Milk prices need to rise by at least 3p/litre for dairy farmers to make enough return on capital to secure their future, according to farm profit figures released by Promar International this week.
“The results demonstrate the real extent of the problems being faced,” said regional consultant Andrew Thompson.
The survey was based on more than 120 farms with 19,500 cows across 14,700ha (36,300 acres).
The average farm made a profit of £29,155 in the year to March 2006, similar to the previous year. Yield per cow and herd size rose slightly, as did milk price at 19.3p/litre, but variable costs rose by 8% and overheads by 4%.
Although the most profitable 25% of farms were paid a similar milk price, they made a profit of £86,089, up about £3000 on the previous year.
Mr Thompson said the top group’s better results were due to a higher level of control over all costs, superior technical performance, and, most importantly, critical business mass.
Yield per cow remained static, but these farms carried four cows more compared with the previous year. Variable costs rose by 6% while overheads only rose marginally.
However, the profit figures include subsidies. “When these are stripped out to show the real trading performance, a very different picture is revealed,” said Mr Thompson.
This left the average producer with a profit of just £5188, less than 2% of turnover. Removing the SFPÊ from the top 25% left a profit of just £49,500, or 2.8p/litre.
“This clearly shows the parlous state of many businesses,” Mr Thompson said. “As the SFP rate declines, so more farms will struggle to remain sustainable.”
Since the survey was conducted, the milk price had fallen by about 1p/litre and many costs beyond farmers’ control had increased due to higher global oil and gas prices, he added.
After stripping out subsidies and including family labour at £30,000 a year, the average farm would need 20.8p/litre to break even.
“For the top 25%, the breakeven price is 18.8p/litre. But these farms are currently making a 5% return on capital and to do so in future would require a milk price of 21.1p/litre.
“For these farmers, who are world-class dairymen, a situation of zero financial growth is unacceptable and we are already seeing some deciding to exit the industry,” Mr Thompson said.
“Only if milk prices increase and technical performance continues to improve will it be possible for farms to start to rebuild net worth and grow their business.”
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PROMAR-COSTED FARMS TO MARCH 2006
|Farm profit [£]|
|Change in Net Worth [£]|
|Change in borrowings [£]|
|Gross margin/cow [£]|
|Profit net of SFP [£]|