Dairy downturn – the proof is now out there
Can anyone really, truly get a handle on exactly how difficult this year is going to be for farming generally and for dairy farmers in particular?
Mike Butler, Senior Partner
The potent cocktail of horrendous weather, milk prices suppressed by the processors and retailers and the ongoing devastating implications from escalating TB outbreaks can potentially mean only one thing for the UK dairy farmer when it comes to assessing the financial prospects for 2012/13.
We are well into preparing June and indeed September 2012 year ends. Clearly in these winter months dairy farmers are relying upon their winter forage stocks and the feedback we are getting is that yields are continuing to come under pressure unless rations are complimented by expensive concentrates. With high feed costs and a sense of procrastination in raising milk prices set to stay for the short-term at least, there is very little likelihood that dairy farmers will feel inclined to invest in production which itself delivers no additional profits.
The graph below shows the twelve month performance on a rolling basis for a sample of Old Mill’s dairy farming clients for the years ended 31 March 2012, 30 June 2012 and 30 September 2012 compared with the same sample for the previous year. The most significant trend you will note is that the farm profit has increased from £64,000 for the year to March 2011 to £83,000 for the following year. Translated into pence per litre, the net profit for the March 2011 year was 4.63ppl and this rose by 28.51% to 5.95ppl for the next year.
However, looking at September year ends, 2012 is proving less profitable when compared to 2011 with total profits falling by 12.8% and profit per litre falling by 4.7%, the latter being lower due to reduced milk output.
The data also confirms our expectations, the drop in profits year on year when looking at September year ends is only partly due to falling milk price and rising costs. Loss of volume production is possibly the biggest influence on the downturn as output falls on the back of poor grazing and forage, making it increasingly difficult to cover overheads. Put simply, cost of production has risen significantly with the productivity drop and processors need to take this on board.
These numbers will form part of a survey spread with many more June and in particular September year end accounts yet to be prepared. However there is enough data to show that there is a clear trend emerging. Profits have just “fallen off a cliff” for 2012/13 and without an appropriate level of support, those profits will continue to flounder as we get towards the end of the conventional milk year ending 31 March 2013.
The numbers being produced also rely upon the fact that there are reasonable forage crops held in stock at the end of September. Clearly this is something that may not be the case and if one has to factor in exceptionally high concentrate costs to keep rations realistic, expect to see the back half of the year for many dairy farmers fall back compared with the same period for 2012.
The most important thing that dairy farmers can do is assess exactly how variations in input costs and milk prices will affect their businesses’ overall profitability. Having animals in the best possible shape going into Winter is one of the crucial factors and minimising replacement costs is another key factor to sound herd profitability. One of the biggest elements to affect costs that is often overlooked when it comes to dairy farm profitability is the cull rate. Taking an average cow yielding of 8,000 litres per annum and average net cull replacement cost of £1,200 per cow, the cost associated with a cow producing for, say, two lactations instead of four will mean the difference between a replacement cost of 7.5ppl and 3.75ppl respectively.
To plan ahead is the only way to go forward and whilst some days individuals may feel the weight of the world is on their shoulders, it is true to say that a problem shared is a problem halved with many in the farming community at the moment.
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