Dairy Event 2010: Subsidies prop up better livestock incomes

Many medium-sized livestock businesses still rely on subsidy payments to make a profit, despite improved prices this year, farm business consultant Andersons says.

Latest figures from its notional Meadow Farm model suggest that while margins are expected to improve in 2010/11 due to better market returns, the 154ha farm will only achieve a business surplus once single payment and agri-environment receipts are included (see table).

The farm, like many others, has been hit by higher feed, straw and forage costs, which have pushed this season’s variable costs up by almost 14% on 2009/10. Cost of production for its 60-head finished suckler beef enterprise is estimated at 260p/kg deadweight, while this rises to 303p/kg for the 500-ewe spring lambing flock and 331p/kg for the finished dairy bull beef.

The farm also continues to invest in capital, labour and management time employed, so overheads are reasonably high at £451/ha, and are expected to hit £477/ha in 2011/12 due to higher depreciation charges from a planned machinery investment.

“Meadow Farm is typical of many medium-sized, mixed family farming businesses,” Andersons head of business research Richard King said. “The general increased optimism in light of tightening beef and lamb supplies and increased market returns is therefore welcome to many producers. This, however, masks the underlying issue facing many businesses, namely an unsustainable overhead cost base.”

He advised farmers to scrutinise their cost structure to identify areas for potential savings. “Where businesses are exploiting livestock systems that suit their farm and are able to run their enterprises in a cost-conscious manner, sustainable margins are being realised.”

Profitability of Andersons’ hypothetical dairy farm – Friesian Farm – was also tight, although the situation had improved following recent milk price increases. The 150-cow unit was predicted to make a small 0.7p/litre margin from production in 2010/11, despite cost of production increasing by 0.6p/litre to 27.9p/litre. With the single payment and ELS money added in, that surplus was boosted to over 3p/litre. It could grow to almost 4p/litre by 2012, if predicted milk price increases are realised.

However, on Friesian Farm and many other dairy businesses, the majority of the business surplus continued to come from support payments, Mr King said. “If CAP reform results in lower subsidy payments then this income will need to be replaced. Ideally, all parts of the dairy supply chain should contribute – farmers making further on-farm efficiency improvements to reduce costs, and processors passing on more of the retail price to primary producers.”

Meadow Farm budgets

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