Milk Money

A look at the profitability and prospects for a typical UK dairy business.

The table below shows Andersons' 'Friesian Farm' model. Milk price increases look like restoring profitability for a typical dairy business in the current year. However cost rises are soaking up a large part of higher revenue, so overall profitability remains marginal. The prospects for 2012/13 look better, but this relies on the market delivering further price increases, and costs abating.

Friesian Farm produces 1.125 million litres from 150 cows and their replacements. It has year-round calving and is on liquid contract. It is 100ha (of which 40ha are rented on a farm business tenancy). The proprietor provides labour along with one full time worker (plus casual/relief). The table shows the farm's performance for the previous two milk years, based on actual returns and costs. An estimate is given for the current 2011/12 year, and a forecast budget for 2012/13.

There have been significant milk price rises over the last year. The Andersons' model also assumes that further increases should be forthcoming during the remainder of the year. This will partly be driven by the whole UK milk market belatedly catching up with booming global commodity prices. It is also envisaged that payments under standard liquid milk contracts (which Friesian Farm is on) will increase to reinstate the customary premium above milk going for commodity uses. Thanks to these milk price rises, the average price for the current production year is estimated to be almost three pence per litre higher. Unfortunately, this will not translate fully into higher profits.

Variable costs increased compared to last year, largely driven by rises in feed and fertiliser prices. Often overlooked is inflation of 'other' variable costs, such as straw, vets and medication, seeds and dairy consumables. In terms of overheads, fuel and electricity contribute to the cost increases. The farm has also had to replace its main...