Dairy expansion is no panacea, warns Old Mill
31 August 2017
The dairy industry is in a far better place than this time last year, but farmers should beware increasing production without careful forethought, according to farm accountant Old Mill.
“The past three years have seen some of the greatest turbulence in milk prices, driven by the precarious state of agricultural commodities and the delicate balance between supply and demand,” says chairman of the board Mike Butler. A global drop in milk production and a weakening of Sterling post Brexit boosted UK prices from 19.95p/litre in June 2016 to an average of 26.75p/litre one year on. However, that could encourage farmers to ramp up milk production, potentially triggering yet another downward spiral.
“The key is not to automatically drive for larger economies of scale,” warns Mr Butler. “Expansion may be right for some businesses, but it’s not the universal answer. It’s important to find the right level of production for your circumstances, and then take steps to make that system as sustainable as possible in the event of another drop in milk price. If every dairy farmer expands, oversupply will result in only one outcome – a return to low milk prices.”
So how can farmers go about finding that sweet spot? According to Mr Butler, the first step is to have a frank discussion with all those involved in the business, and draw up a succession plan. “What do the younger generation want to do, and how will the older generation be able to provide for themselves in retirement? Planning ahead will enable you to identify personal and financial goals, and then you can design the business to meet them.”
After such a prolonged downturn in the dairy industry it will take most producers at least two or three years to rebuild their balance sheets, says Mr Butler. “Now is a good time to take stock, and create a clear plan for the future, with a business that is able to withstand the fluctuations of currency and political uncertainty ahead.”
Part of that planning will be assessing the strength of the business right now, and the availability of capital to restructure should that be required, he explains. “It’s important to take a realistic look at the farm budget and how different scenarios will affect it in the coming years. Only then can you look ahead and plan with real confidence for the future.”
Old Mill be releasing its annual Dairy Income Survey at the Dairy Show on 4 October.