EuroDairy – Milk price volatility

Dairy farmers are often confronted with substantial changes in the prices they receive for their milk. When you have a look at the milk prices of the last decade, it’s clear that all dairy farmers have to deal with fluctuating prices. The cause of this phenomenon? Dairy farmers make relatively small changes in short-run milk production decisions when the milk price changes and consumers do the same thing with purchase decisions. This type of behaviour can lead to volatile prices.

Price fluctuation is part of a normal, functioning market. However, extreme fluctuations or volatility can have significant negative consequences for milk producers; it makes financial planning and investment decisions more complicated.

This affects producers and processors and could prevent the dairy industry as a whole from maximising its potential.

There is no magical solution to survive periods of recession, but there are some good practices to make it easier to cope with this situation.

Cash flow is one of the most critical components of success for a business company because without cash, profits are meaningless.

Cash flow refers to the difference between the amount of money coming into a business and the amount of money necessary to cover expenditures. It is necessary to get control of your cash flow. Therefore, you must know:

• What your cash balance is right now (cash flow planning)
• What you expect your cash balance to be a year from now (cash flow forecast)

To answer these questions, you can use several cash flow management tools. 

Running a company is a challenge; you need to work both efficiently and effectively.

It’s important to have a critical look at all the organisation’s operations: are they useful? How much money do you gain? Do you make the right decisions at the right time?

You also need to minimise the resources required to get things done. In fact, you demand the best outcome for every action and activity, for example crop management, animal health, animal feed, workforce, etc.

And always remember that efficiency must come before expansion: first better, then bigger.

The break-even price is the point at which total cost and total revenue are equal. The higher your break-even price, the sooner you start to suffer when the milk price drops.

During periods of low output prices, only the most competitive of producers typically make positive margins from milk production. That’s why it’s important to know what your (future) break-even price is, especially when you are making future plans.

A decent cost-price calculation is necessary for each dairy farmer. It makes it clear when you may get financial problems and how you can solve them. There are several ways to affect the break-even price, such as, for example, reducing costs or increasing the value of your output.

Brian’s strategy revolves around keeping his production costs as low as possible. He aims to make the most of his cheapest feed – grazed grass.

Cows are all calved in a 12-week block in the spring, with around 80–85% calving in the first six weeks.

The grass is measured every week throughout the growing season to ensure an adequate supply of high-quality grass. This reduces the amount of silage that needs to be made and minimises the use of purchased concentrates.

In particular, when the recent very severe and extended depression in milk prices occurred, Brian reduced cow numbers.

This had two benefits: he generated cash from the heifer and cow sales and further reduced the pressure on the farm, allowing him to further cut the use of purchased feed.

This project has received funding from the European Union`s Horizon 2020 research and innovation programme under grant agreement No 696364.