Farm business outlook 2022: Costs outstrip milk price rises

To assess the effect on dairy farming systems operating at different levels of performance, Andersons has used the AHDB dairy performance results from 2018-19, tracking key areas of dairy farm income and expenditure during that period and updating them to current levels.

The figures, based on a 350-farm dataset, are compiled with no BPS entered, comparative rates for unpaid labour inputted, and all land having a rent paid on it.

See also: 7 training and development ideas to retain good dairy staff

The first point to note is that income is up. The average milk price used in the Andersons model was 1.95p/litre higher than the reference period (12 months to 31 March 2019), say Oliver Hall and Mike Houghton, partners in Andersons Midlands and The Andersons Centre respectively.

Price increases for different systems vary according to levels of milk solids/litre, reflecting how most UK producers are now paid. Income has been further supported with strong cull and calf incomes.

Milk price prospects continue to appear positive. UK values look set to remain firm through into 2022, supported by robust demand, both domestically and internationally.

Importantly, the Chinese appear to be back in the market and buying.

Limited supply

However, global supply seems likely to be constrained, despite high milk prices. This is partly due to weather – the heatwave in the west of the US being a good example.

But it is also a result of high input costs around the world, skewing the milk price:cost ratio to an extent that no longer favours extra production.

Andersons calculations clearly illustrate the position of UK producers. The authors used known agricultural inflation on feed, fertiliser, farm labour, farm machinery capital costs, contractors, and fuel for their model.

They estimated inflation on vet and med expenses and other livestock costs at half of the 5.5% general inflation based on the Consumer Price Index since the reference period, and 100% for property repairs and other overheads.

The outcomes are stark (see Table 1), with all systems and performance levels losing margin, even with the average milk price applied for the UK at 31.24p/litre, the highest since 2014.

It is worth noting that the average farmgate milk price calculated by Defra has increased further since the study was carried out, reaching 32.55p/litre in October, just over 3.26p above the 2018/19 reference period.

However, costs have risen 4.7-5.6p/litre and there is more to come, especially on fertiliser and labour.

Cost inflation outstrips milk price rises 

At the time of writing there were signs of some major price movements in the offing, but fundamentally cost inflation continues to outstrip milk price rises, for now at least.

Businesses with high costs fare the worst as the percentage increases are acting on a larger starting figure.

Unsurprisingly, those poor-performing businesses without much margin to play with feel the impact on profitability much quicker.

Spring calving systems come out better due to their inherently low-cost nature.

High-performance autumn calving herds also experience less of a slip due to a high initial margin and in-built efficiency.

Average autumn calving herds struggle more, due to large feed price rises and higher overhead costs.

The average all-year-round-calving (AYRC) system moves quickly into a negative margin and requires a milk price of 35p/litre to break even.

Top performance AYRC sees the margin of profit fall by 38% to leave a 3p/litre profit.

Whole farm returns

The effect on whole farm returns is often missed when looking at profit margins per litre, as farm performance is also dependent on stocking rates and litres produced per hectare.

Andersons has created a model 100ha farm to demonstrate this, all derived from the average figures of the AHDB 350-farm dataset. The results show a massive range in profitability.

These are “real life” yearly numbers for a farm of this size, taking no account of support payments.

A 100ha dairy farm in England would receive about a £21,600 BPS payment in 2022 on top of these margins.

The authors highlight two key points. First, this is only a model and every business is different and, second, cost inflation remains an unknown.

However, it does indicate clearly that if dairy farmers want to make a profit and not subsidise the business with unpaid labour or land without a rent return, while in a shrinking subsidy environment, then higher margin a litre low-cost business models can ride out cost inflation more easily.

AYRC will need excellent performance or a retailer contract to make good profit margins.

A good block calving system provides a base to start from, but good performance is needed, as average won’t be good enough.