Give your milk buyer a business health check

The dairy sector is going through another period of consolidation, so there is even more need to make sure your milk buyer will be around for the long term. Paul Spackman examines what checks farmers can do

The recent problems at Farmright  have highlighted the need for dairy farmers to undertake more due diligence when choosing who to sell their milk to.

Slim margins are forcing the whole sector through a period of rationalisation, at a time when underlying milk supplies remain tight and global demand is rising. Milk buyers need the milk, but many face a dilemma: on one hand they need to pay a higher farmgate price to secure supplies, while on the other, fierce retail pressure is driving down prices.

Milk buyer checklist

• Use company accounts to monitor performance and track record

• Consider credit checks and signs of late reporting of accounts

• Make sure financial information is from a credible source

• Understand the business model of your milk buyer

• Visit the factory or processing site

• Listen to independent advice and others in the industry

• Consider credit insurance or try to alter payment terms

Sadly, there are likely to be casualties in this rationalisation. But by doing a bit of homework now, dairy farmers can minimise the risk to their business, says Kite Consulting’s John Allen.

“People should be more cautious now than they ever have been. Milk is in demand and farmers are being courted by buyers, raising the question of whether to move. But the dairy sector is littered with examples of business failures, so you’ve got to think carefully about the business you’re being courted by.”

Getting paid on time

Security of payment is the top priority for farmers, but it is not easy to know whether a buyer will have the ability to pay for milk in future weeks or months.

For public limited companies, Dairy Crest being the last remaining in the UK dairy sector, it is possible to follow the share price and stock market statements to gauge how well the company is doing and look for signs of a problem. But for co-ops and private companies, it may require more work.

Co-ops all publish their annual accounts, which give a good overview of the health of the business. It may be worth speaking to the accountancy firm that prepared the accounts or get another to review them. “Don’t assume scale is a safe business,” Mr Allen says.

It should also be possible to access up-to-date accounts from private businesses to perform similar checks, or pay to have a credit check done – a number of companies offer this service online.

“In every case, don’t take verbal assurances or make decisions on face value and make sure accounts are from a credible source. It may be worth checking with the accountants to see if there’s anything to be aware of since the accounts were signed off.”

Companies House offers a searchable database of more than two million companies, allowing users to view a company’s filing history free and buy copies of company reports. You can also monitor a company, and receive email alerts of any new documents filed at Companies House.

Know your buyer

When assessing the strength and potential of a prospective milk buyer, it is important to understand the way the company does business and its position in the supply chain. This goes beyond milk price and covers how contracts are structured, market performance and its financial position.

Visiting the processing plant can give a good “feel” for how the company is managed, and it’s also worth finding out what products they’re making, what markets are supplied and who they’re selling to.

Internet searches are a useful, quick way of finding out about a company and whether it has been in the news for good, or bad, reasons.

DairyCo’s annual Company Strategy and Performance report provides milk producers with an insight into the strategy and performance of Britain’s eight largest milk buyers. It looks at milk procurement, contracts and milk pricing, markets and financial situation, including:

• The potential of a milk buyer in terms of security of demand and its ability to pay a competitive milk price

• The long-term strategy of a milk buyer and how dairy enterprises can be best structured to fit in with that strategy

• How the milk buyer is performing as a business and in the market place and how this affects farmers’ long-term options

Listen to the industry

Industry gossip can be a useful way of keeping tabs on what’s going on with milk buyers, but treat it with caution, Mr Allen warns.

If you do have concerns about your milk buyer and want to switch to another, it is worth seeking professional legal advice. “It can be expensive to get out of a contract early, but when you consider that six weeks’ milk is probably worth a whole year’s profit, it may pay to get help early.”

Some could try to alter payment terms to be paid more frequently, but it is only likely to be larger milk suppliers that have enough sway over processors to negotiate this, he notes.

Credit insurance could also provide peace of mind in knowing that your business is protected against the risk of bad debts, caused by insolvency or protracted non-payment, but comes at additional cost and may not be appropriate for all.

Find out more

• DairyCo company strategy report – www.dairyco.org.uk – click on Library, then Market Information

• Companies House – www.companieshouse.gov.uk – click on Go to WebCheck for searchable database

• Registry Trust official register of judgments, orders and fines – www.trustonline.org.uk

• www.kiteconsulting.com – case study on making the most of your milk contract