milking clusters in milking parlour© John Eveson/FLPA / imageBROKER/Rex Shutterstock

Dairy farms risk falling into further financial trouble if they chase litreage during the milk price crisis, according to consultants.

Forecasts by Andersons suggest milk prices could stick around 24p/litre until 2017 and farms could lose money if they think producing more is the only answer.

The firm costed out a typical response to low prices on a 150-cow Midlands unit that decided to raise yields from 8,000 litres to 10,000 litres in the hope of diluting other costs.

It found the 2016-17 net profit — after all labour and including support payments — could slip from 0.5p/litre on the old system to a 0.7p/litre loss on the new one.

See also: Livestock 2015 – best dairy farms focus on costs, not milk price

This is because extra variable costs will come from purchased feed – usually more expensive types – which will weaken the benefits of expansion.

There are other hidden costs in the pursuit of higher yields, such as longer milking times and steeper labour and electricity costs.

Andersons’ head of farm business consultancy Tony Evans said many producers were making good money at 10,000 litres.

But these were highly skilled managers, excellent at securing the best prices for milk and smart deals when buying feed and cows.

“If we chase yield with expensive feed we see poorer fertility and other inputs rise as well,” Mr Evans said.

“In the pursuit of this performance and high yield we could see profitability not actually increase and we could increase losses.”

Andersons’ financial predictions show support payments could be key to dairy profitability this year.

The firm’s notional Friesian Farm model made a net profit of 5.6p/litre in the 2014-15 milk year, as the average milk price held up at more than 29p/litre.

But the drop in variable costs for feed and fuel has not kept up with the unprecedented dairy market slump, which would drag this year’s average return to 23p/litre.

This will leave Friesian Farm losing 1.7p/litre from every litre of milk it produced in 2015-16, relying on BPS payments to get anywhere close to breaking even.

Mr Evans said middle-ground producers such as this farm, with production costs about 27-27p/litre, might consider working towards a lower-input, lower-output dairy system.

This would take “ruthless” stripping out of costs and assessment of the business structure, but could lead to positive margins if milk prices stayed low, he said.

Mr Evans added that autumn block calving could be an option for those without a suitable farm for spring calving or a milk buyer that wants more seasonal production.

He said processors could help by making payment schedules more attractive for those hitting peak production over the winter months.

“The dairy companies are very anti-seasonal suppliers. But they naturally think of seasonal as spring calving.”

Friesian Farm scenarios 2016-17 (all figures in p/litre)
  Standard – 7,950 litres More milk – 10,020 litres Less milk – 6,040 litres

Milk price

24.1

24.2

23.9

Total output

26.9

26.0

28.9

Variable costs

12.7

15.2

10.7

Overheads

9.6

8.6

9.8

Rent, finance & drawings

5.1

4.0

6.7

Total production costs

27.4

27.8

27.2

Margin from production

(0.5)

(1.8)

1.7

BPS

1.5

1.2

1.9

Business surplus

0.5

(0.7)

3.6

       
Source: Andersons