29 September 2000

£12,500 profit is just not enough

DAIRY farm profits of £12,500 for an average 128-cow herd in 1999/2000 are insufficient to maintain producers standards of living and mask unsustainable cost cuts in the past year.

That is the view of Promar national finance consultant Tim Archer, presenting the companys Farm Business Accounts results for 100 dairy farms at the European Dairy Farming Event.

This level of profit fails to cover requirements, because net worth values are also suffering with a £4500 fall this year, the third year of decline, he said.

In the past four years, profits have fallen by 60% from £32,000.

"This year, farmers have maintained profit as last year, partly by sensible changes through increasing output and through short-term measures such as cutting overhead costs," said Mr Archer.

Output had risen both in yield per cow and through increasing herd size, he said, compensating to some extent for the fall in milk price over the past four years. These changes had improved profits.

"If producers had done nothing and suffered lower prices, returns would be £95 a cow lower." Costs had gone up by £38 a cow, said Mr Archer, but the gain with an extra 10 cows and 500 more litres produced per cow was worth £13,000 to the herd gross margin.

"The tactic of increasing output is successful in limiting the damage of lower milk prices, when done efficiently. There is still potential to exploit that."

Overhead costs had also been reduced during this four-year period, but in the past year spending on wages, sundries and property repairs showed a greater fall.

Mr Archer warned: "There is a big reduction in wages in the past year, when herd size is growing and office costs for accountants and consultants have been cut. When producers are busy outside on the farm, this short-term thinking could compromise production in future.

"These short-term cuts in overhead costs could come back to haunt producers."

But there was still a big difference between top 25% and bottom 25% farms, added Promar senior strategic consultant Peter Brown. The top 25% farms had larger herds and cows yielded more, so they saved on every area of variable costs – producing a saving of 2.6p a litre and gaining 0.6p/litre on total income. Overhead costs were also lower on the top 25% farms.

DAIRYPROFITS

&#8226 Same as last year.

&#8226 Saved by increased output.

&#8226 Some cuts unsustainable.

Short-term cuts in overhead costs could come back to haunt producers, warns Tim Archer.