Accountancy and financial planner Old Mill has predicted dairy farm profits to drop rapidly in the coming year, and has urged businesses to adapt to manage cashflow over the winter.

According to the ‘Milk Cost of Production‘ report by Old Mill and the Farm Consultancy Group (FCG), the reverse of higher yielding, year-round calving herds making the most of last year’s high milk prices is set to happen.

Profits are forecast to drop back to £415/cow in 2023/24, due to high costs and reduced income, down from a high of £914/cow between 2021/22 and 2022/23.

Rural administrator at FCG, Annabel Hole, warned that volatility is set to continue – and there will be some losses made in the short term.

However, efficient dairy producers will continue to make profits in the longer term – although they should beware large tax bills in January 2024 when some of the lowest milk prices of the past 18 months will be paid, she said.

“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 said.

“Mistakes in the next 12 months will be punished severely, financially.”

Input costs

Rural accountant at Old Mill, Dan Heal, said the year to March 31, 2023, is the only year in the last five where milk income alone has comfortably covered the cost of production for dairy businesses.

However, this summer has deviated from this drastically, he said.

“Looking back over a five-year period, the year to March 31, 2023, is the only year where milk income alone has comfortably covered the cost of production,” he said.

“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.”

Although costs are falling, Heal said the cost base for inputs 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.

2021 – 2023 dairy profits

The Milk Cost of Production report showed that average profits increased by 146% between 2021/22 and 2022/23, to £914/cow.

This was due to a 56% increase in milk income/cow (given both higher yields and milk prices) and increased non-milk income (like calf and heifer sales), Old Mill said.

Combined, that more than offset the higher input costs, which rose from £2,300/cow to £3,182/cow.

The figures don’t include rent, interest, drawings, tax, capital expenditure or basic payments, and include a labour charge of £30,000 per full-time partner or director.

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, Old Mill said.

“Larger, higher yielding herds were more suited to the market conditions of 2022/23,” Heal said.

“These systems typically perform well in times of high prices, although have high cost bases for when prices fall.”

Heal said there are some common themes among the best performing herds: They benchmark their costs of production, are involved in discussion groups, are willing to change, and plan and budget ahead.

The type of system is irrelevant, he said, as there is a mix of both in top and bottom 10% of herds.

“Farming efficiently relies on the farmer and is not based on the system which is run,” he said.

“We’re confident that producers who manage their businesses effectively will be able to weather the more difficult periods as well as take advantage in the good times.”