Dairy Profitability

Ahead of the Livestock Event on the 2^nd and 3^rd of July, Andersons have updated their Friesian Farm model.  This forecasts dairy farm profitability to remain reasonably robust for the next year or so, despite the recent milk price cuts. 

Friesian Farm is a notional 150 cow business in the English Midlands with a non-aligned liquid milk contract.  The table below shows the farm’s performance for the previous two milk years, based on actual returns and costs.  An estimate is given for the current 2014/15 year, and a forecast budget for 2015/16

The farm made a considerable loss before support payments in 2012/13 due to adverse weather conditions and lacklustre milk prices.  The very wet ‘summer’ of 2012 reduced forage quantity and quality and this had to be made up through purchased feeds.  The late spring only added to the problems in that milk year.

The difference between 2012/13 and 2013/14 shows the largest yearly swing in profitability that Friesian Farm has ever seen.  For 2013/14 costs abated; this includes lower concentrate costs for winter 2013/14, coupled with lower volumes of purchased feed.  However, it is the much-improved milk price (up over 4ppl on the year) that really changed profitability for this business.

Looking to the current 2014-15 year, the industry is rightly concerned about milk price cuts.  The forecast yearly average factors-in the reductions already announced for May and June, and is based on further market falls in the autumn and spring.  The fall of 1.5ppl for the year may look conservative.  However, it must be remembered that milk prices in 2013/14 only started to move in the second half of the year (bringing the year-average lower).  The converse will happen in 2014/15; prices will start high before falling. 

Although 2014/15 will see a lower milk price this will be partially offset by a further reduction in variable costs.  Feed prices are budgeted to fall for next winter and fertiliser this spring has been cheaper.  Some of the cost reduction comes about because yields are rising compared to last year.  The figures are expressed in pence per litre – with more litres per cow each cost is divided by a larger figure. 

One cost that does rise in the current year is land.  Friesian Farm has some of its area on an FBT agreement that came up for renewal this spring.  Due to the high rents being paid right across the farming industry, the farm has seen its rent increase to £370 per Ha (£150 per acre) to secure the land.  This has pushed up the rent and finance charge for the year (and the next two years as well).

Overall, profits for 2014/15 are back on the previous year.  However, given that 2013/14 was particularly good, and against the background of falling milk prices the forecast performance is reasonable.  However, it still needs to be remembered that in the dairy sector returns compared to capital invested is still pretty low.  Net of drawings, the budgeted level of profits shown for 2014/15 provides a return on capital of around 4%. 

At this point, any forecasts for the 2015/16 milk year can only be tentative.  The milk market may start to recover late in 2016, but this is not enough to see the average price rise compared to the current year.  Variable costs may drift up slightly although the inflationary pressures in most dairy costs appear muted at the present time.  The result is another decline in profitability, although there still remains a positive margin from production.  Support levels will fall from 2015 onwards as the BPS replaces the SPS.  Also, Friesian Farm’s ELS agreement comes to an end mid-way through the 2015/16 milk year.  With no direct replacement available, the farm’s agri-environment income starts to tail off.