28 February 1997

BEATING THE P RICE SQUEEZE

Improving efficiency will become increasingly important as a falling milk price erodes profits. Jessica Buss reports

MILK producers have yet to realise the effects on incomes of both a lower milk price and the end of residuary Milk Marketing Board payments, according to Tony Evans of Andersons dairy business consultancy.

"In April when producers start to plan margins and budgets for next year the impact of lower incomes will become apparent," he says.

Budgets prepared for the 1997/98 milk year must reflect a drop in milk price of at least 0.6p/litre. For each 1p/litre drop, income falls by £65 a cow for an average yielder, or £5000 for every 500,000 litres of quota, warns Mr Evans.

A possible 20% cut in EU support prices for dairy products could also have a small effect on incomes in the next year.

Mr Evans advises using next years budget to review the impact of a 4p/litre fall in milk price. This is where the market could be in five years when quotas may have gone, he claims.

"But variable costs will have to fall in proportion to milk price," he adds. "The economics of milk production will have an effect on the price of most variable costs, especially feed, so margin a litre could stay the same. However, overheads will carry on increasing as milk price has little influence on costs such as oil and fuel."

He believes overhead costs may eventually overtake the margin a litre, going up by an average 3% a year. Finance cost is also an important issue that must be considered separately.

Management changes needed to cope with the squeeze on margins will depend on the problem areas identified when reviewing individual situations. Mr Evans suggests considering efficiency of grass use, the cost of feeding systems and restructuring of borrowings when finance costs are high.

"Efficiency is a big factor in some instances, but in others it is not and improvements in efficiency may be unattainable or unrealistic."

It may not be possible, for example, to improve factors such as efficiency of grass use (UME). "It is easy to say maximise litres from forage but you can sacrifice the benefit somewhere else in the system," he warns.

Where improvements in grass use, for example, could be made, a 1% rise in UME, at a stocking rate of two livestock units a hectare (0.8/acre), could be worth 500 units of ME. Mr Evans values this extra ME at £7.20 when replacing compound feeds and £5.85 when replacing straights.

But increasing UME depends on whether you are not growing, or just not using, the grass and what is achievable in your circumstances (see panel). It may also be possible to save money by grazing more and making less silage, he adds.

"If you are not growing the grass now you have to consider the cost of growing more." As grass silage costs four times as much as grazed grass, the cost of growing extra silage could be £3.20 to provide 500 units of ME; for 500 units of ME from grass the cost would be 80p.

And silage costs can rise further when it has to be fed out or waste is high, he adds.

"When grass use is good and UME is 100 or above, any increase in output must come from concentrates."

But he warns against spending time changing the feeding system when other areas such as overheads may be more important. Simple feeding systems may save labour and machinery.

Investments planned on machinery may be better spent on improving buildings to save on time and machinery. It is costly to put the feed in front of the cows, he says.

When mixer wagons are used, for example, it may cost £15 a day in depreciation and each tractor costs £10/hour to run.

Labour costs are also on the rise, yet the standard of labour is falling with fewer students attending college each year. Employers must invest in employees to improve the quality of labour, says Mr Evans.

"Cows must be fed, milked and watered by 9am so that by breakfast the job is done, allowing the herdsman to spend time on tasks such as foot trimming. Owners could focus on other ideas and on using the business resources correctly. The cows may also benefit from a more peaceful time." &#42

Improved use of grazed grass will boost efficiency when margins are squeezed.

Andersons consultant Tony Evans: "80% of the profit comes from 20% of the time and the final 20% of the profit comes from 80% of the time."


Calculating UME

UME is a measure of the energy used by stock from an area of land. It can be assessed from the energy output achieved as milk or meat and maintenance, deducting the energy known to have been provided by concentrate or bought bulk feed. This figure is then multiplied by the stocking rate. The measurement used is the gigajoule (GJ or 000s of MJ) of metabolisable energy.

A dairy cow needs 25GJ for maintenance and 5.3MJ for each litre of milk produced. So a 6500-litre cow needs 34 GJ of energy for milk production and 25GJ for maintenance, a total of 59GJ. Feeding 1.5t of 13MJ/kgDM concentrate will provide 19.5GJ so the remaining 39.5GJ must come from forage. That must be multiplied by the stocking rate. If it is 2.5 livestock units a hectare (1/acre) the UME would be 99GJ/ha.

That figure is sometimes given as a % of that achievable. The UME achievable depends on the area, rainfall, soil type and nitrogen use. A farm with average growing conditions and typical nitrogen use will have a potential UME of 90 to 115GJ/ha.


PROFIT KEYS


&#8226 Good grass use efficiency.

&#8226 Low cost feeding systems.

&#8226 Minimal finance cost.