Most milk producers enjoyed an improved financial year to March 31, 2020, as a result of better weather, increased forage production combined with reduced concentrate and variable costs.

That was the good news story from Promar International’s Farm Business Accounts Service for 2020, based on figures from 465 farms in the UK – 9% of which were based in Scotland.

Speaking at a Promar International webinar, managing director, Neil Adams, said the results give valuable insight into farm performance and opportunities for improvement.

“The year to March 31, 2020 was a better financial year for the dairy sector. Milk and feed prices were basically static. However, thanks to better weather and resultant increased forage production, feed use decreased with the average farm achieving a reasonable efficiency gain, producing almost 200 more litres but feeding 50kg less concentrates.

“Overall, the average herd increased output by 1.9%, but with a 7% reduction in feed costs and a 2.9% reduction in other variable costs. Overheads, notably power, machinery and labour, increased by 4% resulting in an increase in profit per cow of £33.

Nevertheless, he stressed the huge difference between the top and bottom 25% of farms ranked on operating profit, is a massive £640 additional profit per cow and is not just a factor of scale of operation.

“While the top 25% of farms produce around 400 litres per cow more, and have 6% higher output per cow, the striking point is that they are more efficient at everything they do,” he said.

Their figures show the top 25% of farms’ feed rate per litre is 15% lower at 0.33kg/l, yet they still produce 9280 litres/cow. Furthermore, their other variable costs are 19% lower while overheads are 20% lower than average.

And, higher milk prices are not the answer to increased profit margins, with the top 25% of producers receiving an average of 30.76p compared to the bottom 25% at 30.17p per litre.

Instead, Mr Adams said, the bottom end of producers tend to spend more on purchased feed, forages, labour and machinery.

He added that one farmer on his books has cows producing 9000litres per year at a cost of 20p per litre, but he also has producers with herds giving anything from 5000-11,000litres at 25p per litre and some costing 35p per litre.

“If you have a high yielding herd, it is better to try and reduce your costs of production, whereas if you have a low yielding unit, you’d be better increasing herd numbers, to improve margins,” he said.

“Higher yields on their own are not the panacea for higher profitability. They must be produced at a sensible feed rate and with good understanding of all costs.”

Despite the improved financial year for many, Mr Adams also insisted a lot of dairy farmers are not making money and face a challenging time with the uncertainty over any Brexit deal, redefinition of subsidy schemes and global commodity uncertainty as a result of market fluctuations.

Hence, he advised all producers to understand where their system is now, where they want it to be and how they can manage the transformation.

“I would encourage any dairy businesses to set out to deliver a retained operating profit of 19% of total profit. For a high production system, key performance indicators could be a margin over purchased feeds per cow of at least £2300, labour and machinery costs not exceeding 11.2ppl and a retained profit of at least £600/cow.

“For a low-cost system, good might look like a margin in excess of £1900, a replacement rate under 23%, labour, power and machinery below 10ppl and a profit greater than £500/cow.

“The key for any business is to understand their current financial and physical performance based on comprehensive management accounts, and to have a clear plan in order to remain competitive. Sustainable businesses need to challenge the status quo, identify a clear strategy and focus on,” he concluded.