Dairy farmers need to take swift action if they are to successfully navigate the challenges ahead which will affect financial returns in the next few years.

While milk prices have remained buoyant over the past year, the lack of available forage caused by the late spring and the summer drought, increase in concentrate costs and a fast approaching Brexit, point to less positive year in 2019 and 2020, according to Promar International.

Add to that the expected changes to support payment schemes, which currently equate to a total of 1.91ppl for the average farm, and milk producers have a lot of work to do to improve levels of efficiency.

Announcing the latest results from Promar's Farm Business Accounts (FBA) service, national consultancy manager Nigel Davies warned that although the year to March 2018 showed improved profits, producers need to be aware of new challenges facing the industry

“The results to March 2018 show a profit after depreciation of £96,318 – significantly up from the £53,130 recorded to March 2017 and 30% above the average figure achieved in the last five years – which was only surpassed by the 2013-14 results."

He added that while total variable and overhead costs increased by 6.9% and 5.6% respectively, critically, as far as driving profits were concerned, the average producer in the sample increased total milk output by 74,009 litres, by keeping four more cows and producing an extra 188 litres per cow, without increasing feed usage.

“This, in conjunction with an average milk price increase of 2.86p per litre diluted the impact of cost increases, resulting in profit after depreciation per litre rising from 3.09ppl to 5.38ppl.”

Of greater significance however, is the fact that while average profits were higher, the average farm made a cash deficit of £85,152 before any new capital introductions. Consequently, total liabilities rose by around £18,000 to £563,310.

Furthermore, commenting on the projected profit for the year ending March 2019, Mr Davies warned that such figures are likely to lower than the five year averages and less than half the average profit to March 2018 as a result of the challenging weather in 2018 and a number of deteriorating market factors.

“While we have seen an essentially level milk price across the year so far and a continued increase in herd size and yield per cow, rises in feed costs due to increased usage and higher prices coupled with increased overheads will impact materially on profit and the balance sheet.

“We anticipate profits will remain under greater pressure in the year to March 2020 and believe farmers need to start planning now to minimise the impact of several major pinch points."

He said the first pinch point is the impact of price changes. Feed prices are currently £24/t (11%) higher and there are clear signals that milk prices will come under pressure. Rising oil prices will push many overheads higher too.

In addition, the higher profit achieved in 2018 will work through to a higher tax bill for many which will fall due this year placing a further cash demand on businesses.

“Farmers need to understand the impact of these factors on their borrowings, particularly looking ahead to spring 2019. With all banks now looking more sharply at full farm viability, steps should be taken to put adequate cash facilities in place in good time.”

The second potential pinch point is forage as he said it make take until late 2020 before adequate stocks are rebuilt to comfortable levels.

There is also the global political uncertainty to consider which Mr Davies said is already impacting on dairy commodity prices and the industry still has to learn the impact of Brexit in terms of tariffs and exchange rates. To this must be added the likely changes to support payment schemes which currently equate to a total of 1.91ppl for the average farm in this sample. Fully offsetting support payment changes will require increased efficiencies across the business.

Finally 'dairying’ related inflation will not slow in the coming years, with added pressure in particular on wages, feed costs and most overheads.

For a number of producers, there are fewer replacements in the pipeline and the poor spring and challenging summer will have adversely impacted herd reproductive performance and hence future milk output meaning the dilution effect on costs of producing more milk will be reduced.

Instead, Mr Davies urged dairy farmers to continue driving technical efficiency and fully embrace the use of financial management information – managing people and animals are the two key areas for attention.

He said it is in these areas where a wide disparity in the quality of calf management, youngstock management, milk quality and herd reproductive performance remain and it is these areas which impact hugely on profitability.

"People on farms are key. Effective people management is not just about costs, although the top 25% in our sample achieved wage costs 23% lower average. Staff management is an overlooked skill and must embrace training and development, delegation, motivation and communication of everyone in the team. With current labour shortages, being a good people manager could be the difference between having someone to milk your cows or not.

“And don’t forget the external members of the team. The better producers work more closely with their vets, consultants, contractors, accountants etc than the average and there is room for most producers to improve in this area.

“Implementing changes and improvement can take time, but they happen most successfully when businesses have the best possible financial information to hand and are prepared to regularly step back from their businesses and take an alternative view," concluded Mr Davies.