High costs push down dairy profit forecasts

High production costs and the slow pace of farmgate price rises point to a drop in profit for milk producers in the year to March 2019.

A report by the Farm Consultancy Group (FCG) in conjunction with accountant Old Mill shows a projected profit of £240 a cow for the average herd in a study of the firms’ clients, which is £143 a cow lower than in the year to March 2018.  

This is based on an average milk price of 32p/litre – evidence of the large proportion of herds in the sample that are on constituent contracts, producing high butterfat and protein milk.

In contrast, Defra figures show that average farmgate milk prices have only been above 30p/litre in four of the past 12 months, although they are likely to reach 30p/litre for October.

The Old Mill/FCG figures include a £30,000 charge for unpaid labour and include non-milk income, mainly from cull cow and calf sales.

However, they are before rent, finance and BPS payments, to standardise the figures and allow for comparison between farms.

See also: Practical advice on health and safety: farm policy and finance

There are some stark contrasts in performance between the top 10% and bottom 10% performance.

At 330 head, the poorest performers have an average herd size almost 50 cows higher than the best performers.

Their costs of production, at £2,756 a cow, are £821 a cow higher than their top-performing counterparts.

“With higher cow numbers, they should have been able to spread their costs further, but their labour, machinery and variable costs a cow were all significantly higher,” says Phil Cooper of FCG.

“In addition, both milk yields and milk price were lower among the bottom tenth of producers – all of whom calved year-round – resulting in a loss of £333 a cow compared with a profit of £925 a cow among the top 10%.”

Top 10% v bottom 10% by retained profit for 2018

 

Top 10%

Bottom 10%

Difference

Herd size

288

330

42

Yield a cow (litres)

8,324

7,582

(742)

 

£ a cow

£ a cow

£ a cow

Milk income

2,590

2,207

(383)

Non-milk income

279

225

(54)

Total income

2,869

2,432

(437)

 

 

 

 

Purchased feed costs

696

907

(211)

Variable costs

375

523

(148)

Labour (paid + unpaid)

368

606

(238)

Power and machinery

372

599

(227)

Administration

78

103

(25)

Property repairs

55

27

28

Cost of production

1,944

2,765

(821)

Comparable farm profit

925

(333)

(1,258)

Advice

  • Consider cutting cow numbers – many milk producers could come through the winter in better shape if they hang on to fewer of their less-productive animals. A reduction of 5% often makes no impression on output. Even with a 10% cut in some cases milk output can be maintained because of the space this creates for husbandry, also relieving pressure on housing and forage stocks. Sometimes labour, which affects everything, is overstretched, but not identified as the issue.
  • About 250 cows is the optimum herd size for two full-time people with relief help.
  • The biggest opportunity to reduce costs is to extend grazing day numbers – it costs £2-£3 more a cow a day to keep them housed in a “normal” year, so an extra 15 days at each end of the grazing season can make a huge difference

Source: FCG

The Dairy Group’s Nick Holt-Martyn said UK supply was holding up better than expected, down -0.7% in August on August 2017, while September is expected to be 1.155bn litres (-1m litres) lower than the same month last year.

Supply is expected to continue to be close to 2017 through the autumn, says Mr Holt-Martyn.

“However, rises in feed costs of up to £40/t on the year will mean a 15-20% rise in cost of production over the next nine months.

“2017-18 production costs were up 0.6p/litre [+2.0%] to 30.6p/litre, while 2018-19 is forecast at +9.5% to 33.5p/litre.” 

These costs include rent and finance, as well as just over 3p/litre for the value of unpaid labour.

The pressure on feed prices made it very important to shop around and make sure farmers were getting the best price and value for feed, said Mr Holt-Martyn.

Milk market prospects and price changes

Market signals point to downward pressure on farmgate prices later this year.

Milk production is showing little or no immediate effect from the hot, dry summer, said the AHDB.

The effect of this has already been seen on wholesale markets, with prices falling for butter and cream, while mild cheddar prices have held firm for most of the month.

The New Zealand-based GDT online dairy auction saw a drop of 1.9% in its price index at Tuesday’s (2 October) sale – the same level as in October 2016.

Peter Meehan of market analyst INTL FCStone said global dairy markets remained under pressure in the week ending 30 September, with European dairy spot quotations and futures markets also showing further weakness.

Price changes

  • Dairy processor Muller is holding its farmgate milk price for November at 29.5p/litre for the third month in a row (for 4% butterfat and 3.3% protein milk).
  • Cheesemakers Barber’s has also frozen prices for November, keeping its manufacturing litre at 30.68p/litre.
  • Tesco’s Sustainable Dairy Group (TSDG) farmers are set to see prices rise from 30.17p/litre to 31.24p/litre from 1 November.
  • Co-operative Arla also announced last week that it was raising the price for October milk. A standard liquid litre will be worth 31.21p/litre, while a manufacturing litre will attract 32.47p/litre.

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