How Can Dairy Businesses Survive Winter?

ANALYSIS - It has been a tough year across the agricultural sector, with dairy being one of the hardest hit. Melanie Jenkins looks at what steps dairy farmers can take to weather the storm this winter.
calendar icon 12 November 2015
clock icon 6 minute read

Farmgate milk prices have been under significant pressure this year, falling to a UK average of 23.28p/litre in August, the lowest level since August 2009. Although September saw a small price increase, to 23.61p/litre, this was still 23 per cent lower than in September 2014, leaving many farmers facing cash flow difficulties in the winter ahead.

According to a report by accountant Old Mill, dairy farmers are set to lose an average of 3p/litre in 2015/16, before accounting for non-farm income.

“There is no question that if the current low prices continue it won’t take long to see a significant shift in the industry and ultimately a drop in productive capacity,” said board chairman Mike Butler.

“Most farmers are now steering away from significant investment in their businesses and a notable proportion are very definitely questioning whether there is a future for them in dairying at all.”

Global dairy commodity markets appear to have started a tentative recovery, with the GlobalDairyTrade auction strengthening by 56 per cent between early August and early October, to a weighted average of $2,834/t (£1,843/t), before heading back into negative territory in November. Even so, it’s likely to be a long road to recovery.

“Low milk prices and low income from sales will see the majority of farmers below the cost of production at present,” said Sian Davies, chief dairy adviser at the UK's NFU. “This is more tolerable in the summer months, but in the winter costs increase for feed, bedding and labour.”

According to the AHDB, the top and bottom quartile of dairy farmers’ full economic costs of production averaged 25.6p/litre and 35p/litre, respectively, in the 12 months to August – around an 8 per cent reduction on the previous year.

Reducing feed costs in the run-up to winter

Feed makes up the vast proportion of production costs, said James Miller, senior consultant at Laurence Gould and a South West NFU dairy board member. “A third of total production costs can be attributed to feed, so even if costs can be reduced, it still accounts for too much of the milk price.”

Over the past year, UK feed prices have fallen across the board according to a report by Farm Brief, with soymeal averaging £253-£256/t in October, down from £307-£314/t in October last year, while hipro soya averaged £266-£268, down from £317-£324/t last year. Feed wheat is around £10/t cheaper on the year, at £112-£116/t in October, while feed barley is about £3/t cheaper, at around £108/t in October.

According to Farm Brief, the price of a high energy diet averaged £215-£227/t in October; about £16/t down, year-on-year.

Fortunately, the opening to autumn has enabled farmers to keep cows at grass for longer, and this year’s decent yields of good quality silage should also help to keep costs down, said Mr Miller. “Farmers should get as much from forage as possible – and keep a balanced view on cake because sometimes less is more.”

Producers may prefer to reduce concentrate use and suffer slightly lower yields, if they can retain milk bonuses for butterfat, protein and hygiene, he adds.

“Think about removing cows from the herd that could impact upon this. Farmers need to adapt to the situation depending on their contracts but there is no easy way of cutting back,” he said. “Group buying with other farmers can be an option; it is really a case of being proactive where you can.”

Labour costs a worry whilst other costs fall

Fortunately, other input costs have also fallen. In September, the average price of freshly calved heifers was down 16.7 per cent on the same month last year, at £1350 a head, while freshly calved cow prices were down 14.7 per cent at £1020 a head.

Fertiliser prices are about 12 per cent weaker on the year, with 34.5 per cent ammonium nitrate down by £31-£33/t to £229-£236/t in October said the report by Farm Brief. Fuel prices have also fallen, with red diesel averaging 44.51p/litre in October, compared to 62.42p/litre last year.

In September, big bale hay prices were at their lowest level since 2008, at £41/t, down from £50/t last year, while big bale wheat straw averaged £32/t, down from £36/t last year, and at the lowest level since early 2008. Similarly, big bale barley straw fell by £7/t on the year, to £35/t in September, its lowest price since 2007.

However, labour costs are a concern, with the new living wage likely to result in a 2 per cent hike in employee costs, said Mr Miller. “It is important to look after the people you have got and to not let other issues you have affect the relationship with staff.” Sharing labour with other farms could be an option but trying to find skilled labour can be an issue, he adds.

Late basic payments a concern for cash flow

From a cash flow perspective delays to the Basic Payment Scheme will be the biggest concern for most farmers.

There is no guarantee that farmers will receive their basic payment on 1 December although the RPA said the majority will be paid by January. Mr Miller suggests that the best option is to plan for payment delays. “Get a three to six month plan in place for the deficit and go to the bank and talk to them.”

Cutting expenses where possible and putting a contingency plan in place will demonstrate a proactive approach to the banks. “They understand difficulties in the sector and that the current problems will not be forever,” adds Mr Miller. “Also, the EU dairy fund money will be coming up in December, which will be welcome as it may pay one or two bills for farmers.”

At such a difficult time it is important not to forget other possible issues such as isolation and depression.

“It is important to get together with other farmers and talk to them as it can be an isolated industry, but really farmers are not on their own. Even a quick phone call or giving a struggling neighbour a bit of help can go a long way,” said Mr Miller.

“The industry has not felt quite this much pressure for eight years so it is important to have a plan, and go through and work out what your business and family needs.”

In the longer term, the NFU is calling for a restructure of the dairy supply chain across the UK and Europe.

“While the short term focus is on income and cash flow, Government must prioritise a better functioning supply chain; only then will farmers have the confidence to invest in the future and build resilience,” said NFU deputy president Minette Batters.

“The opportunities for UK farming are clear – in the longer term global and domestic demand will increase. But for British farmers to benefit, we need the right policy and fiscal environment which encourages the sector to increase efficiency, develop and embrace technological advances, and take a long-term balanced view to investment.”

TheCattleSite News Desk

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