The Moral Hazard of Farming

The protests by farmers about the prices they receive for milk are symptomatic of the unrealistic expectations which are held by farmers in general. They have become dependent on subsidies to such an extent that many of them have ceased to prepare budgets or ensure a profitable market for their produce.

The number of dairy farmers has declined but the volume of milk has not. The Milk Marketing Board used to guarantee the price of milk at the beginning of the marketing year and to accept all the milk produced at that price. The Board also negotiated with the retailers of liquid milk and those who manufactured dairy produce such as butter and cheese to sell milk at a price which enabled dairy farmers to make a profit.

The Board’s role as monopoly seller effectively meant that dairy farmers were “price makers”. Since the Board was abolished, dairy farmers have become “price takers”, but they have not adapted. So they expect to be paid a price they want irrespective of whether there is a market for all the milk they produce.

Most of them have enlarged their herds to more than compensate for the volume of milk formerly produced by those who have ceased production. They have moved away from breeds such as the Friesian, which was also useful for producing beef, to the North American Holstein which is poor for beef production but yields more milk. Milk production is the only enterprise on most dairy farms.

Specialisation has always been known to be risky for farmers but many have accepted the risk in the belief that someone will come to their rescue with a safety net. Huge amounts of money have been spent on more cows, new facilities and more land to seek economies of scale which are very difficult, if not impossible, to achieve.

If farmers are selling milk below their costs of production, the more they sell the more money they lose. Size is no saviour; it may hasten the arrival of bankruptcy. The small dairy farm which is owner-occupied and has other livestock, with no mortgage, no overdraft and is reliant on family labour, may be more able to farm profitably than the large unit with high fixed costs of labour and borrowed money, especially for buying land at current prices.

The price of agricultural land is almost five times what can be justified by its productive capacity. Farmers’ Union spokesmen are always ready to declare that farming is unprofitable but they never explain how farmers can afford to buy about half of the land which is offered for sale. Tax advantages are the main incentive for those buying land. Farm subsidies also make land more expensive, which means it is almost impossible for young people to start farming independently.

A monopoly exists in the market for farmland because only those who already own land are able to buy it unless they have accumulated money from outside farming. The market price of our farm is now almost £4m more than we paid 23 years ago. This unearned increment is of no advantage to us because we have no wish to sell. It has arisen through the perverse tax laws which encourage speculation in land-based property and discourage employment and enterprise. I would gladly forego all subsidies in exchange for the abolition of Income Tax and its replacement with the annual collection of the rental value of our land.

We currently employ two full-time staff but send the take-home pay of another to HMRC. I would rather employ another person and increase the productivity of the farm without being penalised for doing so. The ambition of farmers should be to become reasonably rich through farming their land, not to become unreasonably rich through owning land to accumulate its unearned rental value as the market price increases.

  • Dr. Pickard was formerly a lecturer in animal physiology and nutrition at the University of Leeds. He farms in Fife.
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