Dairy budgets show no profit before BPS next milk year

Dairy budgets for the 2020-21 milk year look challenging, showing no profit before BPS payments.

Consultant Andersons runs forecasts for a model 200-plus cow dairy herd, typical of many family operations, owning 130ha and renting a further 60ha.

While this year’s budget shows a farming profit of 1.1p/litre before BPS, the next milk year, starting on 1 April, shows none, with production costs at 29.2p/litre.

The main factor is a lower milk price – down by 0.8p/litre to an expected 27.1p/litre.

Adding BPS income to next year’s forecast gives a profit of 1.9p/litre, compared with the 3p/litre budgeted for the current milk year.

See also: Rules on temporary slurry storage when pollution risk is high

Variable costs are seen to fall marginally in 2020-21 as a result of lower feed costs. However, overheads are set to rise to 10.4p/litre on higher labour, power and machinery costs.

Higher spending on rent, finance and drawings in the coming milk year is due to a restructure of the model farm, which included borrowing for expansion.

Dairy data needs new direction

Kite Consulting says while pence-a-litre measures are still relevant, it will be focusing on figures a cow.

“The key element that combines the limiting resources is the cow. Stocking rates, both housed and grazing; capital required; technology; and, most importantly, the people involved, are all centred around the cow,” said the firm’s Edward Lott.

Data from more than 550 farms recorded by Kite shows retained profit a cow (after all costs, including family labour) compared with retained profit a litre.

“There is obviously a massive range,” said Mr Lott. “However, the interesting points are seen at the top end of the profit scale.

“There are businesses where profit a litre ranges from 4p to 12p, where the profit a cow remains at £500.

“Whereas at a profit a litre of 10p, the profit a cow varies from £500 to £1,000. Total farm profit is dictated by profit a cow.”

BPS phase-out

With the demise of BPS between 2021-27 in England and from 2022 in Wales, dairy farmers will need to earn more from their farming operations and consider their place in the dairy sector of the future, warns Andersons.

The firm sees the next decade as a period of profound change in the dairy sector and says producers need to start planning now how they will cope with the withdrawal of subsidy.

Some will join the trend of those getting out of the sector, while others will diversify or restructure.

“We’re seeing more joint ventures in dairy. If the structure is correct, it can also give a good succession plan,” said Oliver Hall, senior farm business consultant with Andersons. 

 “We’ve worked hard at improving the business skills of farm managers. Getting a good technical and commercial skills combination is really important – especially for larger farms and where you may have an owner who is not hands on or experienced in dairy management.”

Less profit in new support regime

The new English Environmental Land Management (ELM) scheme replacing BPS will offer far less profit, and milk producers are likely to find it more challenging than other sectors to access that funding, said Mr Hall, unless there are animal-based or ammonia reduction-related incentives.

Defra figures show that farmers in this sector are those least likely to have joined Entry Level Stewardship and Higher Level Stewardship.

At the same time, milk producers will face greater regulation and cost in areas such as ammonia emissions and carbon monitoring. 

Advice for the 2020-21 milk year

  • Aim for at least 3,000 litres from forage – the average is about 2,000 litres, so there is scope on many farms.
  • Protein costs are falling and wheat is wobbling – look at budget margin forecasts and planted areas and – especially on a falling market – consider taking at least some cover.
  • Beware of benchmarking against industry averages – a group setting where farms can be compared directly is likely to yield more benefits.
  • As trade talks with the EU get under way, prepare for a volatile sterling to push values and costs around.
  • Check your buyer’s financial standing – while accounts do not reflect the current position, they are a good starting point.
  • If accounts are submitted  late to Companies House, or changes are made to financial year-ends, this could be a forewarning of troubles.

Milk market movements

“With EU butterfat prices drifting down and protein prices held up by SMP [skim milk powder], the prospects are for farmgate prices to stagnate or fall slightly as spring approaches,” said Nick Holt-Martyn of The Dairy Group consultancy.

“There is unlikely to be an upturn in markets while global supply remains stable and GDP growth falls away. The indications are suggesting stability in markets before any Brexit shenanigans are factored in.”

There is good demand for spot milk, which is making 27-28p/litre.

Output in the main milk-exporting countries has risen, but in a limited way, which is keeping global prices relatively stable.

UK production reflects this, but weak consumer demand and Brexit uncertainty have put downward pressure on farmgate prices, despite some key price holds for many producers.

Friesian Farm budgets and results

Friesian Farm

Milk years

P/litre

2017-18  (result)

2018-19 (result)

2019-20 (budget)

2020-21 (forecast)

Milk price

29.0

28.8

27.9

27.1

Total output

31.0

30.9

29.7

29.2

Variable costs

12.8

14.7

12.4

12.3

Overhead costs

9.3

9.6

10.0

10.4

Rent, finance, drawings

6.4

6.4

6.2

6.5

Cost of production

28.5

30.8

28.6

29.2

Profit from production

2.4

0.1

1.1

0

BPS

1.9

1.9

1.9

1.9

Business profit

4.3

2.0

3.0

1.9

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