Counting the costs of the milk price slump
The average dairy farmer will take a €30,000 hit on income at current milk prices, writes
Q AHow much pain are Irish Dairy farmers experiencing with current milk prices?
The average milk price paid for May 2016 to Irish dairy farmers was 24.7 cent per litre including VAT. This is the price paid for actual manufacturing milk supplied in the Republic of Ireland as published by the CSO. The seven year average milk price from 2009-2015 is 33.68 cent per litre incl VAT, therefore the current price is almost 9 cent/litre below this average.
If this differential remains for the calendar year of 2016, which looks very likely with over half the year completed, it will amount to a reduction in income in the region of €31,000 to the average dairy farmer with 67 cows selling 5,158 litres of milk per cow.
Total milk deliveries in Ireland to the end of May are 11.12pc ahead of last year. If this rate is maintained we will deliver 7.099bn litres of milk in 2016 and the milk price drop is equivalent to taking €630m out of dairy farmers’ pockets.
This appears to be a very severe drop in income or is it?
To look deeper, we must first deduct the cost of producing this milk and see what profit, if any, remains. In business, it is said that turnover is vanity and profit is sanity. We need to calculate what profit can be made on the average farm at 24.7 cent per litre, if any.
So what is the cost of producing the litre of milk? This is where the confusion begins when the profitability of milk production is discussed. What costs are included and what costs are not included? Terms like variable costs, fixed costs, common costs and total costs are confusing to farmers.
There are valid reasons for all the different terms, but perhaps a focus on profit or a break-even milk price would be simpler. The confusion can be simplified if one understands the difference between benchmarking and budgeting.
Benchmarking
Benchmarking is taking your farm accounts and allocating the income, expenditure and profit to the different enterprises on your farm so that you can compare profitability with other similar farmers and their farm enterprises.
This is typically done for Irish dairy farms on Teagasc eProfit Monitor (ePM) and it is a great resource for comparing profits between dairy farmers.
Approximately 1,500 or eight per cent of dairy farmers complete ePM an- nually. The argument is justifiably made that only profitfocused farmers complete ePM, therefore is not representative of the average dairy farmer’s profits but, instead, that of an above average farmer.
The figures are mostly inputted by farmers themselves, therefore they are not reconciled or audited as in a set of financial accounts so their accuracy is unknown.
However, it is still the best measure available to show the profit of producing a litre of milk from a dairy enterprise and benchmarking against similar dairy farmers.
The middle table on the right shows the average profit per litre for spring dairy farmers from Teagasc eProfit Monitor for the seven year period from 2009-2015. The Net Profit is 12.35 cent per litre at a milk price of 33.32 cent per litre.
When extrapolated out for the average 67 cow dairy farmer selling 5,158 litres per cow or 335,586 litres per annum, the net profit from the dairy enterprise is calculated at €42,680, which appears a reasonable annual salary for the dairy farmer’s time.
If we apply the 2016 May price of 24.7 cent per litre, it reduces this profit by €29.789 to €12,890 — a paltry sum for the 365 day-a-year job.
The big question is what else has the dairy farmer to pay out of this net profit as calculated by Teagasc ePM? This is where budgeting comes into the equation.
Budgeting
Budgeting is simply adding all income and deducting all expenditure to see if there is surplus or deficit of cash at the end of the year. When calculating the net profit from a litre of milk, the Teagasc ePM does not take account of personal living expenses (farmers’ salary), taxation, repayment of bank debt (capital), capital expenditure on new machinery, buildings, land etc, nor income from subsidies and premia.
A dairy farmer can calculate a break-even milk price needed to ensure everybody is paid in a 12 month period when all these items are counted in to see if there is a surplus or deficit of cash. This is a very easy measure for a farmer to understand, however, it is individual to each dairy farmer and therefore not a figure to compare between farmers.
The bottom table on the right shows a source and application of funds for the 67 cow dairy farmer in the earlier example.
The average net profit as calculated from ePM 20092015 average with a milk price of 33.32 cent per litre shows a small surplus of funds of €472, therefore this dairy farmer’s break-even milk price is 33.18 cent per litre.
A milk price of 24.7 cent per litre in 2016 will cause this dairy farmer to have deficit of funds of €26,339.
Now this is serious pain and a great source of worry and anxiety for many dairy farmers today. They need help from their consultants/advisers, bankers, merchants and milk purchasers at this time to enable them to plan a path through the low milk price period for their business.
Mike Brady is an agricultural consultant based in Cork. Email: mike@bradygroup.ie.