Positive news for dairy profits

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DAIRY farmers’ profits recovered in 2019/20 after falling in 2018/19, according to the Old Mill Milk Cost of Production Report.

The report found that dairy farm profits averaged £233 per cow in the year to March 31, 2020 – up from £141 the previous year. They credit this largely to reduced purchased feed costs.

However, there remained a big gap between the top and bottom producers, with the top 10% averaging a profit of 12p per litre compared with a loss of 5.48p per litre for the bottom 10%, with 24% of the sample not breaking even.

“This is a big reason why 2.5% of producers are ceasing production annually,” explained Gerard Finnan, farm business consultant at the Farm Consultancy Group. “At the current rate, a lot of the bottom 10% could be gone in four-to-five years’ time, unless they change their management decisions.”

This is the third year in a row that income has remained stable, with both yields and prices seeing little change on the previous season. Though the average milk price remained around 31p per litre, the subsequent challenges presented by Covid-19 meant a number of milk buyers instructed suppliers to cut production or dispose of milk.

“This resulted in some producers capitulating, and though the distressed milk market is now behind us, the report highlights how finely balanced supply and demand is,” explained Dan Heal, rural accountant at Old Mill.

After the drought during the 2018/19 season, the favourable growing conditions of 2019 resulted in a £97 per cow drop in purchased feed costs, said Mr Heal. Producers also spent less on seeds, fertilisers and sprays, with the weather allowing for the production of large quantities of quality forage. “However, the unpredictability of the weather does mean it is an aspect that is much harder to plan for.”

In contrast, machinery costs rose by 10% on the year, due to increased contracting costs, with a corresponding fall in depreciation as field operations are increasingly outsourced, explains Mr Heal. The top 10% spent £342 per cow less on power and machinery than the bottom 10%, whose costs averaged £710 per cow.

It’s notable that yields, herd size and system are not driving profits. Yield per cow in the top 10% by profit ranged from 4520 litres, to 10,393 litres, while in the bottom 10% it varied from 3974 litres to 8614 litres.

Despite this anticipated stability, the report also demonstrates that buyer security is volatile in times of oversupply and cost control is more effective when looking at the business as a whole.

Mr Heal continued: “It is not possible to control everything, but the most successful farmers adapt what they can control to suit the factors they can’t.”

“Most of the above points are within a farmer’s control if they need or wish to improve business profits,” added Mr Finnan. “Benchmark in detail against the best and focus on three-to-four key costs. Develop an action plan to reduce these costs and get the whole farm team to buy into what you are trying to achieve.”

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