Dairy profits drop demands close cashflow management

A rapid drop back to 2021-22 profit levels is predicted for the current milk year, after a more lucrative year ending in March 2023.

Managing cash will be the priority, with interest rates up five percentage points, falling Basic Payment Scheme income in England and capital investment required to comply with water and environmental regulations.

All of this will deliver a cash squeeze over the next 12 months, especially where profits from last year have not been well managed, says Gerard Finnan of the Farm Consultancy Group, which produced the Milk Cost of Production Report 2022-23 with accountant Old Mill.

See also: Profits squeeze will hasten structural change in farming

“Mistakes in business in the next 12 months will be punished severely financially,” he says. “Low-performing cows will become loss-making. Surplus dairy replacements will become a short-term luxury.

“Underused or overpowered machinery using up expensive capital at 10% HP rates will start hurting cashflows when it comes to replacing them.”

With some costs remaining stubbornly high, milk deliveries running ahead of last year and consumers challenged by the high cost of living, Dan Heal of Old Mill warns that there will be some losses made in the short term.

Tax bills in January will catch some out, so the advice is to prepare for this now and continue benchmarking to find ways to improve.

While the March 2023 year saw milk income top production costs by £428 a cow, this milk year it is expected to bring in just £7 a cow more than cost of production.

Feed, variable and power and machinery costs all rose in the year to 31 March 2023. Dan points out that labour costs fell because of lack of supply, so business owners had to pick up the slack, adding extra pressure.

Performance gap

While the system of milk production doesn’t determine success, the gap between the top 10% and bottom 10% in performance terms continues to grow, says Gerard.

Higher-yielding herds had higher cow numbers and took full advantage of the higher milk price, tending to be in the top 10%, though not exclusively, he says.

“All-year-round calving herds tend to be the higher yielding and were more flexible in adapting to the milk price increase.

“Retaining more cows, they could see a quicker response to increased concentrate feeding due to the different stages in lactation within the herd.

“Block-calved herds tend to be fixed management systems focused on getting cows back in calf, not maximising production when cows are in peak milk.”

What’s in store for the rest of 2023-24?

Both financially and physically, this year will be the polar opposite of the milk year just gone, says Gerard.

“The high-yielding herds will experience the biggest decreases in income and profit due to the lower milk price.

“Their ability to cope with a rapidly declining income, with a slower declining cost base, will be based on how cashflow was managed in the last 12 months.

“Has debt been reduced with this extra cash, or has it all been invested in depreciating assets?”

Poor weather has meant some mediocre quality forages. Cows are in poorer condition going into the winter as they have milked well off abundant grass on lower cake levels due to the less favourable feed to milk price ratio.

Though falling, the cost base is still 30% higher than two years ago due to electricity costs doubling; feed is still 40% higher and most of the fertiliser used in the 2023 summer was bought forward at double current market prices.

Looking beyond the current milk year

The ability to cope with the extreme market volatility will determine how the successful dairy farm businesses will survive and be more sustainable in the future.

Old Mill and the Farm Consultancy Group identify successful dairy businesses as are those which:

• Benchmark, know their cost of production and how their key performance indicators compare to the best
• Are involved in discussion groups and are open to improvement
• Are willing to change and adapt to new ideas and technologies
• Plan and budget forward for physical and financial requirements
• Are continually focused on improving people
• Minimise overhead costs
• Know their market and supply that market accordingly.

Busy summer of dispersal sales

Auctioneers saw a rash of sales through June, July and August but bookings in the South West have slowed, says Derek Biss of Greenslade Taylor Hunt. 

“TB was a big factor, with some people going for early tests so that they could be sure of selling.

“I think those who were going to sell this year have done so. A lot of people are talking about it but not deciding.

“I think most will try and see it through the winter, but if things don’t improve milk price-wise then we will see more sales in the new year.”

However, things are very volatile, says Derek. Oversupply pushed down the milk price but first-cut silage isn’t great quality and so milk production is slowing, which could lead to a price improvement.

At the same time, tight beef supply and high prices mean culls are valuable, while low milk prices have pushed down in-milk cow values.

At Symonds & Sampson, dairy auctioneer Greg Ridout has also seen the number of dairy sales reduce after a very busy summer.

He expects more smaller herds to disperse and some larger operators will be in financial difficulty, with actual interest rates having gone from 3% and 4% to about 9%.

The latest AHDB survey of milk processors (May 2023) put the number of milk producers in Great Britain at 7,500, down 4.8% on the year.