Dairy farm profits double but soaring costs remain concern

Average comparable farm profits increased to £371 per cow in the year to 31 March 2022, Old Mill's report shows
Average comparable farm profits increased to £371 per cow in the year to 31 March 2022, Old Mill's report shows

Dairy farm profits doubled in the milk year to 2021/22 and are set to continue improving this year – although soaring input costs remain a concern to all producers.

Average comparable farm profits increased to £371 per cow in the year to 31 March 2022, driven by a combination of slightly firmer milk prices and lower production costs.

Milk income in 2021/22 increased by £80 per cow, with modest price increases offset by lower yields driven by a desire to reduce production costs.

The figures are within an annual milk cost of production report by farm accountants Old Mill, published today (5 October) at the Dairy Show.

“Good forage growing conditions meant a plentiful supply of high quality forage, leading to lower concentrate feed rates,” said Dan Heal, rural accountant at Old Mill.

“The grazing season lasted well into the autumn, shortening the winter housing period. As a result, variable costs related to labour, bedding, power and machinery all fell.”

Even so, there remained a marked difference between the top and bottom 10% of producers, with the gap widening by £137 to £1,234 per cow.

Of this, £541 related to income; although top 10% yields were 1,334 litres per cow lower, income was higher, the report explains.

This shows that meeting buyer requirements reaps rewards, Old Mill says, as does reducing concentrate usage when marginal litres are uneconomic.

Production costs were £693 per cow lower among the top 10%, mainly attributed to feed, labour, power and machinery.

Mr Heal explains: “There is a high focus on efficiency for the top 10% of herds. In contrast, more work is being done in a less efficient manner among the bottom 10%, which is not generating a return.”

However, much of this could be attributed to less efficient setups, likely requiring investment to change, Old Mill's report explains.

Although the top 10% of herds were larger, at 287 cows versus 188 cows, there were a variety of systems and calving patterns in both groups, showing that efficiency relies on the farmer not the system, he adds.

Last year, milk prices averaged 33.8p per litre, most fertiliser was bought at sub £300 per tonne and electricity contracts were in the 20p per unit range.

Milk prices at 50p per litre indicate a marked improvement in margins, but at the same time fertiliser is nearing £800 per tonne and electricity is around 65p per unit.

“Inflation has hit the dairy sector hard over the last six months, especially as milk supply is finely balanced,” explains Mr Heal.

These rising costs and strong cull cow prices have led to more cows exiting the herd; the average herd size fell from 269 in 2020/21 to 250 last year and a forecast 235 in 2022/23.

The report shows that average feed costs are predicted to increase by £46 per cow as prices rise and concentrates are fed to replace forage shortfalls.

Mr Heal said: “Cost increases are steadily coming through as fixed contracts for energy, feed and fertiliser come to an end, but the full effect will not be seen until the 2023/24 year.”

Combined with higher fertiliser prices, the overall cost of production is set to jump by £259 per cow to £2,559 per cow this year.

However, milk income is set to increase by £791 per cow to £3,102 due to higher milk prices, despite a forecast drop in yield to 6,600 litres as the summer drought impacted both milk and forage production.

Non-milk income is expected to fall marginally to £350 per cow as calf prices ease, leaving a comparable farm profit of £893 per cow.

“This is the fourth year in a row that average profits in excess of £100 per cow have been achieved,” said Mr Heal.

“Now is time to focus on building balance sheets to make up for the lean years and build future resilience. This is particularly relevant with the cost increases that are around the corner."

He added that the old adage of ‘cash is king’ had never been more accurate, with working capital requirements testing any business.

“Challenge creates opportunity – there is the potential for good profits to be made, but the focus needs to be on efficiency to maximise these and secure the business for the future.”

According to Annabel Hole, rural administrator at the Farm Consultancy Group, producers need to budget for future capital investment in water quality and slurry storage improvements to meet new legislation.

They should also prepare for higher tax bills given the larger profits made and beware the impact of rising interest rates on loan repayments, she added.