Dairy cows eating© John Eveson/FLPA / imageBROKER/REX

Dairy businesses in strong shape for the volatile future will focus on costs and not milk price, according to consultants Andersons.

Results from the firm’s Friesian Farm model, a notional 150-cow Midlands dairy with year-round calving, show businesses cannot afford to stand still.

The farm is forecast to make a loss from production of 0.5p/litre in 2015-16, on a milk price of 25.2p/litre.

It will only make a net profit of 1.1p/litre after including support payments.

See also: 4 ways dairy farms can cut costs to improve performance

In 2016-17, the business could earn a margin from production of 1.1p/litre and net profit of 2.6p/litre – but only if milk prices start to recover.

“I do not think we have even reached the bottom yet in regard to cashflow. How many people will have spent money last year and have to pay tax on that this year?”
Tony Evans, Andersons

Andersons partner and head of dairy business consultancy Tony Evans said farmers had to first focus on the short term, projecting their cashflow needs over a difficult six to 12 months and work out how to reach them.

But he said farmers must also think longer term, working out whether their business can be profitable in an era of volatile milk prices and shrinking support payments.

The average milk price for the past six years has been 27p/litre, making this crash very much a low, Mr Evans said.

“I do not think we have even reached the bottom yet in regard to cashflow. How many people will have spent money last year and have to pay tax on that this year?”

Mr Evans also advised that:

  • Farmers had to work out their profit demands – perhaps for finance or private drawings – then build a cost structure to fit that.
  • Banks were more likely to support a business that was clearly trying to manage its costs more tightly.
  • Every piece of spending should be evidence-based. You need a cost justification for everything, especially in tight times.
  • Farmers should take on an “essentials-only” attitude in the downturn. For example, could reseeding that field wait until next year?
  • Dairy producers should think about their total revenue, not just the currently low milk price. Maximise returns in selling calves for beef and pregnant cows.

“The best businesses are not about the attention to milk price but the attention to cost control,” Mr Evans said.

Friesian Farm (p/litre)

2013-14 result

2014-15 result

2015-16 estimate

2016-17 estimate

Milk price

32.4

29.4

25.2

27.2

Total output

35.3

32.1

28.0

30.0

Variable costs

14.7

13.2

12.8

12.9

Overheads

11.3

11.0

10.8

10.9

Rent, finance and drawings

4.7

4.7

4.9

5.0

Total cost of production

30.7

28.9

28.5

28.9

Margin from production

4.6

3.2

(0.5)

1.1

SPS/BPS and ELS

2.2

1.9

1.6

1.5

Business margin

6.8

5.1

1.1

2.6

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