Dairy farmers' profits down by a quarter

New figures suggest that dairy farmers’ net profits fell by around 25 per cent in the year to March, and could fall even further this year.

Farm gate milk prices remain way below the cost of production with even the best placed farmers - those who are supermarket-aligned suppliers - suffering price cuts of between 1p and 4p per litre (ppl) over the 12 months to March, while the average price on some supermarket-aligned contracts has still fallen by more than the cost of production.

According to the most recent government figures, the average UK farmgate price stood at 19.85ppl in June - a 2.3 per cent decrease on the May average price and 3.90ppl lower than the same month last year.

As a result on low prices, almost all producers have endured a “large hole” in profits and a steep drop in turnover, an analysis by farm accountancy experts Old Mill suggests.

The firm’s head of rural services, Andrew Vickery, said: “Profits have been extremely volatile and some producers will have suffered far greater losses.

“As a result, almost all producers - whoever they supply - have endured a large hole in profits and a steep drop in turnover, which in many cases has translated into serious cash flow problems.”

Although there are signs of an uplift in milk price, producers should not expect a rapid improvement in profitability in 2016/17, warned Mr Vickery.

“At the start of the 2015/16 milk year prices were in the high 20s - even if they improve by 4ppl the 2016/17 average may not look any better. And while cereal feed prices remain low, the weaker pound is making imports; particularly of proteins like soya, more expensive.”

In the short-term, cash flow is likely to be the greatest challenge, even for businesses which have remained in profit, he said, adding that it is vital for dairy farmers to draw up a clear cash flow forecast so they can see when the pinch points will arise.

“If you’re up against your overdraft limit now, speak to your bank manager early to put an extension in place or suspend capital repayments on loans for a time. Just don’t be the last person in the queue,” Mr Vickery said.

Farm gate prices have been kept low by over production and shrinking demand internationally for dairy products - largely prompted by the Russian trade ban and China’s relative withdrawal from the market.

But there are promising signs. According to industry group AHDB Dairy, despite the seasonal upturn in milk production in the northern hemisphere, the combined milk production of the worlds five key exporting regions - the EU, US, New Zealand, Australia and Argentina - showed a reduction in May, largely as a result of a slowdown in average daily production in EU member states.

Mr Vickery said the situation is “not all doom and gloom”.

“Many people have survived the troughs and will come out with a leaner, more efficient business that will make good profits in the future,” he said.

“There has been a lot of belt-tightening, and the key is not to let costs of production rise again as the milk price improves.”