22 March 2002

Change is needed to close the gap and return to profit

By Andrew Shirley

RADICAL solutions may be needed to close the ever-widening gulf between the UKs best and worst performing specialist dairy producers, claims one agricultural banker.

Speaking ahead of the release of the latest HSBC/ADAS Dairy Spotlight figures, senior HSBC agricultural manager John Colley said some farmers might have to consider sharing fixed equipment or even a milking parlour with their neighbours if they are to see a return to profits.

However, he emphasised that such drastic measures will not be needed by every struggling enterprise. "Producers can move out of the bottom quartile by making relatively minor changes. There are savings to be had right across the board."

Compiled from the accounts of 94 dairy enterprises where at least 90% of total gross margin comes from milk, the figures reveal that the top 25% of milk producers returned a profit of £60,000 more than the bottom quartile for the year ending August 2001.

Not only did they make more money – 3p/litre after drawings and tax compared with a loss-making 3.6p/litre – but they were also more successful at cutting costs during the year (see table). The top performers slashed total costs by 2.2p/litre to 16.9p/litre, but the worst showed a more modest decrease of 1.4p/litre to a still non-viable 21.9p/litre.

Mr Colley noted that the most profitable farms had managed to reinvest in their businesses with a net capital expenditure, such as investment in new machinery, land and quota, of 5.1p/litre, while for those struggling at the foot of the income league this figure was only 0.8p/litre.

According to the Spotlight results there is a correlation between size and profitability. The average herd size on the best units was 172 cows, at least 50 animals more than the least profitable holdings.

"Obviously there are economies of scale to be had, but it would be wrong to say all big businesses are profitable. It is a question of focusing on the individual business and understanding the impact of decisions on the total costs of production." &#42

Spotlight year-on-year changes 2000-2001 (p/litre)

Bottom Average Top

25% 25%

Variable -0.4 +0.2 +0.2

costs

Overhead -0.1 -0.2 -0.6

costs

Rent/finance -0.8 -0.6 -0.8

Drawings -0.2 -0.6 -1.1

Surplus after -0.8 +0.5 +2.3

drawings

Total costs -1.4 -1.2 -2.2