Dairy profits set to topple from recent highs

In the upcoming year, dairy farm profits are anticipated to decrease rapidly, necessitating swift adjustments by businesses to manage input expenses and cash flow during the winter season.

The Milk Cost of Production report, conducted by Old Mill and the Farm Consultancy Group (FCG) and unveiled at the Dairy Show, reveals that higher-yielding year-round calving herds took full advantage of last year's elevated milk prices by investing in feed to maximise production. However, with the reversal of circumstances leading to a sharp decline in milk prices, these herds must now move swiftly to reduce their costs.

“Looking back over a five-year period, the year to 31st March 2023 is the only year where milk income alone has comfortably covered the cost of production,” says Dan Heal, rural accountant at Old Mill. “This is a clear signal of supply and demand being out of balance. But summer 2023 has taken a very different path, with milk prices falling quickly, and some costs remaining stubbornly high.”

The report, based on dairy clients with a year-end of 31st March, illustrates a significant increase in average profits, rising by 146% between 2021/22 and 2022/23, reaching £914 per cow. This notable increase is attributed to a 56% surge in milk income per cow, resulting from both higher yields and milk prices, as well as an increase in non-milk income derived from calf and heifer sales. These gains more than offset the substantial rise in input costs, which escalated from £2,300 per cow to £3,182 per cow. It's important to note that these figures do not encompass factors such as rent, interest, drawings, tax, capital expenditure, or basic payments. They do include a labour charge of £30,000 per full-time partner or director.

The expected volatility in the market is set to persist, and some short-term losses are anticipated. Nevertheless, efficient producers are poised to sustain their livelihood in the long run. However, it is advisable to exercise caution regarding substantial tax liabilities expected in January 2024, when some of the lowest milk prices observed in the past 18 months will be paid out. Annabel Hole, rural administrator at FCG, cautions that while many producers invested surplus cash in property repairs and other assets, it is equally essential to reduce debt in preparation for more challenging times ahead.

“Though costs are falling, the cost base is still 30% higher than two years ago due to electricity costs doubling, feed still being 40% higher and most fertiliser having been bought forward at double current market prices,” says Annabel.

Profits are forecast to drop back to £415/cow in 2023/24, due to high costs and reduced income. “With interest rates 5%+ higher, basic payments declining, and extra investment required to comply with water and environmental regulations, there is a cash squeeze looming,” she says. “Mistakes in the next 12 months will be punished severely, financially.”

The gap between the top and bottom 10% of herds continues to widen, with the former making £1,668/cow profit versus the latter at £187/cow. “Larger, higher yielding herds were more suited to the market conditions of 2022/23,” explains Mr Heal. “These systems typically perform well in times of high prices, although have high cost bases for when prices fall.”