Outlook 2014: Dairy industry prospects

Prospects for the dairy industry look positive. The much-improved summer has allowed dairy farmers to refill empty silage pits and barns, repair grass swards and recover some production lost in the previous financial year due to the appalling weather.

The high concentrate prices of winter, spring and summer have been falling and milk prices are at record levels, helping ease the cash-flow squeeze, says Andersons head of dairy consultancy Tony Evans.

While the 2013-14 milk year got off to a slow start due to the cold, late spring, production has more recently been well above historic trends. Total output for 2013-14 could end up close to 500m litres (3-4%) above year-earlier levels.

“With milk still undersupplied globally there is great optimism in the dairy sector,” says Mr Evans. “But, with growth in UK milk production being mirrored elsewhere, how long will it be before commodity prices start to weaken?

“Profitability is currently good but there is no room for complacency – cash flow is still tight on farms and balance sheets need to be rebuilt. Recovery will take 12 to 18 months depending on the business. It is perhaps time to reflect on the dairy business strategy of each unit to understand how best to cope with the volatility of milk pricing and climate.”

Often there is a temptation to think increased yields will lead to larger profits, he says. However, highest profit levels are often derived from a lower cost system, which also brings lifestyle benefits. “Such a system change does not suit all farms and farmers, but there is scope to improve performance in many dairy businesses.”

Historically, the milk price to concentrates ratio is still relatively high and producers will need to do their costings carefully to generate extra profit rather than just extra revenue, he advises. “In 2008 farmers were paid 24p/litre and concentrates cost £140/t. They could feed 1.7kg of concentrates to break even on an extra litre of milk. Today they would have to be paid 38p/litre to do that.”

Those at biggest risk are medium-yielding herds striving for high-end output. Pushing extra feed into cows that cannot convert it into milk, either due to poor genetics or poor management, makes no financial sense, says Mr Evans.

Growing quality forage and using it to the maximum is key to controlling costs of production, he adds. “A sound dairy business should achieve a profit margin of 5-6p/litre before rent or a return on the investment is taken. That represents a reasonable return on assets and helps to weather the bad times such as this spring, which cost many businesses 2-3p/litre.”