Dairy profits recover in 2020 according to Old Mill report

Dairy farmers’ profits recovered in 2019/20 after falling in 2018/19, largely due to reduced purchased feed costs, according to the Old Mill Milk Cost of Production Report.

The report – conducted by rural accountant Old Mill and the Farm Consultancy Group – found that dairy farm profits averaged £233/cow in the year to March 31, 2020 – up from £141 the previous year.

However, there remained a big gap between the top and bottom producers, with the top 10% averaging a profit of 12p/L compared with a loss of 5.48p/L for the bottom 10%, with 24% of the sample not breaking even.

“This is a big reason why 2.5% of producers are ceasing production annually,” explains Gerard Finnan, farm business consultant at the Farm Consultancy Group.

At the current rate, a lot of the bottom 10% could be gone in four-to-five years’ time, unless they change their management decisions.

Income remains stable

This is the third year in a row that income has remained stable, with both yields and prices seeing little change on the previous season.

Though the average milk price remained around 31p/L, the subsequent challenges presented by Covid-19 meant a number of milk buyers instructed suppliers to cut production or dispose of milk.

“This resulted in some producers capitulating, and though the distressed milk market is now behind us, the report highlights how finely balanced supply and demand is,” explains Dan Heal, rural accountant at Old Mill.

The top 10% of producers have once again outperformed the bottom 10% by over £1,000/cow, despite income levels only being £142/cow higher. Reducing costs has been a major driver for numerous producers over the past year, with producers cutting costs by an average of £124/cow.

“However, the effectiveness and impact of cutting costs is starkly apparent between the top and bottom 10% of producers.

“Cost efficiency is about much more than requesting suppliers to reduce their prices,” said Heal.

It is looking into the expenditure of the business and adapting to suit the farm or milk contract. Or making timely investments if they will give a return.

After the drought during the 2018/19 season, the favourable growing conditions of 2019 resulted in a £97/cow drop in purchased feed costs, Heal said.

Producers also spent less on seeds, fertilisers and sprays, with the weather allowing for the production of large quantities of quality forage.

Machinery costs rise

In contrast, machinery costs rose by 10% on the year, due to increased contracting costs, with a corresponding fall in depreciation as field operations are increasingly outsourced, explains Heal. The top 10% spent £342/cow less on power and machinery than the bottom 10%, whose costs averaged £710/cow.

It’s notable that yields, herd size and system are not driving profits. Yield per cow in the top 10% by profit ranged from 4,520L, to 10,393L, while in the bottom 10% it varied from 3,974L to 8,614L.

Though the top 10% of producers have doubled the herd size of the bottom, scale should not affect variable costs, explains Finnan.

Variable costs were 4.5p/L cheaper for the top 10%, and though greater buying power might account for 1p/L, it shouldn’t account for 4.5 times that, he adds.

Again, system has little impact on the profitability of a business. Of the top 10% in terms of profitability, 44% were spring calving, 28% were autumn calving and 28% all-year-round, with organic and non-organic enterprises represented across these.

“The same applies in the bottom 10%. Profitability is not down to what you do, it is the way you do it,” concluded Finnan.