Dairy Event 2011: Costs take shine off better prices

There has been a much-needed recovery in the profitability of typical beef, sheep and dairy businesses over the past year, but many still rely on support to stay in the black, according to farm consultants Andersons.

Improved prices have boosted output on both its hypothetical model farms, but much of this has been wiped out by big jumps in production costs and overheads.

At Fresian Farm, a notional 100ha holding running 150 cows, total output is forecast to increase from 28.3p/litre last season to 31p/litre this year, while cost of production is set to jump from 28.8p/litre to 30.4p/litre.

This leaves a margin from production of 0.6p/litre in 2011/12, rising to 3p/litre when the single payment and Entry Level Stewardship income is included. This is about a penny per litre up on last season.

With cost of production expected to fall slightly next year and further milk price increases predicted for this autumn and next spring, Andersons predict a similar improvement in 2012/13, leaving a margin from production of 1.6p/litre and business surplus of 4p/litre.

“It is an improving situation, but unfortunately higher prices don’t translate directly into higher profits,” Andersons Richard King said. “The dairy supply chain needs to recognise that higher prices need to be paid to the primary producer if milk supply is to be maintained and farmers are encouraged to reinvest.”

Profitability of Andersons’ 154ha lowland beef and sheep farm is also more encouraging after a significant improvement on 2010/11. The total gross margin from livestock and crops is forecast to rise by almost £150/ha to £703/ha, but the overall margin from production is still negative at -£120/ha (up from -£215/ha last year). Adding SPS and ELS income brings the business out of the red, to a surplus of £136/ha.

The firm’s Oliver Lee said there was likely to be a slight drop in the overall margin in 2012/13 as further cost increases wiped out any price improvement. “Disappointingly, Meadow Farm, like the majority of similar businesses, still relies on income from single payment and agri-environment receipts to achieve a business surplus.

“Producers should not be complacent when appraising their business – the most successful constantly monitor their activities and are able to make instant and informed decisions.”

As well as controlling costs and maximising technical efficiency, all farmers should ensure their production system fits with the farm’s characteristics and the requirements of those businesses they are supplying, Andersons’ Tony Evans added.

“The key is the amount of capital going in relative to the output – both volume and income. For example, the industry is still awash with all-year-round calving herds, which have the associated costs all year. Unless you’re on an aligned contract, it’s highly likely you’ll struggle on that cost base.”

For more from the Dairy Event and Livestock Show see FWi’s special report

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