Dairy farmers’ earnings dropped sharply in 2018/19 and are only set to recover marginally in the coming year, according to a survey by rural accountant Old Mill.

The survey of Old Mill and Farm Consultancy Group clients found that comparable farm profits fell from 5.9p/litre (£383/cow) to 2.69p/litre (£141/cow) in the year to 31 March 2019. This was mainly attributable to the very dry summer, which hampered milk production and required producers to buy in extra feed, pushing costs of production up from £2,186/cow to £2,411/cow, said Andrew Vickery (pictured) head of rural services at Old Mill.

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Unveiling the report at the Dairy Show, Mr Vickery explained that higher milk prices partially offset a drop in milk production, bringing milk income to £2,267/cow, compared to £2,272 in the previous year. That left the average farm making a marginal profit only after accounting for non-milk income like calf and cull cow sales.

Although all systems were capable of making a profit – or a loss, year-round calving herds tended to be towards the lower end of the scale, with spring-calving herds likely to make more on a per-litre basis, said Mr Vickery. “This is due to their ability to produce cheap milk, which insulates them against lower milk prices.

“However, spring calving herds had lower than average yields: As yields climb, a lower margin is needed to maintain profit per cow. The best farms carefully monitor the costs of producing marginal litres, to pre-empt those margins getting squeezed.”

When comparing the top and bottom 10% of clients, those in the top slice had larger herds (270 cows) but lower yields (6,695 litres) than the bottom decile, at 151 cows and 7,385 litres, respectively. Milk income per cow was therefore £83 lower among the top 10%, but their focus on expenditure stood out, with a £1,085/cow difference between the top and bottom producers’ costs of production.

“The average comparable farm profit for the top 10% was 12.13p/litre compared to a loss of 6.46p/litre for the bottom 10%,” said Mr Vickery. “They spent £285 less on concentrates, and £34 more on forage, indicating a choice to plug the gap in home-produced forage with purchased forage rather than higher cost concentrates.”

Looking ahead to the 2019/20 milk year, the better summer, likely higher yields and lower feed costs should help boost profits by 0.71p/litre, to 3.4p/litre or £269/cow. “But given Brexit, there are arguably more uncertainties over profitability now than at the same point last year,” warned Mr Vickery. “Although the weakening value of sterling will prop up milk prices to some extent, its impact on imported inputs is only partly being offset by lower domestic grain prices from the good 2019 UK harvest.”

Last year’s increase in costs were mostly due to the drought, said Phil Cooper at the Farm Consultancy Group. “Most of these costs are budgeted to be reversed this year, but it still leaves only £76,400 for this 2.1 million litre average dairy farm to cover rent, debt finance and repayment and taxation on a 30p/litre milk price.

“It has been a challenging year, and many farms are sitting around the break-even point, with a need to rebuild profitability next year,” he added. “Producers should now have enough information to budget accurately for the coming six months, and must act quickly to put their businesses on a sound footing no matter what Brexit throws at them.”

Note: In order to make the businesses comparable, rents, interest payments, drawings, tax and capital expenditure have been excluded from the figures and a labour charge of £30,000 has been included per full time partner/director. Basic payment scheme has been excluded from the income, while depreciation has been included.