12 September 1997

Efficiency key to surviving £400m dairying losses

By Philip Clarke

MILK price cuts are set to take over £400m from farmer incomes this season, leading to the biggest upheaval since the introduction of quotas.

"The ones that will survive will be the ones that are technically and financially efficient," Bibby head of marketing, Duncan Rose told milk producers meeting at Losely Park, Surrey, this week. "But many dairy farmers do not even know how much it costs them to produce a litre of milk." Using industry figures he showed that, on average, variable costs were expected to come to 9.4p/litre and fixed costs 10.6p/litre, giving a total of 20p/litre.

That left less than 2p/litre profit, assuming an average milk price of 22p/litre for the 1997/98 milk year. Even the top performing 25% would only make a margin of about 4p/litre.

"More than half the costs are overheads, so one of the keys to survival will be to lift yield and so reduce fixed costs per litre of milk produced," he said.

But just increasing concentrate use was not always a viable solution. Low yielding cows would certainly respond, but high yielders would need a lot more cake to get just a bit more milk. Much would depend on the relative values of milk, quota and concentrates.

Assuming a milk price of 22p/ litre and a leasing cost of 10p/litre, that suggested there was 12p/litre potential margin to go at. A low yielder might require 0.4kg of concentrate to produce one more litre of milk which, at £145/t, would cost 5.8p/litre, leaving over 6p/litre. But a high yielder would require 0.8kg more cake at an equivalent cost of 11.8p/litre. In this case it would be hard to justify feeding for extra yield.

"Taking a 6000-litre cow, increasing yield by 250 litres over the lactation would give an extra margin of £12, equivalent to an across-the-board increase of 0.2p/litre," said Mr Rose.

Lower feed prices were already helping offset the slump in milk prices, he added. The £25 to £30/t fall seen so far this year was worth 0.7p/litre to the farmer. Further gains could be achieved by manipulating milk constituents.

For those on flat rate milk contracts, it may be worth lowering butterfats. A 0.5% drop would release an extra 9% of butterfat adjusted quota, effectively allowing another 593 litres to be produced from a 6000 litre cow. After allowing for higher feed costs, this could increase margins by 1.37p/litre. "Producers on constituent based contracts should also consider dropping butterfats, though the economic benefits depend on the individual farmers contract and quota position."

&#8226 Improving milk quality is fundamental to the survival of dairy farmers, Andy Marshall, Losely Park farms manager told the conference. But achieving that needed a total farm approach, with attention paid to every detail, from buildings and cow comfort, to staff morale and personal ambition. &#42


Table 1: Milk production costs 1997/98

p/litre

Variable costs

Purchased feeds4.0

Forage1.7

Quota leasing1.5

Vet and med0.6

AI and recording0.6

Other costs1.0

Total variable9.4

Fixed costs

Labour3.5

Power/machinery3.0

Property charges1.5

General1.4

Interest1.2

Total overheads10.6

Total costs20.0


Table 2: Cost of producing an extra litre

Extra concConc costCost/litre

0.4kg£145/t5.8p

0.5kg£145/t7.3p

0.6kg£145/t8.7p

0.7kg£145/t10.2p

0.8kg£145/t11.6p

p/litre

Milk price22.0

Quota cost10.0

Potential margin12.0