20 March 1998

Dairy – anticipate cuts

DAIRY consultants are urging producers to radically appraise their businesses ahead of Aprils predicted milk price cut of 1.5ppl-2ppl if they are to survive in the milk market.

ADAS head of dairying, John Allen, says the continual crashing of milk prices has caught producers by surprise. "Half of producers are operating at a loss already. While that situation isnt surprising, nobody could have predicted prices would be this low."

Hes urging all producers to achieve what he calls world class benchmarks to stay profitable. These include a 375-day calving interval, feed costs below £100/t, average herd PIN £30 plus, 700,000 litres milk an employee and machinery costs of 1.5ppl-2ppl.

"Producers will have to consider options they dont like – such as making staff redundant – to maintain profits," he stresses.

But increasing output to spread costs is no panacea to counter ailing profits. "Producers with high fixed costs should not be lured into thinking high output is the answer. It could be disastrous," he warns.

According to SAC farm management adviser Jim Ritchie fixed costs must be pegged against turnover. He suggests labour, including family, should not exceed 10% of turnover; rent and finance no more than 15%; and power, including machinery maintenance and depreciation, no more than 15%. Variable costs should be no more than 35-40% of turnover, he adds.

The predicted 2ppl cut will wipe £12,000 off profits for a 100-cow herd, whose profits were already into single figures and too low to support private drawings, says Mr Ritchie.

Even the top 10% of Axient-costed herds, previously making profits of 10ppl, are feeling the pinch, warns Axients Giles Coley. "Lower milk and cull cow prices, even compensated by cheaper feed and quota, have reduced those profits to 6.5ppl.

"After tax and private drawings not much is left for capital investment where 4.5ppl is needed to maintain standard of living."

However, Andersons dairy business manager, Tony Evans, says producers must look confidently at future prospects whether in or out of dairying. "Cheaper quota will allow some producers to expand output. Those opting out could increase arable operations on mixed farms."

Changing milk buyer is seen as only a small step to better profits, adding between 0.5ppl-1ppl.

However, increasing milk from forage has greater potential, says Mr Ritchie, whod like to see all producers aiming for 4000 litres a cow a lactation from forage.

With Anderson figures suggesting 10ppl is tied up in overheads, Mr Evans says any cuts will bring guaranteed savings every day. &#42

DAIRY RESTRUCTURING

&#8226 Consider less labour/machinery.

&#8226 Higher output could be disaster.

&#8226 Increase milk from forage/grass.

&#8226 Price fall of 1,5-2p/litre on top of 4,5-5p/litre.

&#8226 2p/litre cuts 100-cow herd profit by £12,000.

&#8226 Overall profits cut by £30,000/herd