A good year followed by a bad year poses a cash flow and tax conundrum for dairy farmers in 2012, says Strutt & Parker's land management department.

The firm's farm business consultants have warned that low milk prices and high feed prices combined with a big tax bill from last year will result in a cash squeeze.

Paul Dennison, of Strutt & Parker's Northallerton office, said: "Farmers need to budget very carefully this year.

"With the current backdrop of falling farm gate prices, dairy farmers will soon be feeling the effects of lower milk prices and seeing the squeeze on the cash flow as feed prices and other input costs go up.

"Compounding the difficulty is the fact that in the year to March 2012 the average farm gate milk price was 28.15ppl, the highest it has been in the last 20 years. As a result, the profits for the year ending 2012 could be significantly higher than previous years and lead to a much higher tax bill.

"As the tax is payable in the January following the April 5 year-end, this could hit farmers with a double whammy as they try to juggle the falling milk price, high feed and other input prices with a hefty tax bill on top."

Mr Dennison added: "Planning the cash flow is always difficult and when the milk price drops with less than a month's notice, or even backdated, it is even trickier.

"With this in mind, getting the year-end accounts prepared well in advance would be advisable and at least that should give a better idea of the pending tax bill.

"This year is going to be a tough one for dairy farmers and it has never been more important to budget as accurately as possible and look at the business structure and the efficiency of your system."

Mr Dennison said: "On a brighter note, the recent white paper from Dairy UK has reported a 3% increase in regular dairy consumption to the extent that 99% of people now eat or drink dairy products. The challenge for the UK dairy industry is to ensure that these dairy products are UK-produced and that we can export to the rest of the world. This will be helped by the current increase in capital expenditure by the UK's major processors."

For more advice and information please contact Mr Paul Dennison in Strutt & Parker's Northallerton office on 01609 780306.