Dairy costs of production to increase to beyond 40ppl
Recent analysis by Kite Consulting confirms that dairy farm costs of production will continue to rise considerably in the coming months, with break-even milk prices* likely to exceed 40ppl later this year. These increases will come from increased feed, fuel and fertiliser costs, as well as higher labour costs due to strong wage inflation. The analysis also suggests that milk supply will come under significant pressure if milk buyers don’t maintain price increases ahead of the inflationary curve, as farmers are losing confidence.
The scale of cost increases over a two-year period is considerable, with a 37% increase in variable costs being driven primarily by increased forage variable costs (driven by increased fertiliser prices) and by increases in feed, bedding and vet and med. Over the same period, overheads have risen by 22% because of strong wage inflation, increased machinery costs and the impact of higher materials costs in property repairs. This means that from 2021 to early 2023 total costs of production will have risen by 29% and, because of falling subsidy payments, the breakeven milk price will have risen by 36%.
Commenting on the analysis, John Allen, managing partner, Kite Consulting, said: “The dairy industry was already feeling the impact of cost inflation through 2021, but the conflict in Ukraine now transforms an environment of modest cost inflation to one of exponential cost increases, as well as introducing considerable volatility.
“Our analysis suggests that as well as cost increases, productivity will fall by a further 1.3 per cent, and that’s from a base that is already below 2021 production. For many farms, cashflow will be negative in the months ahead as costs are increasing faster than milk prices. Unless milk buyers ensure that milk price rises stay ahead of the inflation curve and react to volatility, the uncertainty will continue to damage farmer confidence. There is already some panic in UK dairy farming as we see costs spiral out of control, particularly for those who have not used risk management measures to delay cost rises, and farmers need to be reassured by prompt milk price increases to avoid making decisions that could cause long-term damage to their farming businesses and to national milk supply.”
* Break-Even Milk Price = Total Cost of Production minus stock sales, other dairy income, valuation change and subsidy incomes. This provides a retained profit break-even figure. A cash breakeven would require adjustments to add loan capital payments and remove depreciation/valuation change.
