Following a prolonged spell of low milk prices, incomes are set to increase markedly in 2017/18 amid soaring dairy demands and values.
Dairy farmers lost an average of 3.49p per litre in 2016/17, following a spell of disastrously low milk prices, according to a new survey.
However, incomes are set to increase. Based on Old Mill and Farm Consultancy Group (FCG) clients with a March year-end, dairy farmers had an average cost of production of 29.20p/litre in 2016/17 – well above the average milk price of 25.71p/litre.
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 0.28p/litre.
“That was well below our forecast profit of 1.08p/litre this time last year,” explained Mike Butler, chairman of the board at Old Mill.
“And it is purely down to the extended period of low milk prices. Farmers cut expenditure as far as possible, in areas like property repairs and variable costs, but there was only so much they could do to offset the catastrophic milk price.”
Brighter future
Fortunately, the outlook is now considerably brighter, with milk prices predicted to average 29p/litre in 2017/2018 and non-milk income pegged at 3.3p/litre.
“Efficient businesses should be able to generate a profit of around 3p/litre, with the more efficient operators sitting above 5p/litre,” explained Phil Cooper, partner at FCG.
Costs of production are set to remain virtually unchanged at 29.19p/litre (including imputed costs of £30,000 for unpaid labour), with feed and fertiliser prices dropping back while other areas increase.
“We would expect to see increases in vet and medicine costs as more businesses start vaccinating stock – although some of this should be offset by a reduction in dry cow therapy as milk buyers encourage selective dry cow treatments,” said Mr Cooper.
“Silage costs are expected to increase due to the good grass growing year. And depreciation could rise slightly as renewed confidence leads to increased investment.”
Steep cost
Analysis of the top and bottom 10% of producers shows that feed, labour and machinery costs are the main areas of focus for their businesses.
Perhaps surprisingly, the bottom 10% of producers received 0.77p/litre more for their milk price than the top 10%, at 25.76p/litre in 2016/17.
Although their herd size was smaller, their yield per cow was higher – but at a steep cost, with expenditure on purchased feed more than double that of the top 10%, at 8.73p/litre.
Overall, the top 10% managed a comparable farm profit of 8.94p/litre last year, against a loss of 13.06p/litre among the bottom 10%.
'Encouraging'
“It is encouraging to see that the top producers can continue to make a profit at times of low milk prices,” said Mr Butler.
“And there is a much brighter outlook ahead, with the average 2m litre producer likely to see profits rise from £5,600 to £62,200 in 2017/18. However, it will take months, if not years of trading at this level to repair depleted balance sheets – and we would like to see profits rise further, not least through greater efficiency gains.”
It’s also vital that producers don’t simply ramp up milk production again, as it will tip the balance towards another downward cycle, Oil Mill warned.
“There is no perfect solution, but the more producers who understand that over-production will destroy their market, the greater the chance this precious industry has of maintaining a sensible level of profitability.”
'Specific needs'
National Farmers' Union (NFU) Deputy President Minette Batters has called on Government to recognise the "specific needs" of the British dairy industry to ensure it remains competitive in a post-Brexit era.
At the South West Dairy Show, Mrs Batters will tell industry representatives that the policies must be right on trade, labour and a domestic agricultural policy.
She said: “Currently the EU is UK dairy’s biggest trading partner with 80% of our exports going there. Any future deal with the EU must maintain two-way tariff-free trade in agricultural goods and must avoid costly and disruptive customs checks, processes and procedures.
“South West dairy companies such as Wyke Farm, OMSCo, Quicke’s, Lynher Daires and Barbers have led the way in finding new EU and non-EU markets for their high quality dairy products and we need to ensure that any future trade deals don’t jeopardise the hard work that’s already been carried out.
“Domestically, import displacement offers a significant opportunity for the UK dairy industry as we are only around 75% self-sufficient. This is especially true for products such as Cheddar cheese and yoghurt which we can produce here given the right production and processing incentives and support.”
