Dairy farmers’ net profits fell by around 25% in the year to March 2016, and could fall further this year, according to farm accountant Old Mill.
Non-aligned milk prices dropped by around 4-6p/litre over the year, compared with 2014/15, meaning profits typically fell by more than 25%, says head of rural services Andrew Vickery. “However, profits have been extremely volatile and some producers will have suffered far greater losses.”
Supermarket-aligned suppliers fared rather better, with price cuts of between 1p and 4p/litre. “Some or all of that was offset by lower costs of production as the models seek to reflect, so profits were far less volatile.” Even so, the average price on some supermarket-aligned contracts fell by more than the cost of production, he adds. “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, warns Mr Vickery. “At the start of the 2015/16 milk year prices were in the high 20s – even if they improve by 4p/litre 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.”
That said, it’s 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,” says Mr Vickery. “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.”
In the short-term, cash flow is likely to be the greatest challenge, even for businesses which have remained in profit. “It’s vital to draw up a clear cash flow forecast so you can see when the pinch points will arise,” he explains. “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.”
Historically, farmers have tended to pay for small capital items like a building extensions out of cash flow, but that will be harder to do right now. “And some businesses have benefitted from a degree of extra credit from their suppliers, but that cannot continue indefinitely.”
When milk prices do start to improve, it’s important not to get carried away, warns Mr Vickery. “There could be the inclination to start spending fairly quickly, and it’s easy to let costs creep back in.” Of course, some cost-cutting is helpful in the short term but could be damaging to the business in the long run, so farmers need to identify where to rein in and where to invest.
“It’s very interesting to see where farmers have cut costs: Suspending investment in maintenance and repairs can only go on for so long before it starts to be detrimental. But changing management practices like making more of grazed forage and improving labour efficiencies should definitely be retained,” he adds. “There also seems to have been an increase in farmers working collectively to secure keener deals on inputs: If milk prices jump back up there’s no need to change this.”
Full analysis of clients’ figures will be unveiled in conjunction with FCG at the Dairy Show on 5 October.