Dairy Profitability

Prospects are looking good in the dairy sector.

Milk prices have been increasing steadily over recent months and with this there has been a return in confidence within the sector. The increase in prices has been due largely to a recovery in global milk product values, assisted by the favourable exchange rate in the UK. Commodity markets appear to have peaked, but this may not affect domestic prices too much as the full effect of the commodity market increase has yet to filter down to producer level. Table 1 shows Andersons' Friesian Farm model – a notional 100 hectare holding in the Midlands running 150 cows. It has a liquid milk contract.

Table 1: The Friesian Farm model. (Source: Andersons

2009-10 Result

2010-11 Estimated

2011-12 Budget

Milk price

24.8

26.1

26.8

Total output

27.2

28.6

29.1

Variable costs

11.8

11.9

11.3

Overheads

10.5

10.6

10.9

Rent, finance and drawings

5.0

5.0

5.2

Total costs of production

27.3

27.5

27.4

Margin from production

(0.1)

1.1

1.7

SP and ELS

2.6

2.4

2.3

Business margin

2.5

3.5

4.0

The 2009-10 figures are based on actual returns and costs. For this year the business dipped into negative returns from production (both the previous years produced a positive margin from production of around 1.7-1.8 ppl). This was mainly due to the fall in milk prices but was not helped by high fertiliser prices. Overheads also went up for the 2009-10 year as Friesian Farm invested in compliance for nitrate vulnerable zones.

With milk prices steadily rising for 2010-11, Andersons is budgeting an average price for Friesian Farm of 26.1ppl (1.3ppl more than last year). Variable costs are also expected to be slightly higher this year compared to last as extra concentrate, straw and bulk feed is required due to the the summer's drought. The rise in variable costs would have been higher but for an offsetting fall in fertiliser prices.

The net effect is a positive margin from production. Friesian Farm has been in the ELS and is planning to renew its agreement for a further five years. The SP is budgeted to fall due to a stronger pound than last September. This support, when added to the margin from production, produces a reasonably...