Investment demands drive many dairy exit decisions
© Tim Scrivener The massive investment needed for climate mitigation measures and environmental compliance is the primary factor in a good number of decisions to quit milk production.
However, there are many other influences at play.
Figures from the AHDB showed recently that 440 producers in Great Britain, almost 6%, left the sector in the year to April 2024, most of these over the winter.
To some extent, this represented a catch-up from a lower-than-average exit rate following the high milk prices of 2022. However, many advisers expect the higher rate of exit to continue.
See also: Advice on managing borrowings and their costs
A recent report from Kite Consulting estimated that £3.9bn of investment is needed by dairy farms to become environmentally compliant over the next 10 years.
(See “Dairy Compliance Investment Requirements”).
This equates to 2.4p/litre a year, or just over £200 a cow – a sum which the market certainly isn’t providing.
The current average cost of production is put at 39-44p/litre, with milk prices in a similar range – insufficient to provide a margin to invest to a high enough standard to be sustainable.
“Producers need 40p/litre now just to exist,” says Kite’s John Allen. While good operators are back in profit, those are not “super profit” levels.
John expects the high rate of exit to continue for two to three years because of investment demands, alongside staffing and other issues.
“There’s a very large range in profit – an average profit might be £200-£300 a cow, but we will see ranges between minus £200 and plus £1,000 a cow.
The range in profit a cow is probably bigger than it has ever been in my career,” he says.
Combination of factors
It is often a wider combination of factors that drive the decision, with TB, interest rates and the high-working capital requirement all in the mix.
Competition for land and for a variety of uses, rising land prices and wider interest in owning rural assets add to the challenge.
UK pressures reflected elsewhere
The infrastructure pressures on milk producers here are replicated in many EU member states, in New Zealand and to some extent in the US, says John Allen.
Global demand for milk is growing at about 2% annually, and UK milk production is in a fairly resilient state, he says.
“Milk prices are going back up, world supply is fairly subdued and demand is gradually coming back in the world market – that means we are at a different reset level in terms of milk price.
“If the milk price went back to 35p, you will find milk [output] declining, but you would find milk declining in the rest of Europe and in New Zealand and parts of the US.”
Where will the milk come from?
There is a question whether those producers remaining can fill the production gap left by those leaving the sector.
“The fact that we saw inward investment in the last year by both Arla and Muller means that they must have confidence in their milk pools, to have reducing numbers but to have farmers who will continue to produce more,” says John.
Given that retailers want evidence of carbon and other environmental credentials from their suppliers, he believes the market will start to return cost-plus.
“I think we’re going to see contracts where it isn’t just covering the costs of production in those aligned pools, we’re going to see an allowance for investment because they recognise the need to meet environmental standards.”
With cheesemakers having export opportunities in future, retailers will need to be sure they have secure, sustainable supplies with long-term relationships, he says.
However, Gerard Finnan of the Farm Consultancy Group believes the massive changes being experienced mean that the historic trend of milk output being maintained by those remaining in the sector will not continue.
The milk price volatility and cost increases of the past two years, coupled with wet weather for months on end, have culminated in peak borrowing in spring this year, with every second farmer requesting bank overdraft increases, he says.
“In 34 years as a farm consultant, I have never seen the dairy industry as despondent as it is now.”
Lack of a successor and mental health issues arising from some of the factors set out above compound the issue for many, says Gerard.
Investment returns
“On a positive note, I have clients whose output hasn’t increased in the past six to seven years, and profitability has been maintained or increased through investment in technology and innovation to reduce costs of production without affecting output.
“There are some excellent well capitalised dairy businesses who are taking advantage of grants, have succession plans and have good teams working together producing profitable high-quality milk.
“But these are getting less and less. Sometimes we are encouraging the farmer to exit the industry, sometimes we are encouraging expansion.”
Planning challenges for new dairies
Where there is the appetite to invest, planning restrictions are making greenfield site developments more difficult and more expensive to get planning on, says Gerard.
At The Dairy Group consultancy, Nick Holt-Martyn thinks that rising milk solids will compensate for lower volume output.
“UK milk quality has increased to record levels,” he says, expecting the trend of dairy sector exit to settle back down to its more traditional long-term 4% rate.
With production costs at their current level, he also does not expect the rate of producer exit to slow, despite expectations of further slight milk price improvement.
© Tim Scrivener
Milk price rises ahead
He says: “August is set to see 40p/litre and September 41p/litre, but with the average cost of production over 44p/litre, declines in producer numbers are not expected to slow.
“Although the remaining producers will absorb many of the cattle released by the retirees, the cost of reinvestment and environmental compliance/improvement will limit herd expansion.”
Referring to the new farmgate contract obligations on processors which took effect in July – the Fair Dealing Obligations (Milk) Regulations 2024 – he says:
“Improved, fairer contracts will help give some confidence to producers, however there is no substitute for a milk price much closer to the cost of production.”
Kite report – Dairy Compliance Investment Requirements
The cost of improving climate resilience on UK dairy farms over the next 10 years is more than £3.9bn, according to a study by Kite Consulting.
In its report The cost of climate resilience – future proofing UK dairy, the firm estimates the average cost of capital infrastructure investments and additional land required to ensure environmental resilience at £472,539 a farm, or an additional 2.4p/litre a year for 10 years.
It says the average farm in the study needs an additional 1,350t of silage storage to increase capacity to 1.5 years’ worth of cover in case of drought or late turnouts.
This means having enough storage for 4,087t to guard against milk production being compromised by climate change.
An estimated 85% of dairy farms have less than 8 months of slurry storage, even after accounting for the 5% planning to exit in the next five to 10 years.
The report reckons an average of £92,296 needs to be spent by each farm on slurry storage capacity and slurry store covers.
The study:
- Data from more than 850 UK dairy farms
- Estimated costs based on average herd size of 236, housed for an average of 30 weeks
- Herds studied ranged from fewer than 100 cows to more than 1,500 cows
- Yields ranged from 6,500-10,000 litres, averaging 8,455 litres.
- Almost half plan to in crease milk output over the next two to three years – a combination of increasing milk output a cow and herd expansion
- Systems included all-year-round calving, spring block and autumn block calving systems, with farms in the dataset having an average dairy farm area of 165ha.
Dairy cattle sales less predictable
At Yorkshire based Norton & Brooksbank, auctioneer Simon Lamb says that the pattern of dairy cattle sales is increasingly difficult to predict as so much depends on bovine TB status.
“Our job has changed in terms of forward bookings generally, but in particular because of TB,” he says.
“Once a herd goes clear, then the sale tends to happen within a couple of months.
“We’re not as busy with dispersal auctions as in the past, but we are moving more than ever privately,” he says.
“Having said that, we have got some exciting sales coming up.”
The private sales aspect is growing partly because of the reduced availability of imported stock, he says.
Monmouthshire-based auctioneer and agent Gwilym Richards says sale bookings are similar to last year and again often dictated by TB status.
While most cows sold are still being taken up by other producers, he is concerned at the increasing requirements on milk producers.
He fears that those who are less accessible will find things more difficult unless they have a niche market or are processing milk themselves.
Those with arable neighbours with suitable land who are willing and able to accommodate slurry and muck from dairies will be in a better position.
Some are finding that an AD (anaerobic digester) is the answer to their slurry problem, he says, adding that second-hand dairy equipment is not in great demand.
The numbers
- 14.8bn Estimated GB milk production (litres) forecast in year to April 2025
- -0.3% Estimated drop in milk production in current year (to April 2025) compared with previous year
- 7,130 Number of GB milk producers at April 2024
- 19% Drop in milk producers in England and Wales in past five years
- 11% Drop in Scottish milk producers in past five years
- 1% Drop in Northern Irish milk producers in past five years