Illustration of cows in a shed© Paul Wootton

Like many, Savills’ model dairy farm is suffering the after-effects of a prolonged milk price crash and what looks an all-too-brief recovery. We look the prospects for how the farm’s finances will perform in the year ahead.

While the year to 31 March 2018 is budgeted to be much improved, with a profit of £70,926, there are continuing cashflow concerns carried over from the previous year.

The budget for the current year is based on an average milk price of 28p/litre.  Half-year revision of the budget suggests the average price could exceed this, but this is dependent on the price for the second six months of the year.

See also: Low milk price challenges dairy expansion plans

Savills model dairy farm – what is it?

A fictional dairy farm, fully costed and based on dairy businesses advised by Savills. This allows scenarios to be modelled and their effects assessed.

  • Family partnership of parents and son
  • 180ha farm, mainly ring-fenced
  • 160ha owned, 20ha on 10-year farm business tenancy
  • One full-time employee
  • All Grade 3 medium/heavy soil type on undulating terrain
  • The business has a 20-year loan taken out several years ago with a balance at 1 April 2017 of £163,776. This is being reduced at £15,000/year, and at 1 April 2018 will be £148,776. There is also an improvement loan, initially at £250,000, repayable over 10 years – balance at 1 April 2017 was £201,000. At 1 April 2018 it will be £177,000
  • Rainfall 760mm, altitude 125-180m
  • In a nitrate vulnerable zone

The average price received for April 2017 to September 2017 was just over 27p/litre, while October 2017 to March 2018 is expected to average 29.5p/litre.

The dairy enterprise

  • Initially a 200-cow, 8,000-litre-a-cow high-output system, planning to expand to 300 cows
  • Year-round calving
  • Non-aligned milk contract.
  • Performance in line with AHDB top 25%
  • Recent investment in parlour, bulk tank and cow accommodation

Therefore the overall budget has not been amended, giving an overdraft at the year-end of almost £56,000, which is still £37,000 more than the position at April 2016.

Year to March 2019

By the end of the year to 31 March 2019, the UK is likely to have left the EU and the family has started to consider how the business will be affected.

“They have minimal control over milk price, but will be discussing with their milk buyer the action they will be taking to manage the effect of potential changes to milk and milk product imports and exports,” says Charles Skelton, a consultant in the Savills food and farming team.

“The most significant direct effect is the potential loss of Basic Payment Scheme [BPS] income .” The budget therefore excludes BPS income, currently claimed on 180ha and worth about £40,000 in the current year, or 1.9p/litre.”

Excluding this income from the budget helps the business identify how it will manage with a milk price effectively 1.9p/litre less than it is currently being paid.

Future milk price

The future of the actual milk price is uncertain, but the budget for the year to March 2019 includes an average price of 28p/litre.

However, within this the monthly price is assumed to change by more than 5p/litre, creating a variation in the monthly milk income of almost £9,000.

“Although BPS is important to the overall performance, the change in milk price has a much greater effect on the profit and thus the family’s confidence in the future. For every change of 1p/litre the profit and cash income alters by more than £21,000. They will therefore be considering routes to minimise the fluctuations,” says Mr Skelton.

This includes further focus on purchased feed costs and the potential to increase production of milk from forage, as well as a plan to look at volatility management tools in the spring.

Budget to March 2019

The herd is budgeted to rise from 233 cows at 1 April 2018 to 266 cows by 31 March 2019. This will be achieved through the introduction of 109 heifers due to calve in the year and the sale of 76 culls and casualties budgeted to leave the herd.  

However, this represents a 30% culling rate on the average herd size and so the family plans to reduce this and either sell 10-15 surplus heifers or expand the herd faster. This has not been included in the budget.

In the current budget the closing herd number is 20 head less than originally planned for March 2017, demonstrating the longer-term effect of selling both cows and heifers as a cash-management tool.

There is a budgeted improvement in the overdraft of £41,694 to end the year at £14,235. With no BPS income in the budget, this is a positive improvement and indicates that at the current scale and strategy, the business is sufficiently robust to withstand a loss of BPS, says Mr Skelton.

Recent business history

The business is on a non-aligned milk contract and was affected by the drop in milk prices in 2016.

Performance was on target at about 8,100 litres a cow, but the original budget to March 2017 showed a trading loss of £20,000 and a rise of more than £110,000, so action was taken to reduce this. This involved slowing the planned expansion and selling 50 head of cattle, reducing herd size to 215 head at 31 March 2017.

This also provided an opportunity to turn a planned wholecrop wheat area into a grain crop to generate cash in the short term.

The combined effect of these changes still resulted in a trading loss in the year of £15,739, but reduced the increase in the overdraft to £55,929, to close the year at £70,940.

Practical measures

Practical measures this year have included tighter silage clamp management, ensuring good consolidation and swift sealing to cut waste and improve fermentation quality. Alongside this, clamp face management is being sharpened to further reduce waste and a forage review will be carried out early next year.

The business has set a target to reduce the purchased feed rate from 0.34kg/litre, to 0.32kg/litre this year and this will be reviewed after the end of March 2018 so new, realistic targets can be set for 2019.

At almost 1p/litre, vet and medicine costs are higher than for top-25% herds and are under review.

“Like many things in the past 12 months, vet and medicine was treated on a “needs must” basis during the cash crisis, but the family continue to work through medicine protocols within the herd health plan,” says Mr Skelton.

“The cost a head has not improved – this remains an ongoing issue. There are concerns that forcing a reduction could lead to health issues that could affect performance in the long term.

“Therefore the procedures will continue to be monitored with the goal of reducing cost a litre. If cost can be held and output increased, this may provide better long-term benefits than cutting out a cost.”

Yield continues to be lower than the owners would want to see for the level of input. “This is however hard to monitor while the herd is in a growth period,” says Mr Skelton.

An application for a Leader grant to fund improved handling facilities has been put on hold as part of a capital expenditure freeze for cash management reasons.  

However, grant funds are still coming forward and this will be reviewed again in 2018. It will offer long-term benefits, but was not considered a priority.

Model dairy farm – cost of production analysis

 

Budget 2016-17

Budget 2017-18

Budget 2018-19

Revenue

£

p/litre

£

p/litre

£

p/litre

Milk

  346,450

20.50

  496,283

     28.00

    590,296

     28.00

All other income (includes value of heifers transferred to the herd)

  174,850

10.35

  147,850

       8.34

    140,600

       6.67

Herd replacement

    45,750

2.71

    45,750

       2.71

      60,900

       2.89

Purchased feed

  135,135

8.00

  158,745

       8.96

    173,750

       8.24

Forage

    50,060

2.96

    54,560

       3.08

      54,560

       2.59

Other direct costs

    58,975

3.49

    61,975

       3.50

      69,615

       3.30

Total direct costs

  289,920

17.16

  321,030

     18.11

    358,825

     17.02

Labour

    43,000

2.54

    43,215

       2.44

      45,375

       2.15

Power & machinery

  101,750

6.02

  103,927

       5.86

    107,582

       5.10

Office & administration

    26,400

1.56

    32,490

       1.83

      35,613

       1.69

Rent & finance

    23,469

1.39

    24,260

       1.37

      24,787

       1.18

Total overheads

  194,619

11.52

  203,892

     11.50

    213,357

     10.12

Depreciation

    52,500

3.11

    48,285

       2.72

      48,255

       2.29

Drawings

    25,000

1.48

    25,000

       1.41

      40,000

       1.90

Total cost of production

  562,039

33.26

  598,207

     33.75

    660,437

     31.33

Full economic net margin

–   40,739

-2.41

    45,926

       2.59

      70,459

       3.34

Model dairy farm – profit forecast summary

 

Budget – year ending March 2017

Budget – year ending March 2018

Budget – year ending March 2019

 

Total (£)

(£/ha)

Total (£)

 (£/ha)

Total (£)

(£/ha

Gross margin

195,680

1,087

287,403

1,597

366,271

2,035

Other farm income

35,700

198

35,700

198

5,800

32

Fixed costs

Labour

43,000

239

43,215

240

45,375

252

Power

138,090

767

136,248

757

139,338

774

Maintenance

35,160

195

38,054

211

40,362

224

Miscellaneous

7,400

41

10,400

 58

11,750

65

Total fixed costs

223,650

1,243

227,917

1,266

236,825

1,316

Profit pre rent & finance

7,730

43

95,186

529

135,245

751

Rent & finance

23,469

130

24,260

133

24,787

133

Net profit

-15,739

-87

70,926

396

110,459

618