Profitability in dairy farming

August 14th, 2015 12:05 PM

By Southern Star Team

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THE change in the milk production landscape and abolition of quotas are for the future, but let’s look back firstly at the year in question when it comes to profitability and tax liabilities.

2014 was quite a good year from a dairy farming perspective. Milk prices were good and the weather was excellent right through from late winter into the spring and summer. This helped to increase profits by about 25 to 30% depending on your farm system. Milk prices were as high as 42 cents per litre with the cost of production holding at about 50% of milk output. This depended on how efficient costs were kept, such as labour costs, land leasing, animal health, etc. However capital repayments can be a huge drain on overall set-up.

Price per litre has dropped in a 12-month period by as much as 7 cent. This can be equivalent to the total cost of feed, fertiliser and animal health on the low-cost production dairy farms. Or, putting it another way, it could knock 40% off the profit margin for these farmers.

The higher-cost production operators are experiencing cash flow problems already and it is only July. Action will need to be taken immediately to alleviate problems with feed merchants and financial institutions.

Cash flow budgets will have to be put in place now and adhered to, in order to avoid nasty letters requesting payback. More and more dairy farmers are opting for co-op or merchant credit at present.

While it is understandable from their point of view, the repayment schedule can be uncertain and they are never sure what milk payment they are going to receive from month to month as this is unsecured debt. The farmers see the co-op or merchant credit as far easier to obtain as against the red tape to be followed by the financial institutions.

Also the cost of bank credit can be expensive for small amounts of borrowing where legal costs are incurred in the form of your own solicitor as well as the bank’s legal need. The level of merchant or co-op credit is still running high in some cases as a result of poor profitability in the years 2009 and 2012.

Profit margins

There was a big range in profit margins in 2014. Milk prices varied by 3 to 4 cent per litre dependent on many factors. Milk yield per cow and per hectare vary greatly. Net profits per hectare range between €3,270 to as low as €1,000.

Kgs of milk solids and efficiency have a major role to play here. Production costs per litre varied, but not as much as one would imagine. Cost at the top end of the scale amounted to 25 cents per litre to as low as 15 cents per litre, with the average being 19 cent per litre.

Large herd numbers did not necessarily achieve the best results, the message being expand with caution. We have seen that in the years 2009 and 2012, due to a continuation of poor weather and lower milk price, the large-scale operators were hit hardest. Total costs have varied between 19 cent and 27 cent per litre. The present milk price leaves a very tight margin for the higher-cost producer.

Perhaps it is a sign of the times when cows are being culled now to alleviate cash flow problems. This might not be a bad thing when cow prices are holding firm and the net margin is very low, based on the current milk price. I have very seldom seen this before in the height of the milk production season.

We will expand in a follow-up article in the future on this theme and expanding with caution on all those variables above mentioned.


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