Milk price volatility a key driver in Farm Business Income

07 August 2017

A new piece of joint research from Savills and the Duchy and Bicton College’s Rural Business School shows that milk price volatility has been the main driver in the considerable fluctuations in Farm Business Income* (FBI) over the six trading years 2010/11 to 2015/16.  Although dairy FBI in the sample performed at a higher level in the South West, including milk price, than the average across England, similar changes to income patterns were followed.

The research  analysed a sample of dairy farms in the South West of England contributing to the Farm Business Survey and specifically looked at investment decisions in these on these farms, and how the fund flow of the businesses changed.

During the six year period herd and farm size for the South West farms gradually increased with around 16% of farms buying land. About two-thirds of the farms invested in buildings and most bought some machinery. 60%  made re-investments greater than depreciation, ;leaving the remainder of the sample investing less than the calculated machinery depreciation charge over the same period meaning their equipment asset value will have declined. There are many reasons for this including:

• Inability to afford reinvestment in the business for the future, which may require a radical restructuring, including ceasing milk production to protect the long term viability of the farming business

• A reserve of funds is being generated to make a large investment in the future

• A strategic disinvestment has been undertaken with the view to ceasing dairy farming

A look at performance by farm tenure showed mainly tenanted farms had higher cow numbers with higher milk yields more leading to higher FBIs and more cash. Net investment in machinery/equipment was similar to the mixed tenure farms and as would be expected, little investment or capital appreciation in land or woodland occurred on these farms. The generally higher performance of mainly tenanted farms suggests a greater focus on how capital in the business is used.

Likewise, fewer opportunities for diversification within the tenanted sector has encouraged a complete management and investment focus on the core dairy business leading to its long term sustainability.

Looking forward - where farms may have resource constraints which limit or prevent expansion alternative forms of tenure or collaboration should not be discounted. For example the amalgamation of smaller herds in a locality might offer the opportunity to concentrate a larger milking herd in one place.

This could enable more effective investment in buildings, equipment, new technology and innovations, and an increase in economies of scale, as well as presenting the opportunity to locate and manage herd replacements and forage production away from the milking cows. Also the redundant buildings could be reused or converted to generate new sources of income to the new collaborated/shared farm business.

Click here to read the research report

*FBI for sole traders and partnerships, represents the financial return to all unpaid labour (farmers and spouses, non-principal partners and directors and their spouses and family workers) and on the capital invested in the farm business, including land and buildings.



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