National Milk Records: helping farmers improve milk production

The number of dairy farmers in the UK has halved over the past 10 years to 17,060, according to The Royal Association of British Dairy Farmers (RABDF). The independent trade body representing UK dairy farmers claims they are abandoning the industry in droves at a rate of 14 a week. Falling milk prices, soaring fuel costs and livestock feed have squeezed dairy farmers’ profits to the point where they are selling milk at a loss.

In June, the collapse of the Dairy Farmers of Britain, a co-operative of some 1,800 milk producers who supply around 10% of the UK’s milk to major supermarkets such as Tesco and Asda, took some by surprise, but for many within the industry it was a sign of the times: only competitive and efficient milk producers can survive.

National Milk Records (NMR) is a UK supplier of milk recording services, providing herd management information on individual cattle performance to its customers. The company, which is headquartered in Chippenham, Wiltshire, collects and analyses milk samples from dairy cows and provides farmers, milk buyers, dairy industry bodies and breed societies with critical information about yields, carving and dry periods. NMR’s  laboratories in Glasgow, Harrogate and Wolverhampton analyse milk quality and the herd, helping farmers to improve milk production efficiency as well as to deliver high quality produce in a competitive market.

Previously listed on John Jenkins’ junior trading service JPJL, NMR was launched on PLUS Markets in December 2006 at 43p, giving the company a value of £3.1 million. That said, over the last 12 months, shares have fluctuated between 23.5p and 34.5p. Its share price currently stands at 30.5p, giving the support services minnow a market cap of £2.24 million.

Liquidity has been a problem for NMR with investors struggling to get their hands on significant volumes. For the most part, NMR has small shareholders who act in isolation, placing small quantities on to the market. Share consolidation would address these liquidity issues and could go some way to giving the company a higher share price that reflects its solid core business and potential for growth.

NMR was formed in 1997 following the deregulation of the milk industry, which saw the Milk Marketing Board, a government agency controlling milk production and distribution, dismantled. The responsibilities of the Milk Marketing Board, which included acting as buyer of last resort in the UK milk market and guaranteeing a minimum price for producers, came to an end in 1994. However, the Board was only finally dissolved in 1997.

Through deregulation of the industry, NMR gained 28,000 shareholders who were granted shares in proportion to their milk production. However, these days the figure is closer to 24,500 as the number of dairy farmers has declined substantially and smaller shareholdings have disappeared off the radar. Deregulation also led to the company inheriting partial liability for The Milk Pension Fund, a multi-employer final salary pension scheme. The Milk Marketing Board was one of the UK’s largest employers and its pension was overfunded and running at a surplus.
Nonetheless, longevity and erratic investment returns has led to a deficit, which NMR now shares with a number of UK dairy companies and co-operatives.

In July 2007, the PLUS small cap announced that it had taken steps to reduce its pension hole by closing the fund to future accrual and replacing it with a defined contribution scheme. The move provided a one-off boost to the financial results for the year ending 31 March 2007, when NMR’s pension liabilities stood at £2.2 million compared with £2.9 million for the same period in the previous year. Since then, longevity and poor asset performance has caused the pension deficit to bounce around at £977,000 in 2008 to £2.5 million the following year. Although, the company still faces a large liability for the pensions accrued up to that date, steps have been taken to reduce the risk of volatility in the scheme.

NMR operates in three divisions: milk recording, milk testing and livestock recording. National Milk Records (NMR), the milk recording division, is the strongly cash generative core business looking to expand into new markets, such as Scotland and Ireland. NMR has also identified opportunities in Kosovo, Botswana and Indonesia, and more recently in China.

National Milk Laboratories (NML) provides payment testing services to major UK milk buyers, making sure that milk quality is high and disease is detected before it is sold to customers. The business is currently building its presence in the Irish market and samples are being submitted from two key milk recording organisations within the region.

The newest division, National Livestock Records (NLR), is gaining momentum and generating higher returns through its ear tagging business as well as in animal ID and traceability within the red meat sector. The ear tag distribution service is set to take off this year as EU agricultural legislation implemented in January 2010 states that all sheep in Europe must be electronically tagged for monitoring in the same way as cows.

NMR is also seeking to expand its offering to farmers through third parties with additional products, such as collars that monitor temperature to identify when livestock is on heat. It is also reviewing new ways of tackling Johne’s disease with more frequent testing.

As seen with the ear tagging service, NMR is eager to exploit technology and the company continues to develop new tests to detect even more diseases for customers. During the last three years, the PLUS small cap has been developing a new software system designed to optimise data collection and provide a faster service. THOR is set to go live this year and the investment will enable the support services enterprise to offer additional testing services to farmers.

NMR Managing Director Andy Warne said: “We have worked hard to maintain our position as leading providers of milk services in the UK by enhancing our technological offerings to customers, positioning ourselves to maximise the full potential of the group in the future.”

A recent update from the company revealed that it in spite of bad debt created by Dairy Farmers of Britain going into administration in June, the company was “still on budget”. Half-year figures to September 2009 revealed increased turnover of £7.9 million compared with £7.6 million in 2008. Operating profit remained healthy at £395,000 compared with £440,000 in the previous year, however, the results were dented by a hefty £137,000 interest charge related to the pension scheme.

Warne added: “Our milk testing divisions have  performed  well  despite  the challenges  experienced  by many of those operating within the dairy sector  throughout  the  past year, due  to the continued relevance of quality and disease testing for both dairy farmers  and milk buyers.”

Facing little or no competition when selling to customers, Warne said NMR will continue to benefit from a reliable revenue stream as its customers pay up close to £1 million a month for the company’s services. This strong cash generation has enabled the company to recently upgrade equipment, extend its product range as well as tackle more fundamental problems, such its yawning pension deficit.

Investors looking to milk opportunities in less turbulent sectors, such as agriculture may find NMR an attractive, long-term proposition with its robust core business and a keenness to embark on a healthy expansion plan.  http://www.proactiveinvestors.co.uk/companies/news/13290/national-milk-records-helping-farmers-improve-milk-production-13290.html