Model dairy farm shows better prospects – but beware

Dairy farmers are being warned they must continue to aim for the lowest cost of production – and make sure any money they do spend is delivering them a return.

Farm business consultancy Andersons said that although recent increases in farmgate prices had improved farmers’ prospects, the medium-term outlook contained a number of potential problems.

The firm has updated the figures on its Friesian Farm model farm, which is a notional 150-cow business in the Midlands on a non-aligned liquid milk contract.

See also: Dairy farms warned to prepare for dairy downturn in 2020

The farm’s position has improved significantly since the figures were last run in July 2016, when the company was suggesting a business surplus, after subsidies, of 0.4p/litre in 2016/17 and 2.3p/litre in 2017/18.

With milk prices on the rise, the farm is now forecast to make a business surplus of 1.7p/litre in 2016/17, which is estimated to rise to 5.4p/litre in 2017/18.

But Andersons has warned that while the sharp upturn in milk prices means that budgeted returns are once again at sustainable levels, it may be short-lived.

One reason is that producers will be facing inflationary cost increases, which will affect labour, commodities and any products they buy.

“Inflationary increases in costs may well be one of the key features of 2017,” it said. “Some of the shifts seen are a result of market factors, such as the rising oil price, but the fall in the pound against the dollar has also been a major factor.

“Many cost items, being products rather than commodities, do not react immediately to inflationary factors. However, while slower to react, they will eventually be affected as price lists are readjusted.”

Other potential problems include the impact of a “hard” Brexit, which could see prices fall for many commodities because of the effect on trade flows.

There is also expected to be a fall in subsidies because support is likely to be lower under a British Agricultural Policy than under the CAP.

Global dairy markets may also have risen significantly from their lows, but another downturn will arrive at some point – perhaps as soon as late this year or early 2018, it said.

“All this means that dairy farms… need to use the current period of better profits to prepare for the future,” Andersons said. “They must continue to strive for the lowest costs of production as this simply means they remain profitable at a wider range of market process and subsidy levels.”

Friesian farm forecasts

p/litre 2014/15 (result) 2015/16 (result) 2016/17 (estimate) 2017/18 (forecast)
Milk 29.4  22.6 23.2 28.0
Output 32.1  25.2 25.8 30.6
Variable costs 13.2 12.0 11.5 12.2
Overheads 11.0 9.7 9.5 9.5
Rent, finance and drawings 4.7 4.8 4.9 5.3
Cost of production 28.9 26.5 25.9 26.9
Margin from production 3.2 (1.3) (0.1) 3.6
BPS/SPS (And ELS*) 1.9 1.6 1.8 1.8
Business surplus 5.1 0.3 1.7 5.4

*ELS 2014/15 only