Dairy farmers’ profits recovered in 2017/18 as milk prices returned to more sustainable levels – but the outlook for 2018/19 is far less bright, according to a survey by accountant Old Mill.
The survey – unveiled at the Dairy Show – revealed that Old Mill and Farm Consultancy Group (FCG) clients made a profit from milk of £86/cow in the year to March 2018, compared to a loss of £253/cow in 2016/17. When taking non-milk income, such as calf and cow sales, into account – but not including rent, finance or the single payment – the average farm profit was £383/cow in 17/18 against just £19/cow the previous year.
“Compared with 16/17, any year was going to have to be an improvement if dairy farmers were going to survive,” says Mike Butler, chairman of the board at Old Mill. “As it turned out, the 17/18 survey shows a much-needed return to profits for the majority of farms in the survey.”
However, the pendulum has already started to swing the other way, with a sharp increase in costs of production likely to erode margins in 18/19. “The full effect of this year’s wet spring and dry summer will not be known until we get well into 2019,” says Mr Butler. “Only then will we know how tight winter fodder volumes are, how much supplementary feed is needed, and how well milk producers can maintain output under these challenging conditions.”
Phil Cooper, partner at FCG, expects costs of production to rise by 5-10% this year, to over £2,300/cow. Although milk prices are likely to remain stable, reduced milk yields due to the summer heat stress and lower quality forage will drag down milk income to £2,256/cow. Farmers are therefore likely to make a loss of £44/cow before accounting for non-milk income.
“Cow numbers are expected to be lower this year as businesses have had to reduce their herd size to ease pressure on feed stocks,” explains Mr Cooper. “This has resulted in costs, particularly overheads, having to be spread over fewer cows/litres.”
Even so, many farmers can still show a profit across all systems providing costs are controlled. “The concern is that while this year still shows a profit, it is with a milk price of 32p/litre. The average milk price over the past 10 years has been 27p/litre, so there is plenty of work to be done.”
Analysis of the top and bottom 10% of producers reveals that costs of production are a major focus, with the lower tenth paying £821/cow more than the top producers, at £2,765/cow. The bottom producers had considerably larger herds, averaging 330 cows against 288 in the top 10%, so they should have been able to spread their costs further. But their labour, machinery and variable costs were all significantly higher.
In addition, both milk yields and milk price were lower among the bottom tenth of producers – all of whom calved year-round – resulting in a loss of £333/cow compared to a profit of £925/cow among the top 10%.
“A number of businesses are still unable to generate a profit, despite the noticeably higher milk price achieved in 2017/18,” says Mr Butler. “Anyone entering into this winter without an honest and firm assessment of where they stand could end up in a difficult position. Planning ahead can not only identify pinch points, it can also help to inform the best solutions to the problems. Speaking to the bank early is a fundamental part of coping with the challenges ahead.”