March 19, 2013

 

Profitability of UK dairy industry affected by low production and milk prices

 

 

The UK dairy industry is witnessing declining profitability due to lower milk prices, decreasing production and rising input costs, according to rural accountant, Old Mill.

 

Mike Butler, senior partner at the firm, said that incomes had been reduced in the last year and the outlook for the next few months 'remains equally bleak.'

 

"While clients in March and June year ends managed to increase profits compared to the previous year, those with September year ends averaged a 12.8% drop in overall profits," he said.

 

"And that trend looks set to continue. The potent cocktail of horrendous weather, milk prices suppressed by processors and retailers, and the devastating implications from escalating TB outbreaks mean only one thing for UK dairy farmers when it comes to assessing the financial prospects for 2012/13."

 

Clarke Willis, CEO of AF Group, said: "The rising cost of fuel has affected all sectors and rising animal feed prices have caused significant increases in production costs for livestock and dairy farmers."

 

Last month, the National Farmers' Union said the UK's dairy industry will 'fall behind in terms of scale and efficiency' if it failed to keep up with global growth.

 

The discussion document, 'A Strategy for the British Dairy Industry' aimed to bring together the whole industry to conjure a working strategy for the industry.

 

"We're starting a conversation with farmers, processors, retailers and everyone with an interest in the dairy industry about a robust, ambitious strategy for its future development" said Mansel Raymond, chairman of NFU's dairy board.

 

"Since the Dairy Coalition committed to agree to a strategy last year, the NFU dairy board has kicked off the process. Our focused working group, which has drawn on the expertise of NFU board members, DairyCo and Dairy UK has developed a set of key assumptions, which we intend to discuss in the coming months."

 

"We believe this strategy must be based on growth in output of milk in Britain. Our starting point is growth that at least keeps pace with the growing global market place. If we fail to do this, then relatively speaking, we are falling behind in terms of scale and potentially efficiency."

 

Butler added: "Last year's wet summer means grazing and forage stocks are limited, leaving farmers having to supplement rations with expensive concentrate feeds."

 

"But the drop in profits is only partly due to falling milk price and rising costs: Loss of volume production is possibly the biggest influence on the downturn. Milk yields are falling well behind last year, making it increasingly difficult to cover overheads."

 

With most processors showing little sign of raising milk prices to cover such increased costs, dairy producers are likely to shelve any investment plans until they can identify better returns, he adds.

 

"In the meantime, the most important thing that dairy farmers can do is assess exactly how variations in input costs, milk yields and milk prices will affect their businesses' overall profitability and cash flow," Butler said.

 

One of the biggest elements affecting costs is the replacement rate.

 

For example, with an average cow yielding 8,000 litres per annum and net replacement costs of US$1,812 per cow, averaging four lactations per cows instead of two, replacement costs can be reduced from US$1.21 per litre to US$0.60 per litre.

 

"Dairy producers are feeling under immense pressure at the moment, and I would urge them to be proactive and seek help whenever needed" Butler said.