How much will rising costs eat into improved milk prices?

How much will rising costs eat into improved milk prices?

Business Management
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Climbing input costs may be shrinking the profit margin many dairy farmers hoped to again see this season.

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SQUEEZE: Rising input costs could wipe out gains from higher milk prices this season.

SQUEEZE: Rising input costs could wipe out gains from higher milk prices this season.

The 2020/21 season proved profitable across most dairy regions in Australia.

In Victoria, dairy farmers reported the most substantial returns since 2013/14.

This was primarily due to relatively strong farmgate milk prices, favourable seasonal conditions and lower input costs.

In 2021/22 farmgate milk prices appear to be around 7 per cent higher on average compared with last year.

In several dairy regions, seasonal conditions have been reasonably kind so far, albeit in others it has been too wet.

This, combined with solid cattle prices, is likely to see considerable income on many dairy farms.

However, climbing input costs may be shrinking the profit margin many hoped to again see this season.

The input costs that are likely to have the most significant influence on margins are grain and fertiliser prices.

At the time of writing, nitrogen-based fertilisers had roughly doubled in price since the start of 2021, while grain prices increased around $66 per tonne since last season, despite significant local supply.

There is also no indication that these inputs prices have finished their upwards trajectory.

READ MORE: Dairy outlook positive but production constrained

Other costs such as chemicals, fuel and labour have also increased, however, they alone are not likely to significantly affect the profitability of many farms this year.

Using last year's average of all farms involved in the DFMP in Victoria, adjustments have been made to costs and income settings, to assess the net impact on profitability in 2021/22.

This exercise assumes that seasonal conditions, cow numbers and milk production remain constant and the way the farm is managed stays the same.

For example, the level of concentrate feeding and tonnes of fertiliser applied are unchanged.

In reality, most farm managers will adjust input usage to suit changing conditions.

The significant changes made to the budget for 2021/22 are:

  • Milk price increased by 7pc ($6.87/kilogram milk solids to $7.35/kg MS).
  • Livestock sales income increased by 5pc.
  • Electricity price increased by 5pc.
  • Fertiliser costs increased by 90pc.
  • Purchased water prices decreased by 40pc.
  • Purchased fodder and fodder harvesting costs have not been changed.
  • Purchased concentrates increased by $66 per tonne of dry matter.
  • Pasture improvement costs increased by $5000 due to higher chemical costs.
  • Fuel prices increased by 20 cents/litre.
  • All overhead costs, including labour but excluding repairs and maintenance, have been increased by 5pc.

The results show that income has increased by $107,501 (6.7pc) while costs have increased by $142,028 (10pc) or a decrease in net cashflow of $34,527 (19pc).

All things being equal, except for changes to key input and output prices, returns for the average farm are expected to ease in 2021/22 as a result of higher input costs.

Nevertheless, a robust profit is still likely.

On top of this, most dairy regions will not experience the same seasonal conditions and many will tinker with their management to adapt to changes in circumstances.

Tinkering can become a double-edged sword.

In a year where key inputs costs are high, the response most managers will consider is to reduce input usage.

In 2021/22 the two inputs many farmers will consider cutting are concentrates and fertiliser.

This will be carefully balanced against not wanting to diminish these inputs to the extent that the output value is reduced by more than the value of the inputs.

READ MORE: Concentrate feeder accuracy should be checked regularly on dairy farms

For example, if taking out a kilogram of concentrate saves $0.45 but milk production decreases by 0.075kg MS, which would be sold for $7/kg MS, this would result in income being reduced by $0.52 to save $0.45 or lowering profit by $0.07.

For most farms, it will involve some experimentation to determine how much (if any) concentrate can be taken out of the diet without altering incomes by more than the cost saved.

This will likely be different for each farm, and for some, the optimal result will reduce production - weighing on industry growth even during an otherwise favourable season.

Similar considerations apply to fertiliser use, which will be a focal point for managers balancing rising costs against incomes.

Key take-home messages

  • Generally higher farmgate milk and cattle prices will help to absorb a significant increase in critical inputs this season.
  • As long as seasonal conditions remain favourable, returns on most dairy farms should be similar to 2020/21.
  • With higher input and output prices, farmers will be giving careful consideration to input levels in trying to maximise returns.
  • This is a complex balance as care needs to be given so that cutting inputs does not reduce income by more than the costs saved.
  • For some farmers, the most profitable settings will mean lower milk production.
  • This is likely to weigh on overall growth prospects this season.

This article was featured in the Dairy Australia Dairy Situation and Outlook report, December 2021. The full report is available at www.dairyaustralia.com.au/sando.

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