Dairy Profitability

With UK milk prices falling rapidly, Andersons have updated their Friesian Farm Model to illustrate the effect on dairy farm profitability.  This shows that returns for the current milk year will still be positive as a result of the good prices through the spring and early summer.  But for theupcoming 2015/16 year, the farm drops back into a loss-making situation before support. 

To recap, 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 2013/14 year saw this business make some very good returns – in marked contrast to the previous year where it was loss-making before the Single Payment and ELS money.  The reason for the massive turnaround was a much-improved milk price, pushed up by booming world markets, and reduced costs.

Looking to the current 2014/15 year, it can be seen that the average milk price reduces by over 3ppl.  This fall may look conservative given the recent cuts, andthe threat of more to come.  However, it should be remembered that it is a year-average price, and the first part of the milk year saw very high farmgate values. 

The lower milk price for 2014/15 will partially be offset by a further reduction in variable costs.  Feed prices are budgeted to fall for the coming winter and fertiliser this spring has been cheaper.  Some of the cost reduction also comes about because yields are higher 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. 

All this still leaves the business with a positive margin from production.  Once the support payments are added in, the return looks reasonable in historic terms.  It is though, 1.2ppl lower than was forecast only three months ago.

For the 2015/16 year milk prices will start the year at low levels.  There seems little prospect of prices recovering quickly during the year, so the average will be back further on the current year.  With costs down only slightly, margins come under pressure, and the farm is forecast to be loss-making from production.  With decline in support under the CAP overall business returns move sharply downwards. 

Friesian Farm is a middle-of-the-road business, deliberately designed to be average so that it mirrors the fortunes of the dairy sector as a whole.  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 sector as milk price cuts start to bite.