Category: Dairy & Livestock

The summer drought is set to reduce dairy profits by around 3ppl on Andersons’ Friesian Farm model.  This is one of the results seen in the latest figures from Andersons’ Friesian Farm model.

Andersons have been using Friesian Farm to track the fortunes of dairy farming for well over a decade. It is a notional business, that has recently expanded to 200 cows (from 150) to keep track of changing trends within the sector.  It has a year-round calving pattern like 80% of the GB industry, but it is moving towards a more forage-based production system.  The farm comprises 130 hectares (of which 60 hectares are rented on an FBT).  The proprietor provides labour along with one full time worker (plus casual/relief).  The table below shows the farm’s performance for the previous milk year, based on actual returns and costs.  Two budgets are provided for the present 2018/19 year; one before the effects of the weather, and then a current one.  Finally, there is a forecast for 2019/20.

Friesian Farm Model – source The Andersons Centre
ppl           Milk Year –	2017/18	2018/19 (pre-drought)	2018/19 (current)	2019/20
Average Yield	7,850	7,770	7,650	7,700
Milk Price	29.0	28.5	29.1	28.5
Total Output	31.0	30.7	31.3	30.9
Variable Costs	12.8	12.1	15.3	12.3
Overhead Costs	9.3	9.3	9.6	9.9
Rent, Fin. & Drawings	6.4	6.3	6.4	6.3
Cost of Production	28.5	27.7	31.3	28.6
Farming Margin	2.4	3.0	0.0	2.3
Basic Payment	1.9	1.8	1.8	1.8
Business Surplus	4.3	4.8	1.8	4.1

Returns in 2017/18 were good, following losses from production in the previous two years due to the milk price slump.   Things were looking positive for profitability in the current 2018/19 year until the weather took over.  The current budget shows a sharp upturn in costs as a result of low forage stocks and a forecast reduction in yield.  This is only partially offset by better prices resulting in a break-even position before receipt of the Basic Payment.

Long-term forecasts are fraught with danger, but the prospects for 2019/20 currently look reasonable. Costs should (hopefully) return to a more normal basis, but milk prices could well weaken.  Overall the profitability forecast is quite solid – but this assumes an orderly Brexit.

A No-Deal Brexit is also still possible. This would cause chaos in many markets, including milk products, in the period up to and after ‘Brexit Day’ on the 29^th March 2019.  It should be remembered that the UK is a net importer of dairy products, so there might be opportunities for import substitution in the longer-term.  Prices might even rise in a protected domestic market.  But the UK processing sector would have to be re-orientated to adapt to these new demands

Following the publication of the Agriculture Bill (see other articles) we know that the BPS will continue largely unchanged for the 2019 and 2020 years – providing dairy farmers with some stability.   But, with the days of the BPS clearly numbered, producers will need to think about how they will replace this lost margin in their accounts.

DEFRA has released its final estimates of livestock numbers in England as at 1^st June 2018.  The dairy and beef breeding herds have both recorded declines by 0.6% and 1.3% respectively.  Perhaps of more significance is the fall in the number of dairy cattle in the categories aged 2 years or more, or between 1 and two years, which have seen a 6.6% and 7.6% declines respectively; this could have an impact on the number of cattle available for replacements.  After stabilising between 2016 and 2017, the pig breeding herd has seen a 2.2% fall over the year.  However, the number of fattening pigs has increased by 2.2% which would indicate better productivity.

The sheep breeding flock has remained stable at just under 7.4 million head.  Interestingly, the the number of ewes intended for first time breeding has fallen by 6.5%.  With the high prices being obtained for sheep meat earlier in the year, it was reported that a number of ewe lambs initially intended for breeding, actually ended up being slaughtered for meat.  The number of lambs under one year are down by 1.4% compared to 2017, reflecting the difficult lambing conditions.  The UK figures will be available on 11^th October and a fuller analysis will be given then.  For full details see –  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/740136/structure-june18-final-eng-13sep18.pdf

The Scottish Upland Sheep Support Scheme (SUSSS) opened for applications on 1st September and will close on 30th November.  The scheme is one of Scotland’s ‘coupled’ support schemes which it retained when the Basic Payment Scheme was introduced (the other being the Suckler Beef Support Scheme).  The scheme provides additional payments to upland farmers and crofters where 80% or more of their land is classified in BPS Payment Region 3 and they farm less than 200 Ha of land in Payment Region 1.  Payment can be claimed on each homebred ewe hogg kept on the farm or croft from October in the year of the claim until March the following year.  The rate is dependent on the total number of animals claimed each year.  The rate for 2017 was €70.67 per head.

Arla’s Board of Directors has agreed on the proposal to pay out the entire 2018 net profit to its farmers.  This could see a payment in the region of 2-2.2p per litre (2.3-2.5 EURc/kg milk) being made to each member.  The CEO of Arla Foods, Peder Tuborgh, has said that a significant improvement in the balance sheet over the last few years means the company is able to make this extra-ordinary pay out whilst still being able to continue its investment in future growth.  The proposal will be discussed when the Board of Directors meets again next month, with a final decision being made at a meeting held in February 2019 when the annual results are approved.  If approved, the payout will be made in March 2019.  The amount is subject to there being no material changes to the profit level or financial outlook at the year end.  The farmer-owned cooperative usually pays only part of its annual profit out to its farmers.  An exception is being made this year as the Board recognises that it has been a tough year for dairy farmers (as well as the business having the reserves to make a full payment).  

Muller has announced that it will leave the price it pays to its supplying farmers unchanged in October.  Its standard litre price therefor remains at 29.5ppl.  Many in the sector were hopeful that the momentum for further farmgate price rises would be kept up by Muller – not least to offset higher production costs.  However, with wholesale milk market indicators mixed, it appears that the company decided there was, as yet, no compelling case for an increase.

First Milk has announced that its September price will rise by 0.5ppl.  This takes its standard liquid price to 28.5ppl and a manufacturing litre to 29.5ppl.

According to the latest AHDB costings, margins for UK pig producers have almost disappeared.  Production costs for the second quarter of 2018 are estimated to have risen to an average of 150p per kg – the highest level since the start of 2014.  This has largely been driven by an increase in feed costs.  The average pig price for Q2 was 151p per kg, indicating minimal profitability for the average producer.  Since then, the pig price has continued to slip, dropping below 150p in August.  There seems the likelihood that feed prices will also continue to rise, given the uplift in cereals values in the last few months.  All this means the producers are likely to see a period of loss-making during the autumn.

Commodity Markets

The two GDT auctions in August showed that global demand for milk products is currently weak.  The event at the start of the month saw the price index of all products unchanged, and then the sale on the 21st August saw values drop by 3.6%.  There has been a consistent fall in prices throughout the summer.  The index, currently at $3,044 per tonne, is some 16% lower than it was at the end of May.  It seems that weak demand from milk importers, rather than a global surplus of supply, is the main reason for the slide. 

Domestic Prices

Product values closer to home are moving in a different direction to those on the world market.  Although UK milk volumes have not declined greatly (see below) traders appear to wanting to ‘stock up’ in anticipation of potential shortages ahead.  Demand is also strong from the rest of the EU which has experienced similar weather conditions to the UK.  Whilst firming product prices are part of the reason for farmgate milk price increases, there also seems an attempt by buyers to raise prices to offset higher on-farm costs and pre-empt future production declines.  The following selected price increases have been announced from 1st September;

• Muller – increase of 1.5ppl to take its standard litre to 29.5ppl
• Grahams Dairies – up 0.5ppl, also to 29.5ppl
• Meadow Foods – rise of 1ppl
• Dairy Crest – a 0.5ppl ‘extreme weather supplement’ to be reviewed monthly to help Davidstow suppliers cope with the drought conditions
• Arla is keeping its September price unchanged at 30.2ppl for liquid and 31.4ppl for manufacturing

Production and Profitability

UK milk output has remained surprisingly robust given the late spring followed, by the summer drought.  Looking at the daily milk deliveries for the first 18 days of August in Great Britain, the reduction for this year compared to 2017 is only 0.9%.  Looking at the three-year average production for the period, this year’s output is almost exactly the same.  Looking at the UK rather than just GB, milk output in the first half of August was actually higher than both last year and the 3-year average (+0.5% and +1.4% respectively).

For many dairy farmers maintaining output over the last couple of months has only been achieved by supplementary feeding – either silage, or concentrates, or both.  Although the drought has now broken for most, it seems unlikely that autumn grass growth will be sufficient to allow large enough cuts of silage to replenish that already used, and offset the low or non-existent second cuts from earlier in the year.  Therefore, current output may have been ‘purchased’ at the expense of production later in the year.  Producers will be looking at drying cows off earlier and culling harder to stretch limited forage stocks through the winter.  Animals that are being fed on ‘alternative’ forage sources (notably the large tonnages of straw that have been baled this year) may also not yield as well, even where rations are being balanced by the inclusion of higher quantities of (expensive) purchased feeds.  All this points to lower production through the winter.

The drought will inevitably have an affect on the profitability of dairy businesses in 2018/19.  Both through lower output, as discussed above, and higher costs for purchased feed.  We will use our Friesian Farm model to produce some figures showing the likely effects next month.

Company News

The ownership of Britain’s fourth-largest dairy processor has changed hands.  A majority stake in Meadow Foods was sold by its founding families to the US private equity company Paine and Partners in 2016.  This has now been purchased by a UK-based private equity firm, Exponent for an undisclosed sum.  The existing management team at Meadow Foods will stay in place.

The AHDB has updated its Outlook for the UK cattle and sheep meat markets.  The weather conditions have, and remain, particularly challenging for producers.  Since the first 2018 Outlook in April, when producers were having to contend with a long, cold, wet winter, the weather has reversed and we now have it hot and dry with real concern over the availability of winter forage stocks which are in short supply and, in many cases, already being fed.

The AHDB were forecasting a 0.75% contraction in the cattle breeding herd in 2018, but already the level of cow and heifer slaughterings have been higher than anticipated; with the forage shortage, this could see the herd contracting by a larger amount.  With strong demand for manufacturing beef in the first half of the year, cow prices have been high and in the first six months of 2018, 316,000 cows have been slaughtered; 17,000 more than forecast.  Prime cattle slaughterings are forecast to be just under 2 million head, this has not changed since April.  However the timing of supply could differ.  With late turnout after the long winter, supply was expected to be delayed, but now, this could be reversed to preserve feed stocks.  Supply could be concentrated in the third quarter of the season, which may affect prices if processors are unable to balance out supply with lower demand at this time of year.

The table below shows the AHDB’s latest beef and veal forecast.  Exports are forecast to rise this year, as they typically clear any imbalance between supply and demand.  This year domestic demand for beef has been lacking somewhat and if cow slaughterings remain high, exports are expected to rise.  Looking further ahead, supplies into 2019 and 2020 are expected to be lower, due to fewer calf registrations and a contraction of the breeding herd.

Actual & Forecast Supplies of Beef & Veal in the UK – source AHDB
‘000 tonnes	2017	2018 (f)	2019 (f)	2020 (f)
Production	893	903	894	877
Imports	441	459	454	450
Exports	141	158	141	110
Total Consumption	1,194	1,203	1,207	1,216

In the sheep meat market, poor lambing conditions has affected the 2018 lamb crop.  Results from the DEFRA June survey will not be available until the autumn, but the AHDB are forecasting a 1 million head decline in lamb numbers (6%) compared with 2017 levels, with some analysts suggesting this could even be higher.  In turn, the recent hot, dry weather has reduced grass growth making finishing of lambs more difficult and may also have an effect on next year’s lamb crop due to the condition of ewes at tupping time.  For the 2018 calendar year, clean sheep slaughterings are forecast to decline by 3.5% compared with 2017 (see table below) and a slight decline in carcase weights means production from clean sheep is forecast to reduce by 4% year-on-year.  Looking ahead, production is expected to continue to fall.  The bad winter saw ewe mortality rates increase, producers will either keep older ewes on for another year (which in general are likely to be less productive), keep more lambs back for breeding, or contract the flock.

000 head	2016	2017	2018
Q1	2,923	2,920	3,142
Q2	2,722	3,009	2,603
Q3	3,607	3,515	3,432
Q4	3,593	3,844	3,636
Year	12,845	13,288	12,814

Forecasts in italics

The consolidation in the red meat processing sector has continued with the announcement that the Irish business Kepak has taken over the red meat operations of 2 Sisters.  The purchase price has not been disclosed, but includes the McIntosh Donald plant near Aberdeen and four sites operating under the St Merryn brand – Merthyr Tydfil in South Wales and Bodmin, Victoria and Truro in Cornwall.  Together the sites slaughter and process around 250,000 cattle and 1m lambs annually from 13,000 supplying farmers.  The sale leaves 2 Sisters to concentrate on its poultry operations and other interests in prepared foods.  The group has been trying to reduce debt for some time which built up through rapid expansion.  Kepak is a family-owned business, founded in 1981, mainly operating in the Republic of Ireland but with three existing sites in the UK at Preston, Wakefield and Huddersfield.  It has an annual turnover of around €1bn.  Following this deal it is estimated that 60% of the cattle slaughtered in the UK and Ireland are now processed by just three companies – Kepak, Dawn meats ABP. 

The London School of Economics (LSE) has published a report looking at ‘The Impact of Brexit on the UK Dairy Sector’.  The report, commissioned by Arla Foods UK, found that without frictionless trade and unfettered access to key skilled workers after Brexit, there will be delays at the borders, increased further by the shortage of vets, lorry drivers and farm workers.  The report highlights that, at 16%, the UK has the second largest dairy trade deficit in the world and it relies heavily on imports, of which 98% come from the EU.  In the long term, such issues may present opportunities for domestic dairy production, but to make the UK more self-sufficient will take time and investment in dairy herds and processing facilities.  For consumers, the problems identified, at least in the short term, could mean a lack of availability of dairy products, particularly specialty cheeses and the possibility of significant price rises as supply chain costs increase.  The full report can be found at http://www.lse.ac.uk/business-and-consultancy/consulting/assets/documents/the-impact-of-brexit-on-the-uk-dairy-sector.pdf