Where is the cliff edge?

Published 7 March 16

With dairy commodity prices continuing to fall, and milk production in GB starting to slow down, AHDB takes a look at what history tells us about the number of producers who may leave the industry.

On a national scale, historically there has been a strong correlation between the overall milk price in the country and the change in the number of farm holdings. Over the last 5 years, GB has lost, on average, 3% of farm holdings each year. Even when milk prices averaged more than 32ppl, GB saw a 1.5% drop in farm numbers. This demonstrates, on a national scale, that milk price is a key influencer on exit rates, however, at an individual farm level, other key factors such as good management practices, cost control and succession planning will determine whether a farmer can continue to operate.

GB farm holdings v milk price

The correlation does give us the potential to shed some light on the number of farmers we might expect to leave the industry based on current farm prices.

In December 2015 the GB average farm-gate milk price was 24 ppl. At this level, the historic correlation would imply a 4% drop in farm holdings over the coming year, which would equate to about 500 farmers in the country. However, this average does not tell the whole story as there continues to be a significant range of farm-gate prices dependent on geographical location and milk buyer.

Looking at the AHDB milk price league table, some milk buyers are paying more than 30ppl, while others are down below 19ppl. We also know other milk buyers are paying prices around 17ppl, or even lower. Applying the same historic correlation would imply milk buyers paying 17-19ppl could expect to lose 7-8% of their farmer suppliers this year.

Historically, milk prices appear to have had less impact on the overall number of milking cows in the country. This suggests, in the past, when farms have exited the industry, the cows have generally been taken up by other farmers who are continuing. As a result, overall milk production has been slower to react to milk prices than the farm exit rate.

We know from the AHDB production economics data that milk price is only one element of whether farmers make a profit. The chart below shows latest farm sustainability based on rolling 12-month averages for milk price and key costs. 

GB farm sustainability Mar16

We are in unprecedented times when it comes to the number of farmers who are vulnerable from a profitability perspective. Currently, only 10% of dairy farmers are covering their full costs, and around 50% are not even covering the cash costs of producing milk. While it is important to consider sustainability of the business over the longer term, it is clear that this situation cannot last long before we see a noticeable decrease in the number of farms. How long we remain in the low and how quickly we recover will be the key factors to determine just how many dairy farmers survive the crisis.

AHDB Dairy is currently undertaking its annual Farmer Intentions Survey. The results are expected to shed more light on the likely impact of the current crisis and will be published as soon as they are available. Anyone contacted as part of the survey is encouraged to use the opportunity to feed back their plans.

At an individual farm level, it will be those who manage their costs that will be best placed to survive the crisis and will be able to return to profitability when the markets turn. The challenges dairy farmers face as a consequence of the current milk price and market volatility are of great concern. Producers considering their options for the future, including whether to exit the industry, are encouraged to use the range of tools and resources available via the AHDB Dairy website or by contacting their local Extension Officer.

* Long-term sustainable = output covers full economic costs. Short-term sustainable = output covers cash costs only. Vulnerable = output doesn’t cover cash costs. Output is milk sales and other dairy herd income.