Latest milk price cuts push 150 cow herd into loss

The latest farmgate milk price cuts will lead to a 1.8p/litre loss in the current milk year for non-aligned dairy farmers, said farm consultant Andersons.

The firm has forecasted the loss for its 150-cow Friesian Farm model which will suffer the largest projected negative margin since the model farm series began in 2005.

The figures were based on a milk price of 26.3p/litre and a cost of production of 31.1p/litre. Adding SPS and ELS income of 2.2p/litre takes the business to a surplus of just 0.4p/litre.

Prices used to calculate the figures incorporate the latest cuts and presume some increases in late autumn and again in early spring.

Andersons Friesian Farm model 

  • Produces 1.125m litres from 150 cows and their replacements
  • Operates a year-round calving system
  • On a liquid contract but not a dedicated supermarket aligned contract
  • 100ha (40ha of that rented on an FBT)
  • Proprietor provides labour along with one full-time worker (plus casual/relief)

Richard King, head of research for Andersons, said the general feeling was that market justification for the latest cuts was weak given that cream values had firmed and global commodity prices were showing some improvement.

“The widespread view is that processors have done it because they wish to improve their margins and they can get away with it.”

It might not be co-incidental that the discussions on a milk pricing Code of Practice were under way. “It’s possible that processors see an opportunity to get some price deductions done before a ‘fairer’ contracts system is introduced.”

Many dairy farmers would be questioning their future in the industry and viewing that future quite differently than they were a fortnight ago, said Mr King.

“The price rises of this time last year had put some confidence back in the sector, and producers were investing for the future. That confidence has now evaporated and an acceleration of producer exits and decline in milk output may well result.”

The model farm figures have been updated in anticipation that the focus of farmer inquiries at Livestock 2012 would be around the business implications of the milk price cuts.

Andersons Friesian Farm    
Pencer per litre 2010/11 (result) 2011/12 (result) 2012/13 (estimated) 2013/14 (budget)
Milk  25.8 28.6 26.3 27.7
Culls and calves 2.5 2.7 3.0 2.8
Output 28.3 31.3 29.3 32.0
Variable costs 12.9 14.1 14.4 14.0
Overheads 10.7 11.2 11.4 11.5
Drawings and tax 3.7 3.9 3.9 3.9
Rent and finance 1.4 1.4 1.4 1.5
Cost of production 28.8 30.7 31.1 30.9
Margin from production (0.4) 0.6 (1.8) (0.4)
SPS (and ELS) 2.4 2.3 2.2 2.0
Business surplus 2.0 2.9 0.4 1.6
Source: The Andersons Centre

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