A RURAL accountants has warned that dairy farm profits are set to drop 'rapidly' in the coming year - and businesses will need to adapt to manage costs and cash flow during the winter. 

According to a report by Old Mill and the Farm Consultancy Group (FCG), higher yeilding, year-round calving herds made the most of last year's high milk prices by investing in feed to maximise production. However, this means they need to act equally to reduce costs as circumstances have revered and milk prices have plummeted. 

The report, which was unveiled at the Dairy Show, is based on dairy clients with a 31 March year-end. It shows that average profits increased by 146% between 2021/22 and 2022/23, to £914/cow. This was due to a 56% increase in milk income per cow (given both higher yields and milk prices) and increased non-milk income (like calf and heifer sales).

Combined, that more than offset the steeply higher input costs, which rose from £2,300/cow to £3,182/cow. The figures don’t include rent, interest, drawings, tax, capital expenditure or basic payments, and include a labour charge of £30,000 per full-time partner or director.

Dan Heal, rural accountant at Old Mill, said that looking back over the last five years, the year to March 31 2023 is the only one where milk income alone has 'comfortably covered the cost of production'. 

“This is a clear signal of supply and demand being out of balance," he said.

"But summer 2023 has taken a very different path, with milk prices falling quickly, and some costs remaining stubbornly high."

Annabel Hole, rural administrator at FCG, says producers should be aware of larger tax bills in January 2024, when some of the lowest milk prices of the past 18 months will be paid. 

“Though costs are falling, the cost base is still 30% higher than two years ago due to electricity costs doubling, feed still being 40% higher and most fertiliser having been bought forward at double current market prices," she added. 

“With interest rates 5%+ higher, basic payments declining, and extra investment required to comply with water and environmental regulations, there is a cash squeeze looming. 

“Mistakes in the next 12 months will be punished severely, financially.”

The gap between the top and bottom 10% of herds continues to widen, with the former making £1,668/cow profit versus the latter at £187/cow.

Mr Heal said: “Larger, higher yielding herds were more suited to the market conditions of 2022/23. These systems typically perform well in times of high prices, although have high cost bases for when prices fall.

"The type of system is irrelevant, as there is a mix of both in top and bottom 10% of herds. Farming efficiently relies on the farmer and is not based on the system which is run. We’re confident that producers who manage their businesses effectively will be able to weather the more difficult periods as well as take advantage in the good times.”

Old Mill accountants and finanacial planners have four West Country locations - Yeovil, Exeter, Wells and Melksham.