Gerard Finnan (Sherborne)

This time last year we were warning our clients of rapidly rising income from significantly rising milk prices with the potential to increase profits significantly.  With forage in short supply after a dry summer in 2022 and the feed to milk price favourable to fill the forage gap with bought in feeds, milk production increased with more cows being retained in herds and higher yields resulting from the purchased feed.

The shortage of feed raw materials due to the War in Ukraine resulted in concentrate prices increasing significantly resulting in an overall feed cost increase of £471/cow or 127% of the 2021-22 profit per cow.  Purchased feed was 37% of total costs.

At The Dairy Event this week we published our Annual Cost of Production review in association with Old Mill Accountants. Read here.

The gap between the top and bottom 10% gets ever wider.  Those herds which were higher yielding and had higher cow numbers took full advantage of the higher milk price tended to be in the top 10%, though not exclusively.  All year round calving herds tend to be the higher yielding and were more flexible in adapting to the milk price increase, holding onto more cows and could see a quicker response to increased concentrate feeding due to the different stages in lactation within the herd. Block calved herds tend to be fixed management systems focused on getting cows back in calf, not maximising production, when cows are in peak milk.  

What’s in store for 2023-24?

It is going to be polar opposites of 2022-23, both financially and physically.  The high yielding herds will experience the biggest decreases in income and profit due to lower milk price.  Their ability to cope with a rapidly declining income with a slower declining cost base will be based on how cashflow was managed in the last 12 months.  How was the surplus cashflow spent?

The biggest tax bills will need to be paid in January 2024 when some of the lowest milk prices of the last 18 months will be paid.  Has debt been reduced with this extra cash or has it all been invested in depreciating assets?

Forage stocks have been replenished with some mediocre quality forages made, due to weather conditions.  Cows are in poorer condition going into the winter as they have milked well off abundant grass on lower cake levels due to the less favourable feed milk price ratio.

Though costs are falling, the cost base is still 30% higher now than two years ago due to electricity costs doubling, feed is still 40% higher and most of fertiliser used in the 2023 summer having been bought forward at double current market prices.

Overall Profits are projected to decline rapidly to 2021-22 levels.  With interest rates 5%+ higher (e.g., £25k extra interest on £500k borrowed, not accounted for in this comparable analysis), BPS declining and extra capital investment required to comply with water and environmental regulations, there is a cash squeeze looming in the next 12 months for all businesses but especially those who have not managed the cash profits from last year.  Mistakes in business in the next 12 months will be punished severely financially.  Low performing cows will become loss making.  Surplus dairy replacements will become a short term luxury.  Under used or over powered machinery using up expensive capital at 10% HP rates will start hurting cashflows when it comes to replacing them.

Looking ahead post 2023-24.

The ability to cope with the extreme volatility in the market, which is outside ones control, will determine how successful dairy farm business will survive and be more sustainable in the future.

The successful dairy businesses are the ones that:

System of milk production doesn’t determine success as is seen from the graph on page 10. 

How many of the above points are you practicing in your business and of those you are acting on is their room for improvement?  If you are serious about successfully achieving your dairy business longer term goals, what can you do differently in the next 12 months to improve your chances of success?  Contact Gerard at gerardfinnan@fcgagric.com