Dairy Farm Profitability

As UK milk prices have continued to slide during the summer, Andersons have updated their Friesian Farm Model to illustrate the effect on dairy farm profitability.  Although there are glimmers of hope from world commodity markets, the forecast assumes that it will be well into 2016 before UK farmgate prices see any sustained upwards movement.  This means that the upcoming milk year looks set to be another tough one in terms of profitability. 

To recap, Friesian Farm is a notional 150 cow business in the English Midlands with a non-aligned liquid milk contract.  It is an average performer – so the figures do not illustrate ‘best practice’, merely what a large number of farms will be experiencing.  The table below shows the farm’s results for the previous two milk years, based on actual returns and costs.  An estimate is given for the current 2015/16 year, and a forecast budget for 2016/17

The 2013/14 year saw this business make some very good returns – driven by a high milk price resulting from booming world markets.  Prices started to slide from the summer of 2014, but as prices were high to start with, the average milk price for 2014/15 was ‘only’ 3ppl down.  Cost savings, especially in feed, helped to cushion Friesian Farm from the price drop.

The current 2015/16 year sees the full effect of milk price falls.  This farm faces nearly a 10ppl drop in its output price compared to two years ago.  Of course, showing a price for an ‘average’ producer has become increasingly meaningless as milk prices have diverged.  If Friesian Farm had a supermarket-aligned contract it would still be making a healthy return.  Conversely, if it was on a contract delivering less than 20ppl (or even had no contract and was having to sell at the ‘spot’ price) then the losses would be considerable.  There is some small comfort that costs have fallen again for the current year, but the support payment drops.  This is partly due to the move to the BPS and a less favourable exchange rate.  But also the farm’s ELS agreement is assumed to expire halfway through the year, with the farm ineligible to enter the replacement Countryside Stewardship Scheme. 

Looking to 2016/17 the figures can only be somewhat speculative.  Undoubtedly, the dairy market will turn for the better at some point, but when this might be is the great unknown.  With considerable stocks of dairy products now in store around the world, it is assumed any recovery might be protracted.  The average price for the year does show some improvement as UK farmgate prices gradually rise during the year.  The scope for further input price falls is probably limited.  Additional borrowing and rising interest rates may well push up finance charges next year.  Overall, once support is included, Friesian Farm just about makes a margin.  But this level is not high enough for long-term reinvestment in the business. 

This does tend to paint a gloomy picture of the dairy sector.  However, as we have written previously, there is much this business could do to significantly reduce costs.  By taking actions that many real-life dairy farms have already followed, then it is quite conceivable that profitability could be maintained.  This is the challenge facing the industry over the next year or so.