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Farm business outlook 2022: Costs outstrip milk price rises

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To assess the effect on dairy production systems operating at different performance levels, Andersons used the AHDB dairy performance results from 2018-19, tracking key areas of dairy farm income and expenditure over the course of of this period and updating them to current levels.

The figures, based on a dataset of 350 farms, are compiled without entering BPS, comparative rates for unpaid labor and all land on which rent is paid.

See also: 7 training and development ideas to retain the right dairy staff

The first point to note is that revenues are on the rise. The average price of milk used in the Andersons model was 1.95 pence / liter higher than in the base period (12 months to March 31, 2019), say Oliver Hall and Mike Houghton, partners of Andersons Midlands and of The Andersons Center.

Price increases for different systems vary based on milk solids / liter levels, reflecting how most UK producers are now paid. Income was supported by strong cull and calf income.

The outlook for milk prices continues to appear positive. UK stocks are expected to remain firm through 2022, supported by robust demand, both domestically and internationally.

It is important to note that the Chinese seem to be back in the market and buying.

Limited supply

However, global supply appears likely to be limited, despite high milk prices. Part of this is due to weather conditions – the heatwave in the western United States is a case in point.

But it is also the result of high input costs around the world, which distorts the price / cost ratio of milk to an extent that no longer favors additional production.

Anderson’s calculations clearly illustrate the position of UK producers. The authors used known farm inflation on feed, fertilizer, farm labor, farm machinery investment costs, contractors, and fuel for their model.

They estimated the inflation on veterinary and medical expenses and other livestock costs at half of the general inflation of 5.5% based on the consumer price index since the reference period, and at 100 % for property repairs and other overheads.

The results are striking (see Table 1), with all systems and performance levels losing ground, even with the UK average applied milk price at 31.24 p / liter, the highest since 2014.

It should be noted that the average farm-gate price of milk calculated by Defra has risen further since the study was conducted, reaching 32.55 pence / liter in October, just over 3.26 pence above of the reference period 2018/19.

However, costs have increased from 4.7 to 5.6 pence / liter and there is more to come, especially on fertilizer and labor.

Summary of dairy outlook

  • Average UK milk price rose 3 pence / liter in two years to a seven-year high
  • Andersons modeling shows that higher cost levels will exceed this increase, eroding margins across all systems and performance levels.
  • Firms with higher margins and lower costs (spring calving, efficient fall calving) are better able to cope because they are less exposed to inflation
  • Milk prices remain supported by robust demand, but higher costs could reduce additional production
  • Cost inflation appears to be one of the biggest issues facing agriculture in 2022 and the dairy industry will be no exception, with higher costs expected to exceed recent price hikes and squeeze margins across the board. .

Cost inflation outpaces rising milk prices

At the time of writing, there were signs of major price movements on the horizon, but fundamentally cost inflation continues to outpace increases in milk prices, at least for now.

Firms with high costs are worse off because percentage increases affect a larger starting figure.

Unsurprisingly, underperforming companies without much leeway feel the impact on profitability much faster.

Spring calving systems fare better because of their inherently inexpensive nature.

Successful fall calving herds also experience less slipping due to a high initial margin and built-in efficiency.

Medium fall calving herds are having a harder time due to steep increases in feed prices and higher overhead costs.

The Year Round Average Calving System (AYRC) quickly goes to a negative margin and requires a milk price of 35 pence / liter to break even.

Optimal performance AYRC sees the profit margin drop 38% to leave a profit of 3p / liter.

Variations in the margin of dairy farms – 2018-19 to present

Spring calving

Fall calving

Calving all year round

Middle 50%

Top 25%

Middle 50%

Top 25%

Middle 50%

Top 25%

18-19

Running

18-19

Running

18-19

Running

18-19

Running

18-19

Running

18-19

Running

Income p / liter

Milk

32.0

34.1

32.9

35.1

30.6

32.6

31.4

33.5

29.7

31.7

30.4

32.4

Other income

4.2

5.0

5.2

6.3

4.5

5.6

3.6

4.5

3.9

4.7

3.7

4.5

Total income

36.2

39.1

38.1

41.4

35.1

38.2

35.0

38.0

33.6

36.4

34.1

36.9

Variable costs p / liter

To feed

7.5

9.1

8.9

10.5

10.2

12.7

7.2

9.1

11.4

14.2

10.5

13.1

Feed

2.2

3.7

1.7

2.8

1.9

3.2

1.7

2.8

1.6

2.7

1.4

2.3

Other variables

3.9

4.0

2.8

2.9

4.3

4.4

3.5

3.6

5.1

5.2

4.4

4.5

Total variables

13.6

16.8

13.4

16.2

16.4

20.3

12.4

15.5

18.1

22.1

16.3

19.9

Overhead p / liter

All the work

5.8

6.3

4.8

5.2

4.9

5.3

4.6

5.0

5.3

5.8

4.2

4.6

Power and machines

5.1

6.0

4.4

5.1

5.0

5.8

3.8

4.4

5.9

6.9

4.4

5.1

Property and other charges

3.3

3.4

2.5

2.6

2.5

2.6

2.2

2.3

2.2

2.3

1.9

2.0

Rent & financing

3.8

3.8

2.7

2.7

2.6

2.6

2.3

2.3

2.6

2.6

2.2

2.2

Total overheads

18.0

19.5

14.4

15.7

15.0

16.4

12.9

14.0

16.0

17.6

12.7

13.9

Total costs p / liter

31.6

36.3

27.8

31.9

31.4

36.7

25.3

29.5

34.1

39.7

29.0

33.8

Profit margin p / liter

4.6

2.8

10.3

9.5

3.7

1.5

9.7

8.5

(0.5)

(3.3)

5.1

3.1

Source: Anderson

The whole farm makes

The effect on whole farm income is often overlooked when looking at profit margins per liter, as farm performance is also dependent on stocking rates and liters produced per hectare.

Andersons created a 100 ha model farm to demonstrate this, all derived from average numbers from the AHDB’s 350 farm dataset. The results show a wide range of profitability.

These are β€œreal” annual figures for a farm of this size, excluding support payments.

A 100ha dairy farm in England would receive a payment of around Β£ 21,600 BPS in 2022 on top of these margins.

The authors underline two essential points. First, this is just a model and every business is different and second, cost inflation remains an unknown.

However, this makes it clear that if dairy farmers want to make a profit and not subsidize the business with unpaid labor or land with no return on rent, while in an environment of declining subsidies, then a higher margin of one liter can pay off. cost inflation more easily.

AYRC will need excellent performance or a retailer contract to generate good profit margins.

A good block calving system provides a starting point, but good performance is needed because the average will not be enough.

Profitability range of the dairy system

100ha farm

Spring calving

Fall calving

All year

Middle 50%

Top 25%

Middle 50%

Top 25%

Middle 50%

Top 25%

Cows / ha

2.17

2.77

1.71

1.87

1.96

2.07

Liters / ha

11,706

15 664

13 317

14 156

16,431

18 072

Milk solids / liter

8.40

8.45

7.47

7.80

7.36

7.36

2018-19 profit margin

Β£ 53,849

Β£ 161,137

Β£ 49,273

Β£ 137,314

(Β£ 8,215)

Β£ 92,169

Current profit (loss) margin

Β£ 33,590

Β£ 147,902

Β£ 19,906

Β£ 120,018

(Β£ 53,912)

Β£ 55,838

Reduction

Β£ 20,258

Β£ 13,235

Β£ 29,367

Β£ 17,296

Β£ 45,697

Β£ 36,331

Source: Anderson

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