Milk costs of production set to jump by a massive £259/cow

That was the good news story from farm accountants, Old Mill, who said average comparable farm profits among its clients increased to £371 per cow in the year to March 31, 2022, driven by a combination of slightly firmer milk prices and lower production costs.

Dan Heal, rural accountant at Old Mill said: “The year ending March 31, 2022 seems a long time ago and there have been a lot of changes since then, but from these times of market volatility taking a reflective look at business performance has never been more critical.”

Milk income in 2021/22, he said increased by £80/cow, year-on-year, with modest price increases offset by lower yields, driven by a desire to reduce production costs.

“Good forage growing conditions meant a plentiful supply of high quality forage, leading to lower concentrate feed rates,” said Mr Heal.

“The grazing season lasted well into the autumn, shortening the winter housing period. As a result, variable costs related to labour, bedding, power and machinery all fell.”

However, as always, there remained a marked difference between the top and bottom 10% of producers, with the gap widening by £137 to £1234/cow.

Of this, £541 related to income; although top 10% yields were 1334 litres/cow lower, income was higher. This he said, shows that meeting buyer requirements reaps rewards, as does reducing concentrate usage when marginal litres are uneconomic.

Production costs were £693 per cow lower among the top 10%, mainly attributed to feed, labour, power and machinery.

“There is a high focus on efficiency for the top 10% of herds. In contrast, more work is being done in a less efficient manner among the bottom 10%, which is not generating a return.” However, much of this could be attributed to less efficient farming operations, likely requiring investment to change.

Although the top 10% of herds were larger, at 287 cows versus 188 cows, there were a variety of systems and calving patterns in both groups, showing that efficiency relies on the farmer not the system, he adds.

Last year, milk prices averaged 33.8p/litre, most fertiliser was bought at sub £300/t and electricity contracts were in the 20p/unit range.

The coming year does however show a marked change despite milk prices of up to 50p/litre, while fertiliser costs have soared to nearer £800/t with electricity at around 65p/unit.

Such high costs and strong cull cow prices have led to more cows being sold off with the average herd size falling from 269 in 2020/21 to 250 last year and a forecast of 235 in 2022/23.

Average feed costs are predicted to increase by £46/cow as prices rise and concentrates are fed to replace forage shortfalls.

“Cost increases are steadily coming through as fixed contracts for energy, feed and fertiliser come to an end, but the full effect will not be seen until the 2023/24 year.”

Combined with higher fertiliser prices, the overall cost of production is set to jump by a massive £259/cow to £2559/cow this year.

However, milk income is set to increase by £791/cow to £3102 due to higher milk prices, despite a forecast drop in yield to 6600 litres as the summer drought impacted both milk and forage production.

Non-milk income is expected to fall marginally to £350/cow as calf prices ease, leaving a comparable farm profit of £893/cow.

“This is the fourth year in a row that average profits in excess of £100/cow have been achieved,” says Mr Heal.

“Now is time to focus on building balance sheets to make up for the lean years and build future resilience. This is particularly relevant with the cost increases that are around the corner.”

According to Annabel Hole, rural administrator at the Farm Consultancy Group, producers need to budget for future capital investment in water quality and slurry storage improvements to meet new legislation.

They should also prepare for higher tax bills given the larger profits made and beware the impact of rising interest rates on loan repayments, she adds.

“The old adage of ‘cash is king’ has never been more accurate, with working capital requirements testing any business,” says Mr Heal. “Challenge creates opportunity – there is the potential for good profits to be made, but the focus needs to be on efficiency to maximise these and secure the business for the future.”

Key points:

* Top 10% received £454/cow more for their milk, with milk buyer having a big effect on income as milk price rises.

* There was a difference of £693/cow in the costs of production between the top 10% and the bottom 10%, with the gap closing from the £1097/cow seen in 2020/2021.

* All of the key cost categories are significantly higher for the bottom 10%.

* The average comparable farm profit for the top 10% was 14.50p/litre compared with a loss of 3.07p/litre for the bottom 10%.

* The average yield per cow is significantly lower for the top 10% at 6323 litres compared to the bottom 10% at 7657 litres, but there is a huge range within these with the top 10% producing anywhere from 4151 litres per cow to 11,468 litres per cow. The bottom 10% produced between 4634 litres per cow and 10,498 litres per cow.

* The top 10% spent £166 less on concentrates for milking cows, reducing concentrate usage when the milk price to feed price ratio made marginal litres uneconomical to produce, with lower yields not reducing profitability.

* Combined labour and power and machinery, or ‘Cost of Doing Work’ is £1317 for the bottom 10%, compared to £847 for the top 10%. This indicates more work is being done in a less efficient manner, and is not generating a return.

* The top 10% has a herd on average of 99 head larger than the bottom 10%, with smaller herds having less animals to spread fixed costs and family labour over.

* There is a variety of systems and calving patterns in the top 10%, showing all can be profitable if done well with a keen eye on costs.

* There is also a variety of farming systems in the bottom 10% of herds, showing that farming efficiently relies on the farmer and is not based on the system which is run.