An upturn in milk price supports expected £85,000 improvement in profits

By Tim Harper

Very early consideration of the outcome for our national sample of Farm Business Accounts (FBA) for the year-ending (y/e) March 2018, suggests that an upturn in milk price and improved technical performance is likely to contribute towards farm profits increasing by approximately £85,000 for the average farmer compared to y/e March 2017.

Reporting on the data, Nigel Davies, explains that this figure reinforces the effect positive market conditions can have on profits.

Last autumn, we predicted an increase in profit for the average dairy farm for y/e March 2018 of in excess of £50,000 over and above the £43,404 reported as achieved by the average in the sample in 2017.

Although the fully audited results for the whole FBA sample won’t be available until later this year, individual clients are starting to receive their reports now and our recently available Milkminder matched sample data for March 2018, shows that the rolling milk price has increased by 4.98ppl over the period.

This is significant, and if replicated for the average farm in the FBA sample, would imply the generation of an extra £83,789 of income in the last financial year, if the level of milk produced remained the same as y/e 2017.

Combined with the average Milkminder herd increasing yield per cow by 241 litres and keeping nearly five additional cows, these FBA farms could also be expected to add a further £26,263 to income if they replicated the same increase in the volume of milk they produced as the Milkminder sample.”

Nigel Davies

Overview

However, it has not all been positive news. The Milkminder matched sample indicates that average concentrate prices have increased year-on-year by £16/ tonne, this along with feed rates increasing by 0.01 kg/litre up to March 2018 will have diluted margins by circa £10,400.

Farm overheads and other non-feed costs have also come under pressure in the 12 months to March 2018. If the average Retail Price Index (RPI) is applied to these costs in the FBA sample, then an additional average cost of £10,771 can be added for the financial y/e March 2018.

This forecast outcome follows two relatively poor years in 2016 and 2017, which farmers will no doubt still be feeling the effects of. Additionally, the total cash requirement of these businesses in 2017 for loan commitments, capital expenditure and drawings were £168,616, which far exceeds the expected increase in profit. So although producers should have something to show for this increase, it will not be enough to meet these ongoing cash commitments.

Looking forward

Looking ahead, market conditions beyond the producer’s control are likely to have an impact on profit levels in the year-ending March 2019. The rolling milk price is likely to stabilise over the next few months, however, overhead and other costs are likely to continue to increase at a faster rate in the financial y/e 2019.

For example, oil prices have risen by 25% since March 2017, and this is likely to be sustained. The net impact of this is that at this early stage of the year, we would foresee that in 2019, profits may not reach the higher levels seen during y/e March 2018 but shouldn’t return to the lows seen in 2016 and 2017.

Therefore, accurate budgeting for the financial outcome for businesses in March 2019 is important. Given that overhead costs are likely to increase this year, but milk prices should remain stable, one thing that producers could look to do differently when budgeting, is to focus on their costs and associated actions first, rather than sales.

Clearly understanding your current position in terms of cash and using up-to-date and accurate data such as FBA to forecast will be vital to reducing the potential impact of future market conditions.