Farmers warned to plan early to cope with dairy profit drop

Milk producers face a drop of more than 50% in profit for the milk year to 31 March 2019 and greater pressure in the following year, advisers have warned.

Planning needs to start now to minimise the impact of several major pinch points, said Promar International’s national consultancy manager Nigel Davies

The firm’s latest Farm Business Accounts (FBA) results across 500 herds averaging 210 cows show a big improvement in profit after depreciation for the year to 31 March 2018, with a 69% jump to £96,318.

However, wholesale dairy commodity markets are mostly under downwards pressure, and rising production costs have led to the prediction of a severe drop in average profits to £40,000 or lower for the current milk year.  

Profit: past and forecast

(Years ending 31 March, profit after depreciation)

  • 2017 – 57,130
  • 2018 – 96,318 – more than 30% above the five-year average
  • 2019 – 40,000 or lower – well below the five-year average

Source: Promar International

See also: Top farm tenancy issues and how to solve them

Presenting the firm’s latest FBA results, Mr Davies identified three areas of financial challenge:

Input and output price changes

  • Feed prices – currently £24/t (11%) higher than a year ago and heading for a £250/t average (non-organic) by February 2019.
  • Milk price pressure – Promar is using a farmgate average of 28.5p/litre for its forecast of a profit drop of more than 50% for the year to the end of March 2019.  This represents a 0.5p/litre rolling average drop compared with the previous milk year.
  • Each 1p/litre movement in milk prices for these herds adds or cuts almost £18,000/year of income, while a £10/t change in feed prices makes a difference of £6,558.
  • Overhead cost increases – many of these will be driven by higher oil prices.

Forage stocks and quality

Stocks may take until late 2020 to be adequately rebuilt to comfortable levels. 

Political uncertainty

Global factors are already affecting dairy commodity prices and the impact of Brexit in terms of tariffs and exchange rates is yet to be determined and understood. 

Increased efficiencies across the business will be needed to fully offset support payment changes, says Promar.

Profit in the year to 31 March 2018 was driven by:

  • A higher milk price – up 2.86p/litre on previous year
  • Higher average rolling yield a cow – up 188 litres (+2.26%)
  • Higher average herd size – four more cows than previous year
  • Level average feed use at 0.36kg/litre
  • Impact of higher than inflation variable and overhead costs was diluted to 2.1% by increase in milk output.

Future-proof your dairy business

  • Impact of input and output price pressure on borrowings – revise spring 2019 cashflow forecast and prepare for squeeze caused by lower milk prices and higher feed costs. Get cash facilities in place.
  • Tax bills – higher profits in year to March 2018 will mean a higher tax bill for many in January, putting a further cash demand on the business. Lower profit expectations this year mean producers should apply to reduce tax payments on account (advance payments) also due in January.
  • Prepare also for summer 2019 forage pinchpoint.
  • Support payments are worth an average of 1.91p/litre – there is a risk that this will disappear.  
  • Continue to drive technical efficiency and fully embrace the use of financial management information.
  • Improve animal management – quality of calf management, youngstock management, milk quality and herd reproductive performance all have a huge impact on profitability.
  • Securing and keeping good farm staff will become even more important in future, as will being able to cope with weather and climate challenges.
  • Effective people management is not just about costs. Staff management is an overlooked skill and must embrace training and development, delegation, motivation and communication of everyone in the team.
  • Examine not only how employed staff spend their time but also yourself.
  • Think about how the wider team can work effectively, including vets, consultants, contractors and accountants.
  • Make time to step back from their businesses regularly and take an alternative view.

Dairy market background

Muller announced a 1p/litre price cut to 28.5p/litre for December as Farmers Weekly went to press on Wednesday (31 October). The processor cited stronger-than-forecast milk production from farms, coupled with a significant weakening in demand for dairy commodity products over a number of months.

Market returns are dropping but (global) milk supply is not out of line, with supply growth of about 1% expected through the winter, 0.7% below the 24-month average, said consultant Nick Holt-Martyn of The Dairy Group.

Price reductions into the new year should be modest as markets have eased off rather than fallen, said Mr Holt-Martyn.   

European dairy commodity futures markets remained under pressure over the past week with the European Energy Exchange’s (EEX) butter and skim milk powder (SMP) prices both taking a further step lower compared with the previous week, commented Peter Meehan of broker and analyst INTL FCStone.

UK milk production in September was up 0.8% compared with last year. However, lower milk fat and protein content saw UK milk solids collections just 0.3% ahead of 2017.

Denmark and Belgium saw a similar trend. Further afield, New Zealand’s September dairy exports were rather underwhelming, with exports of whole milk powder, SMP, butter and cheese all down compared with last year, posting multi-year lows for the month.

The most recent GDT online dairy commodity auction index fell for the 10th sale in a row.

Promar herds – top 25% results compared with average

  • £864 a cow profit compared with average of £457 a cow
  • Herd size of 201 cows compared with 211 cow average across the sample
  • Fed 0.33kg/litre concentrates compared with 0.36kg/litre for average performers
  • Higher yield – 8,580 litres a cow compared with 8,498 litres average
  • Lower replacement and death rates, more calvings a cow
  • Lower bedding (21%), vet (12%) and dairy sundries (14%) costs
  • Lower wages (23%), power and machinery (13%) and property costs (11%), also lower debt levels (14%)  
  • Lower costs enabled top 25% to spend £236 more a cow on capital expenditure

Futures markets and commodity risk management online course:

  • Risk management strategies for a more predictable financial performance
  • Educated conversations when collaborating with your advisors
  • Negotiate better prices with your grain merchants

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