Resiliant dairy profits forecast

Despite the recent milk price cuts, dairy farm profitability should remain reasonably robust over the next couple of years, according to Andersons’ Friesian Farm model. Friesian Farm, with 100 hectares, runs 150 cows and their replacements on a year-round calving system. It made a considerable loss before support payments in 2012-13 due to adverse weather conditions and lacklustre milk prices.

The difference between 2012-13 and 2013-14 shows the largest yearly swing in profitability Friesian Farm has ever seen. Concentrate costs were lower for winter 2013-14, coupled with lower volumes of purchased feed. However, it is the much-improved milk price (up by more than 4ppl on the year) that really changed profitability.

For the current 2014-15 year, the industry is rightly concerned about milk price cuts. Our forecast factors-in reductions already announced for May and June, and further market falls in the autumn and spring. A fall of 1.5ppl on average may look conservative, but remember that in 2013-14 milk prices only started to move in the second half of the year (bringing the year-average lower). The converse will happen in 2014-15; prices will start high before falling.

This lower price will be partially offset by a further reduction in variable costs. Feed prices are budgeted to fall next winter and fertiliser this spring has been cheaper. Some of the cost reduction comes about because yields are rising compared with last year.

One cost that does rise in the current year is land. Friesian Farm has 40ha on an FBT agreement that came up for renewal this spring. Its rent increased to £370/ha (£150/acre) which has pushed up the rent and finance charge for the year.

Overall, profits for 2014-15 are back on the previous year, but given that 2013-14 was particularly good, and against the background of falling milk prices, the forecast performance is pretty good.

However, in dairy, returns compared with capital invested are pretty low. Net of drawings, the budgeted level of profits for 2014-15 provides a return on capital of around 4%.

The milk market might start to recover late in 2016, but this will not be enough to see the average price rise compared with the current year. Variable costs may drift up slightly although inflationary pressures in most dairy costs appear to be muted. The result is another decline in profitability, although there remains a positive margin from production.

Support levels will fall from 2015 onwards as the BPS replaces the SPS. Friesian Farm’s ELS agreement comes to an end mid-way through the 2015-16 milk year. With no direct replacement, the farm’s agri-environment income starts to tail off.

Faced with a less benign business environment, dairy farms need to be structured to provide sustainable returns for the medium and long term. If the market is less generous, then producers need to look to their own management for profitability improvements.

Richard King is head of business research at the Andersons Centre in Melton Mowbray.

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