A NEW survey shows dairy farmers lost an average of 3.49p/litre in 2016-17, following the prolonged spell of disastrously low milk prices.

However, accountants Old Mill say incomes will increase markedly in 2017-18 amid soaring dairy demand and values.

Based on Old Mill and Farm Consultancy Group (FCG) clients with a March year-end, dairy farmers had an average cost of production of 29.20p/litre in 2016-17 – well above the average milk price of 25.71p/litre.

When taking non-milk income, such as calf and cow sales, into account – but not including rent, finance or the single payment – the average farm profit was 0.28p/litre.

Speaking at the Dairy Show on Wednesday, Mike Butler, Old Mill chairman, said that was well below their forecast profit of 1.08p/litre this time last year, and it was purely down to the extended period of low milk prices.

“Farmers cut expenditure as far as possible, in areas like property repairs and variable costs, but there was only so much they could do to offset the catastrophic milk price,” he said.

However, the outlook is now considerably brighter, with milk prices predicted to average 29p/litre in 2017-18 and non-milk income pegged at 3.3p/litre.

Phil Cooper, FCG partner, said: “Efficient businesses should be able to generate a profit of around 3p/litre, with the more efficient operators sitting above 5p/litre.”

He said costs of production are set to remain virtually unchanged at 29.19p/litre – including imputed costs of £30,000 for unpaid labour – with feed and fertiliser prices dropping back while other areas increase.

“We would expect to see increases in vet and medicine costs as more businesses start vaccinating stock – although some of this should be offset by a reduction in dry cow therapy as milk buyers encourage selective dry cow treatments,” said Mr Cooper.

“Silage costs are expected to increase due to the good grass growing year and depreciation could rise slightly as renewed confidence leads to increased investment.”

With current predictions showing a shortage of milk going into the winter, there are plenty of reasons to be optimistic. “That said, it is important to continue to focus on making your business more efficient.”

Analysis of the top and bottom ten per cent of producers shows that feed, labour and machinery costs are the main areas to focus on.

Perhaps surprisingly, the bottom ten per cent received 0.77p/litre more for their milk price than the top ten per cent, at 25.76p/litre in 2016-17.

Although their herd size was smaller, their yield per cow was higher – but their expenditure on purchased feed was more than double that of the top ten per cent, at 8.73p/litre.

Overall, the top ten per cent managed a comparable farm profit of 8.94p/litre last year, against a bottom ten per cents loss of 13.06p/litre.

Mr Butler was encouraged that the top producers continued making a profit at times of low milk prices.

“And there is a much brighter outlook ahead, with the average two million litre producer likely to see profits rise from £5,600 to £62,200 in 2017-18,” he said.

“However, it will take months, if not years of trading at this level to repair depleted balance sheets – and we would like to see profits rise further, not least through greater efficiency gains.

“Farmers need to plan carefully to retain as much profit in the business, with one eye to investing for the future in the most tax-efficient manner possible.”

He warned producers not to simply ramp up production. “There is no perfect solution, but the more producers who understand that over-production will destroy their market, the greater the chance this precious industry has of maintaining a sensible level of profitability.”