UK dairy production costs could soar to more than 40ppl
The break-even milk price is the total cost of production minus stock sales, other dairy income, valuation change and subsidy incomes. This provides a retained profit break-even figure. A cash breakeven would require adjustments to add loan capital payments and remove depreciation/valuation change.
The consulting company said these increases will come from increased feed, fuel and fertilizer costs, as well as higher labor costs due to strong wage inflation. The analysis also suggests milk supply will come under significant pressure if milk buyers don’t maintain price increases ahead of the inflationary curve, as farmers are losing confidence.
The scale of cost increases over a two-year period is considerable, Kite Consulting said, with a 37% increase in variable costs being driven primarily by increased forage variable costs (driven by increased fertilizer prices) and by increases in feed, bedding and vet and med.
Over the same period, overheads have risen by 22% because of wage inflation, increased machinery costs and the impact of higher materials costs in property repairs. This means from 2021 to early 2023 total costs of production will have risen by 29% and, because of falling subsidy payments, the breakeven milk price will have risen by 36%.
John Allen, managing partner at Kite Consulting, said, “The dairy industry was already feeling the impact of cost inflation through 2021, but the conflict in Ukraine now transforms an environment of modest cost inflation to one of exponential cost increases, as well as introducing considerable volatility.
“Our analysis suggests that as well as cost increases, productivity will fall by a further 1.3%, and that’s from a base that is already below 2021 production. For many farms, cashflow will be negative in the months ahead as costs are increasing faster than milk prices. Unless milk buyers ensure that milk price rises stay ahead of the inflation curve and react to volatility, the uncertainty will continue to damage farmer confidence.
“There is already some panic in UK dairy farming as we see costs spiral out of control, particularly for those who have not used risk management measures to delay cost rises, and farmers need to be reassured by prompt milk price increases to avoid making decisions that could cause long-term damage to their farming businesses and to national milk supply.”
