Farm Ireland

Tuesday 25 October 2016

Calm heads and good budgeting will steer us through milk price storm

We have swapped the wild euphoria surrounding the abolition of milk quotas for needless negativity about milk production, writes John Donworth

Published 23/09/2015 | 02:30

'Milk price over the past five years has averaged out at 32c/l - that's a shock to some, but that's the kind of figure you need to start with,' says Teagasc expert John Donworth
'Milk price over the past five years has averaged out at 32c/l - that's a shock to some, but that's the kind of figure you need to start with,' says Teagasc expert John Donworth

Has the dream turned sour, or to put it another way, has the so-called 'white gold' turned to 'fools gold'. I am of course referring to milk prices. The euphoria that was there with quota abolition has certainly disappeared, but are we over-doing the negativity?

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Firstly the hard facts on milk price for 2015. It looks as if cash receipts for milk will be down 8c/l on average over 2014 milk receipts. If you have below average fat and protein figure, then the likelihood is that you will be down 9c/l.

A drop of 8c/l, equates approximately to a drop of €400 per cow. That's €40,000 in a 100-cow herd and that sounds like an awful of money. Profit Monitor data for the top 10pc of suppliers for 2014, shows that the average milk price was 40.3c/l.

The price paid to the average supplier was 1.04c/l lower at 39.26c/l. Taking 8/9c/l off these prices for 2015 means that average prices for 2014 will be around 30c/l.

What money you make after that will depend very much on production costs. And as we know, these have been creeping up each year since 2011. Average production costs last year for spring milk production were 23.2c/l.

This excludes a charge for the farmer's own labour. If the cost structure for 2015 is the same, then net margins will be close to 6 to 7c/l or €300 to €350 per cow for 2015.

That is quite a dip in profitability over 2014 and while one would be slow to say that the business is haemorrhaging money, it certainly is not sustainable long term.

Don't forget bank repayments, tax and living expenses all have to be deducted from this figure. The net figures above do not include the Single Farm Payment.

Where does this leave all the new entrants that came into milk in 2014 and 2015? At least new entrants last year had the benefit of the high milk price, but then again that may have convinced them that the stories about all the 'white gold' were true and they continued to spend accordingly.

The guys, who came in, in 2015, hardly have that problem, but as in any business, looking at one year in isolation gives a deceptive picture. Figures should be looked at over a five year average.

Milk price over the past five years has averaged out at 32c/l. I know that's a shock to some, but that's the kind of figure you need to start with. Farmers who have been milking cows for a long time know plenty about low milk prices and would claim to have seen it all before but what about the rookie dairy farmers? How are they coping?

From chatting to them, these are common responses and thoughts about where they are at right now:

* The single farm payment will bale me out.

*l Cut costs to the bone, the cows must be fed to ensure production, but other than that, do not spend.

* Put all new work on hold.

l Only do the bare essentials, anything that doesn't have to be done, don't do it. For example, that scraper can wait until cash flow recovers, the water troughs, the same.

* There is a steep learning curve taking place.

* I don't see any improvement for the next six to nine months, no great expectations.

* I converted right, did a lot of the work ourselves except milking parlour. This kept the bank borrowings down.

* The tax man will be paid. It's for peace of mind. I mentioned that it is possible to pay the taxman over a 12 month period, but most wanted the bill paid and finished with.

* The main priority would be to invest in lime and lifting soil indexes. It was mentioned to me that there was no money in drystock to correct soil fertility issues.

* Herd health would not be compromised so all vaccinations programmes would be completed.

* I will continue to increase output. The extra heifers will be calving down next spring and since most of the fixed costs are already incurred, this makes sense. It may not be possible to do this in all cases, for example, if the single farm payment is low, cash may be needed for day to day living. Every case will be different.

* Financial budgets were done at 28c/l.

In tackling a cash flow problem I would agree with all or most of the points raised above. Most of the points made will help to minimise the impact on cash flow while at the same time keeping one eye on efficiency. Other new entrants are also looking at other factors that are helping to cushion the impact of the milk price reduction.


Many of our new entrants were hampered by lack of milk quota.

This resulted in cows being dried off early and underfed at various stages of their lactation. This year, that is not a problem and as a result, extra kgs of milk solids will be produced at very little extra cost.

This will help to dilute the fixed costs side of the business and improve the overall profitability.

The weather this year, particularly in the south of the country, has also helped, as grass growing conditions, combined with utilisation, have been excellent with lots of cheap milk produced over the summer months. This is one major difference with 2009. July milk price has averaged out at 29.5c/l on a number of farms and many of you, with better fat and protein per cent, achieved over 30c/l.

The story with new entrants is reasonably positive and they would be happy about the medium to long term outlook. They know milk price next spring could be around 26c/l as protein percentage is usually on the floor in March. However, if milk price is between 26c/l or 34c/l, the same standards of efficiency must apply.

The mantra must be to run a tight ship, do the basics very well and stay away from negative pub talk.

Obviously, a strong single farm payment will be a serious blessing this autumn. Unfortunately, not everyone has one and this is where the real cash flow problems will occur over the next six months. Giving a glib answer to this problem does not do it justice. but a six-month cash flow budget is needed here to take the business to the first decent milk cheque on May 20, 2016.

John Donworth is a Teagasc regional manager based in Limerick

Indo Farming


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