News

05 Oct 2018

Dairy profits recover but testing times lay ahead

Dairy farmers’ profits recovered in 2017/18 as milk prices returned to more sustainable levels – but the outlook for 2018/19 is far less buoyant.

A recent survey by accountants and financial planners Old Mill has 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 the cost 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 feedstocks,” 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.”

Old Mill warned that anyone entering into this winter without an honest and firm assessment of where they stand could end up in a difficult position. Their advice is to plan ahead to identify pinch points and use this as a process to help inform the best solutions to potential problems. Speaking to the bank early will be a fundamental part of coping with the challenges ahead.

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Dairy farming, milk prices, Old Mill, farm diversification, cost of production, Farm Consultancy Group