Milk profits set to rise to £590/cow after a difficult year

These were the main points outlined in the annual Milk Cost of Production report by Old Mill and the Farm Consultancy Group (FCG), which examined dairy client accounts with a 31 March year-end.

The figures show that average income from milk in 2023/24 was £2910/cow – a drop of 19% year-on-year, due to lower milk prices. The cost of production remained stubbornly high at £3153/cow, leading to a shortfall of £243.

“It was only through selling stock that most businesses managed to remain profitable,” explains Andrew Vickery, head of rural services at Old Mill.

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After accounting for non-milk income, but excluding Basic Payment Scheme income, rent, interest, drawings, tax and capital expenditure (and including depreciation and a labour charge of £30,000 per full-time partner or director), businesses averaged a profit of £152/cow. The previous year the figure was a phenomenal £914/cow.

“The five-year profitability average is £478/cow, showing that milk prices have been notably low this year,” said Mr Vickery.

The average herd size fell from 303 head to 295 head, while yields dropped from 7906 litres to 7256 litres/cow due to poor silage made last year.

Although feed costs dropped from their 2022 high, labour and machinery costs increased – particularly as many businesses bought new kit in early 2023 to offset looming large tax bills.

“These changes could be emblematic of a changing dairy industry,” he said.

“The ‘cost of doing work’, namely power, labour, contracting and machinery costs, are increasingly key to financial performance (rising 10.7% this year), whereas in the past, feed and other variable costs took the headlines.”

This cost of doing work is also the key differential between the top 10% of performers and the bottom 10%.

“Given that these costs are often fixed, it shows that life for the smaller herds shows no sign of becoming easier. Tellingly, there is a difference of 237 cows between the average herd size of our top performers (404 cows) and the smaller herds of our bottom 10% (167 cows).”

The top 10% had much higher yields, receiving £629/cow more for their milk, but the difference between costs of production widened markedly, year-on-year, from £163/cow to £1752/cow.

“The bottom 10% were unable to cut their spend in this time of reduced prices, which led them to making a loss of 15.73p/litre compared to a profit of 12.65p/litre for the top 10%,” said Mr Vickery.

“However, there are a variety of farming systems in the bottom 10%, showing that farming efficiently relies on the farmer and not the system.”

A particular difficulty over the past six to nine months has been cash flow, with many businesses paying large tax bills at a time of falling milk prices.

“Though we are forecasting a significant turnaround in profit for the year ending March 2025, it doesn’t feel like that looking at current cash flows,” says Gerard Finnan at the Farm Consultancy Group. Knowing the difference between profit and cash flow – and managing both – is vital. All businesses should define their aims and goals, and benchmark against others to identify strengths and weaknesses on which to focus, he adds.

It’s also important to invest for long-term sustainability – for example in water quality compliance, and to tackle spiralling repair costs – although high interest rates do need to be considered.

With milk prices now on the rise, the 2024/25 milk year is expected to return a milk income of £308/cow against a cost of production of £3122/cow. On average, profits are predicted to rise to £590/cow.

“Those businesses that retained enough cash during the better times of 2022 were the ones best able to weather the storm of the past 12 months. It is those businesses that should be best placed to reap the rewards of a more positive outlook for dairying in the short to medium term.”