With a number of dairy processors now paying prices below 30p/l, it is leaving cash very tight on many local dairy farms.
The reality of the situation is highlighted in the latest output from the Drumlin Farm model produced by local independent dairy consultants, Jason McMinn and Ian Carrick.
Their model is based on typical performance on client farms, with data adjusted to reflect a 100-cow dairy unit producing 7,800 litres per cow.
As well as calculating production costs, the Drumlin Farm model also recognises that farmers have to generate enough cash to feed their families, pay tax and pay off borrowings. For example, modest drawings of £34,500 are deducted when calculating an overall break-even milk price.
Changes
We last published the Drumlin Farm figures in March 2022 and back then it suggested farmers were in a worse position than they are now.
Costs had shot up, with concentrate at £420/t and fertiliser at £700/t.
However, milk prices were on the rise and hit record levels as the year progressed, meaning 2022 ended up being a good year for dairy farming.
But things have changed quickly in 2023 with an unprecedented market correction taking place between January and May.
The latest Drumlin model is based on an average milk price of 30p/l and once other sales and the basic payment scheme (BPS) are added in, it generates total income of £270,937.
Total cash costs in the business are actually down by around £36,000 when compared to the analysis done in March 2022, mainly driven by reductions in concentrate (£340/t) and fertiliser (£320/t) prices.
Energy costs are also down, while spend on conacre (£8,000) and on AI/vet fees and contractor charges is similar to 2022.
However, farm insurance is up slightly while much higher interest rates have resulted in a significant rise in overdraft and loan payments.
When calculating total cash costs to produce milk, the data includes meal, forage, vet/AI, farm repairs, fuel, contracting, water and electric, conacre, interest on overdraft, etc.
These cash costs come to £227,186 (29.12p/l), leaving a margin over milk price of 0.88p/l.
However, to calculate the break-even milk price, the model takes off drawings of £34,500, an estimated tax bill of £14,000, loan repayments of £27,768 and hire purchase of £18,000.
Allowing for stock sales (cull cows and calves) and a BPS of £18,000, the break-even milk price comes to 36.47p/l – this compares to a projected break-even milk price of 31p/l exactly two years ago, up almost 20%.
So while the model farm is generating a net profit of £22,769 before drawings, tax and loan repayments, it actually needs to be bringing in significantly more income (a net profit of £73,268) to stay cash neutral.
Tax bill
Coming down the tracks in January is also a potentially much higher tax bill on the back of the profits made in 2022 – paying this is going to be difficult for many dairy farmers given current cashflow.
The advice to milk producers from Ian Carrick and Jason McMinn is to focus on the parts of the business they can influence – concentrate feed efficiency in particular must be addressed; milk from forage has fallen 20% on NI costed farms in the last year.
Given the scale of the potential cash shortfall, painful decisions will also have to be made on many farms – the solution will typically involve a critical assessment of enterprise margins/mix, overhead costs and profit requirement.
“But outside of the farm gate, the current focus by politicians, processors and retailers on environmental sustainability needs to be reset to include economic sustainability of farming families,” said Ian Carrick.
“The uncertainty regarding milk price applies across the sector - milk processors, suppliers and banks seem to have little idea about future milk price; the only certainty is that the pace of change within the industry is likely to accelerate,” he added.
Read more
Breakeven milk price over 39p/l
Lower prices see farmers burning through 2022 cash reserves - banks
With a number of dairy processors now paying prices below 30p/l, it is leaving cash very tight on many local dairy farms.
The reality of the situation is highlighted in the latest output from the Drumlin Farm model produced by local independent dairy consultants, Jason McMinn and Ian Carrick.
Their model is based on typical performance on client farms, with data adjusted to reflect a 100-cow dairy unit producing 7,800 litres per cow.
As well as calculating production costs, the Drumlin Farm model also recognises that farmers have to generate enough cash to feed their families, pay tax and pay off borrowings. For example, modest drawings of £34,500 are deducted when calculating an overall break-even milk price.
Changes
We last published the Drumlin Farm figures in March 2022 and back then it suggested farmers were in a worse position than they are now.
Costs had shot up, with concentrate at £420/t and fertiliser at £700/t.
However, milk prices were on the rise and hit record levels as the year progressed, meaning 2022 ended up being a good year for dairy farming.
But things have changed quickly in 2023 with an unprecedented market correction taking place between January and May.
The latest Drumlin model is based on an average milk price of 30p/l and once other sales and the basic payment scheme (BPS) are added in, it generates total income of £270,937.
Total cash costs in the business are actually down by around £36,000 when compared to the analysis done in March 2022, mainly driven by reductions in concentrate (£340/t) and fertiliser (£320/t) prices.
Energy costs are also down, while spend on conacre (£8,000) and on AI/vet fees and contractor charges is similar to 2022.
However, farm insurance is up slightly while much higher interest rates have resulted in a significant rise in overdraft and loan payments.
When calculating total cash costs to produce milk, the data includes meal, forage, vet/AI, farm repairs, fuel, contracting, water and electric, conacre, interest on overdraft, etc.
These cash costs come to £227,186 (29.12p/l), leaving a margin over milk price of 0.88p/l.
However, to calculate the break-even milk price, the model takes off drawings of £34,500, an estimated tax bill of £14,000, loan repayments of £27,768 and hire purchase of £18,000.
Allowing for stock sales (cull cows and calves) and a BPS of £18,000, the break-even milk price comes to 36.47p/l – this compares to a projected break-even milk price of 31p/l exactly two years ago, up almost 20%.
So while the model farm is generating a net profit of £22,769 before drawings, tax and loan repayments, it actually needs to be bringing in significantly more income (a net profit of £73,268) to stay cash neutral.
Tax bill
Coming down the tracks in January is also a potentially much higher tax bill on the back of the profits made in 2022 – paying this is going to be difficult for many dairy farmers given current cashflow.
The advice to milk producers from Ian Carrick and Jason McMinn is to focus on the parts of the business they can influence – concentrate feed efficiency in particular must be addressed; milk from forage has fallen 20% on NI costed farms in the last year.
Given the scale of the potential cash shortfall, painful decisions will also have to be made on many farms – the solution will typically involve a critical assessment of enterprise margins/mix, overhead costs and profit requirement.
“But outside of the farm gate, the current focus by politicians, processors and retailers on environmental sustainability needs to be reset to include economic sustainability of farming families,” said Ian Carrick.
“The uncertainty regarding milk price applies across the sector - milk processors, suppliers and banks seem to have little idea about future milk price; the only certainty is that the pace of change within the industry is likely to accelerate,” he added.
Read more
Breakeven milk price over 39p/l
Lower prices see farmers burning through 2022 cash reserves - banks
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