Business Outlook 2012: Dairy
Dairy profits may have been rising recently but the average producer is still unlikely to make enough money to cover much-needed reinvestment.
Over the year to September 2011 the DEFRA average farmgate milk price increased from 25.3p/litre to 28p/litre.
However, an AMPE milk price (market price equivalent based on butter and skimmed milk powder values after processing costs, overheads and a margin) of 32.8p/litre for October reflects the enormous gulf between the prices received by UK dairy farmers and the real value of the milk they produce, says Andersons partner Mike Houghton.
“This is further highlighted by the fact that the average milk price in Europe (EU-27) is 31p/litre. Extracting a greater proportion of the food chain margin must remain the key priority for the UK dairy industry.”
However this will be difficult with the retail sector apparently embarking upon another round of discounting. The retail price for four pints of milk stands at just £1.25, which is 30p lower than in January 2011.
With daily milk production 0.4m [400,000] litres below this time last year, the hope is that this will galvanise retailers and processors into paying a fair price. “But this may prove to be wishful thinking and farmers should continue to focus on the areas they can control,” says Mr Houghton.
According to the Farm Business Survey in England, profits for the year ending March 2011 were up 7% in real terms. Although there should be another improvement in the current year the average producer is unlikely to make enough to reinvest, says Mr Houghton.
“One of the challenges for the coming year and beyond is for the average producer to get to where the top 25% are. If the right system that fits the farm, proprietors and milk contract is employed and managed effectively, there is no reason why dairy businesses cannot be profitable.”
All milk producers need to carefully consider their costs of production, he says. Grazing-based systems have a cost, pre-rent and finance, of 21-25p/litre while high-output, level supply systems range from 26-31p/litre. Simplistically, to achieve average profits of say £40,000, the grazing-based system would have to produce 800,000 litres, which would cost £170,000-£180,000. But the high output system would have to send closer to 4m litres of milk, at a cost of just over £1m.
“It is likely that grazing based systems will continue to grow in popularity, resulting in a continuing shift of production to the west of the UK.”
The other challenges of milk production remain relatively unchanged, with quality labour still short, NVZ regulations enforced from 1 January 2012, a lack of succession, and the continuous need for reinvestment.
“Having said that, these conditions do create significant opportunities for collaboration to create opportunities for all.”
• Wide gulf between farmgate and retail prices continues
• Grazing-based herds likely to expand
• Liquid milk discounting ongoing
• Profits up slightly but not enough to cover reinvestment
See further Business Outlooks for 2012 below:
• Round-up
• Agricultural Policy Developments
• Beef
• Sheep
• Pigs
• Poultry
• Combinable crops
• Field vegetables
• Sugar Beet
• Potatoes
Andersons’ Outlook
* Commentary for this article is based on Andersons’ Outlook 2012. Copies can be obtained free of charge by calling 01664 503200 or it can be downloaded from the Andersons website – see ‘Publications’.
* The Andersons Centre will be running its popular series of spring seminars on the prospects for UK agriculture in more depth at locations around the UK in spring 2012. These briefings are aimed at farm business managers as well as professionals working with companies in the agricultural sector. Detailed overviews of each of the main sectors of UK agriculture will be covered as well as comprehensive discussion of the latest agricultural policy developments. For details go to the Andersons Centre.