk supply – an intricate process in which producers alter feed rates to cattle to tailor milk supply to anticipated demand.
The loss of herds to the industry requires the implementation of a managed process, as other producers will need to increase output to maintain overall supply – but this will only be achievable only if cows are properly fed with additional bought in feed, especially over the course of the winter.
Failure to ensure cattle at fed at correct rates could result in milk supply being inadequate, and whilst this may not affect the domestic market, it could damage the valuable export trade, an area where the dairy has made significant investment and progress in recent years. A successful export trade with value added products, is key to the long term viability of the sector.
- Related Projects
Quality Milk Payment
The current Rural Economy Strategy states that the Government of Jersey will continue to fund the QMP at 2015 levels (£144 per cow per year) until 2019 at which point the level of subsidy will be reviewed in line with the completion of the current Medium Term Financial Plan (2017-2019). From 2019 QMP payments will require recipient dairy farms to be individually LEAF Marque accredited. The objective of the QMP will be to support dairy farmers whilst legislation governing the marketing of milk and milk products is modernised and until greater and more sustainable level of profitability in the industry is realised.
In 2006, the QMP was set at £196 per cow. Extra funding of £66 per cow, in response to the extreme weather experienced over last twelve months, will raise QMP to £210 per cow for 2018.
- Other dependencies
There are no other dependences.
- Identification of Key Risks
Risk | Likely risk (H,M,L) | Acceptable tolerance | Action | Impact |
Without government support retail price of milk will have to increase | H | None | Provide funds as per option 4 | Higher milk retail price not acceptable politically |
Profit to dairy industry damaged and sector unable to cope with transition to LEAF Marque | M | | | Essential KPI of Rural Economy Strategy not met. Business failure. |
Supply of milk to dairy reduced, loss of export markets | M | | | Loss of financial return to dairy and producers which is being developed to underpin sector |
- Overall timescales and key milestone dates
Decision as to extra funding to be made by end September 2018 for funds to be in place and distributed by end October 2018 in time for winter feed program.
- Project Roles and Sign off (Suggested)
Responsible Budget Holder | Accountable for delivery on time and on budget | |
Finance Director | Sign to vouch that this project is the optimum value solution, that this project cannot be funded from existing resources and will accord to all relevant Financial Directions and that the supporting detailed information has been prepared. | |
Accountable Officer | Sign to confirm that this project is the optimum value solution and has been prioritised against all existing services. | |
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