2 August 2002

SOFTLY,SOFTLY POLICY PAYS

DIVIDENDS…

Benchmarking against other

units is valuable for one

business which has

cautiously expanded

without putting the business

at risk. Suzie Horne reports

PRUDENT planning has allowed a North Wales dairy producer to both expand and improve technical performance, while keeping control of costs.

Eight years ago Bryn Parry had 50 cows and just over 250,000 litres of quota, with an average yield of 5200/cow on Llainwen Ucha, near Ruthin. The farm also ran 240 Welsh Halfbred ewes. Mr Parry and his wife Carys also had a young family and wanted to put the business in a position where it would offer the children an income if they decided to farm.

While the children are not yet old enough for that decision, the business is on target and has grown to 80 cows on roughly the same land area of 53ha (132 acres). Yields have shot up by 60% to 8500, quota holding to 600,000 litres and the sheep have gone to make way for extra cows.

Over the same period, improvements have been made on the holding, but within strict financial parameters so that quota, interest and rent never account for more than 19% of output. The business has a rolling target of 15% for this measure and in one year the actual figure dipped to 8%, explains ADAS consultant Tony Benton.

"It was high in the main period of expansion, but we are now in a position where the business can cope. Even if quota leasing prices and interest rates were to rise considerably, it would not take the business into a danger zone." A further financial indicator for owner occupied holdings is that the balance of liabilities to assets should not go above 20%.

The planned expansion and improvement in yields coupled with tight financial control have put the business well into the top 25% performing bracket in the HSBC/ADAS Spotlight series of dairy costings.

Production costs

In the year to March 2001, Mr Parrys total costs of production, including his modest private drawings, were 16.06p/litre compared with 16.9p/litre for the average of the top 25% in the series. And this is despite his herd having 100 fewer cows than the average herd size in the top 25% group.

Overall Spotlight results for the year to March 2002 are not yet available, but Mr Parrys own results in that series show an improvement in profit and despite higher costs, he will remain in the top 25%. Output was up by slightly more than the increase in costs, leaving an improved profit figure.

This meant that profits at Llainwen Ucha were sufficient to increase equity and expand the business with the purchase of a mixer wagon and other machinery. This was made partly possible because of very modest private drawings of less than £6500 – equivalent to 0.97p/litre. Mrs Parry works on the farm part-time and her earnings as a nursery nurse have also been important in keeping drawings down.

However, the picture will look different again to March 2003. "This year will be entirely different – you cant provide capital for growth with a milk price of 16p/litre and lower in many cases," points out Mr Benton.

The business also has to contend with higher variable costs than the Spotlight average, which Mr Benton attributes mainly to the herds size, in that smaller orders carry a price penalty. However, the benefits of group buying from this year are already making an impact.

Tight stocking

Concentrate feed rates are also relatively high at 3t/cow. A rate forced by the size and layout of the farm and its tight stocking rate. "We only have about 40 acres of land we can graze, the other 80 acres is away from the farm. Also, our land starts at 850ft and goes up to 1000ft," explains Mr Parry. AI and semen costs are relatively high because premium semen is used. The business also suffers from being in one of the lower milk price fields.

Through the period of expansion, objectives have been set and tactics decided on an annual basis, using the controls described above and depending on the previous years profits. Quota purchase was always part of the strategy to reduce the reliance on leased quota and the risk it posed to the business. The business now owns almost 600,000 litres.

Borrowing vital

"My father would never borrow any money, but if you are not borrowing, you are not expanding," says Mr Parry, who farms in partnership with his mother. However, his approach remains cautious, using short term borrowing only and refusing to embark on a new project until the borrowing for the last one is at least half paid for.

Technical improvements to the feeding system have enabled the herds inherent genetic potential to be realised. The farm did not have the system to exploit this until a few years ago, says Mr Benton.

Feeding has changed in recent years, from a trough-based silage system through semi-mixed, to total mixed ration last year. A new cubicle house has been built and automatic scrapers installed, as well as upgrading slurry facilities and improving grassland management. Limited parlour improvements have also been made.

Options for keep and cropping away from the farm have had to be explored to maximise the land available to increase cow numbers. The farm is not suited to maize, so 6ha (15 acres) of maize is grown for him by other local producers. And, heifers are now reared away from the farm and contractors do most fieldwork.

Covering outlay

It is important that all cash requirements of the business are covered by the annual profits, including private drawings, income tax, reinvestment and any capital repayments of loans.

Unless you can cover all of these then the business cannot improve its position, points out Mr Benton. In one year of the past eight at Llainwen Ucha, these items were not all covered, but in every other year they have been.

Limited by acreage and by labour, in that he would have to employ someone if the herd were to expand further, Mr Parry thinks that he has pushed cow numbers as high as the farm can go now. The prospect of borrowing to buy land to expand at todays milk prices is a non-starter. &#42

A limited grazing acreage has not stopped Bryn Parry expanding the dairy herd at Llainwen Ucha.

&#8226 Compare performance with others.

&#8226 Set safe parameters.

&#8226 Review plan every year.

Moving to a total mixed ration has increased cow yields.

All businesses in the top 25% demonstrate good control of trading performance, says Martin Wilkinson, a senior consultant with ADAS who is and responsible for the Spotlight series.

"The only thing these farms have in common is a good management system, with the majority using benchmarking and good up-to-date on farm recording to help them make decisions."

Farm and herd size vary enormously within the sample – from 46 to 364ha (113 to 900 acres) and from 65 to 500 cows. Yield spread is from 4800 to 9000 litres. Costs within the sample vary widely too – it is the common ability to manage those costs and to know what the business can support in terms of costs which enables them to achieve their results.

"The Parrys have put into practice the principle of setting a development strategy for success, setting achievable profit related benchmarks annually and measured actual progress against them.

"Many might say a benchmark of 15% of output for rent, finance and quota is too high. But in some cases it is a necessity to achieve business growth.

"The key message is for producers to take a balanced view on all aspects of the business to minimise exposure to risk and trading losses," he says.