The past 12 months have seen the UK dairy industry go from boom to bust. Heading into 2024, how do we rationalise where UK dairy businesses are, ask Andersons authors Mike Houghton and Oliver Hall.

In autumn 2023 milk prices were 10-20p/litre lower than the same month in 2022. It would be easy just to declare the cows are for sale and be done with it, but take a look at a few things before calling the auctioneer.

The best year for profitability on UK dairy farms should have been in 2022 or for a March year-end 2023, even allowing for drought and poor forage production across the UK in summer 2022.

Average milk prices topped 50p/litre and rolling milk prices peaked in April 2023 at 46.75p/litre. Pre-rent and finance profits hit 20p/litre in the best businesses, effectively two years’ profits in one.

Milk price prospects

So where could the all-important rolling milk price go from here? Not many people like to put their name to a number when the New Zealand-based Global Dairy Trade online auction is trying to find the bottom of the world market price for milk.

However, the New Zealand milk co-operative Fonterra has to stick its neck out and has produced a forecast for the 2023/24 season (August-July).

A 13-year analysis of how the Fonterra payout compared with the Defra average milk price, fully adjusted for exchange rates and milk solid percentages, identifies some interesting points.

Average New Zealand payments have been at 91% of the UK price over that time, which equates to a difference of 2.7p/litre. In only four years of the previous 13 has the Fonterra producer been paid better than the average UK farmer.

Fonterra’s opening forecast for 2023/24 equated to a UK milk price of 25.4p/litre, or 28-33p/litre when basing the expected adjustments on historical actuals.

UK prices are more likely to be in a higher range during periods of lower global prices because the larger domestic liquid market provides some insulation to low world prices.

By mid-October Fonterra had revised the payout to the equivalent of 27.3p/litre (or 30-35p/litre).

Collections were forecast to edge below last season in the early NZ spring and other key exporting countries were also expected to experience below-average milk production growth.

This now looks a bit cautious, as good soil moisture levels and the absence of early season drought are maintaining production.

Fonterra was cautious about stronger demand from China and other customers, noting they were reluctant to commit to buying product forward at higher prices.

Bringing this back to the UK market, the Defra average milk price was 36.22p/litre for the month of August and the yearly rolling price was 43.76p/litre. This was down 3p/litre from its peak during the year to April 2023.

Even with the slightly more buoyant market and mood shift in the autumn of 2023, a Defra average milk price above 36p/litre by the back end of 2024 seems unlikely without some drastic changes in the global milk market outlook.

Assuming 12.4bn litres of production in Great Britain, a 10p/litre drop in the average milk price will reduce overall dairy farm income by £1.24bn.

What can be done?

Milk prices averaged 36p/litre relatively recently, so to start, we can compare costs of production then and now, and identify what has physically changed in the business in that time.

Our analysis identifies areas where costs have increased above inflation alone during the past five years, namely:

• Breeding, AI and recording
• Feed
• Parlour consumables
•  Machinery repairs
• Land and property repairs

Hard questions need to be asked around generating the right number of heifers and the use of sexed semen. Has any system-creep happened on your farm, ignoring the drought years?

It was easy to justify spend to chase production at very high milk prices, but consider whether it is time to hone dairying systems and ask whether marginal litres are being produced or marginal cows milked, both of which on average raise the cost of production.

It was easy for suppliers to pass on price rises to dairy farmers when milk prices were rising.

Now is the time to get the invoice out from three years ago and compare it to the current one and politely ask the supplier to justify why this product or service costs so much more when you are now getting the same price for your milk.

Rent and interest target

Finally, the period of cheap money looks to be over, and targets of spending no more than 15% of income on rent and interest should be heeded.

At a milk price of 36p/litre plus 3p/litre for culls, calves and other revenue, rent and interest should not exceed 6p/litre. If you are over this threshold, a restructure of the balance sheet may be needed.