Dairy farmers look to expansion

Most forward-thinking dairy farmers intend to increase milk production in the near future, according to recent surveys carried out by two major banks.

But many producers may need to be more realistic about their production costs.

Over 60% of dairy farmers surveyed by Barclays agricultural managers at the Dairy Event last month expected to raise output by an average of 20% over the next 12 months, said Euryn Jones, agricultural policy director at Barclays Bank.

If projected nationally that would suggest the trend to bigger dairies would outweigh the loss of production caused by those leaving.

But Mr Jones was quick to point out that the 80 farmers quizzed, milking an average of 170 cows, were more likely to believe they had a future than a sample based on all dairy farms.

“People who are thinking of pulling out would be less likely to attend the Dairy Event,” he said.

“I think milk supply is pretty finely balanced, and it is probable that we will end up under quota for quite some time, especially if milk prices fall further.”

That, at least, would keep quota prices low, reducing what had historically been a major expansion cost, he added.

Of those expanding, 70% said they could break even without the single farm payment at current milk prices, likely to average about 18-18.5p/litre across the sample, Mr Jones said.

“That’s a healthy sign.

For those able to make a profit it makes sense to consider expansion.

“Presumably those who cannot break even at current milk prices hope that by expanding they will be spreading their overheads costs over more litres, thereby increasing profitability.”

However, they needed to undertake sound financial planning based on realistic assumptions, including careful examination of fixed costs, to make sure the figures stacked up, he added.

Steve Ellwood, head of agriculture at HSBC Bank, said about half of the 400 farmers surveyed before and at the Dairy Event by his firm intended to expand, by an average of 10%, over the next two years.

The average herd size was 185 cows.

“I had expected a good number to be investing and expanding, so I was not that surprised,” he said.

“Committed dairy farmers want to remain in business, and to do that they need to improve their facilities and efficiency.”

He predicted that if the findings were repeated nationally, increased milk production among the expanders would make up for the 10% of farmers who said they would quit over the same period, contrary to Mr Jones’ expectations and some other recent survey findings.

“I don’t think the number of people planning to leave is higher than the recent trend, and milk production has not fallen a significant amount.”

However, Mr Ellwood did believe farmers needed to be more realistic about their production costs.

Farmers in the HSBC survey estimated they could break even at 17.6p/litre; those with more than 400 cows at 16.8p/litre.

“I think farmers consistently underestimate the cost of producing milk, because I don’t think these figures include profit for reinvestment and loan repayments, or a reasonable level of drawings.”

The main danger was that producers would continue to invest when there was little or no profit left.

And underestimating costs made it much more difficult to recoup margins that were being lost elsewhere in the dairy chain, said Mr Ellwood.

robert.harris@rbi.co.uk