Facing up to the question: To lease or buy
To lease or not to lease is the question awaiting an answer at Dowrich.
Philip Clarke reports
WITH just six weeks remaining in the current leasing period, minds at Dowrich are focused on the big quota question – whether to lease or buy?
Since last years painful experience, when 300,000 litres was leased in at about 13p/litre, action has already been taken to reduce dependency on the fickle quota trade.
Stocking rates have been cut, so that now Dowrich runs a herd of 252, compared with 270 a year ago, explains Anthony Lee, who manages the farm with his father and two brothers.
Including all youngstock, this gives a stocking rate of 1.71 cows a hectare (0.69 cows an acre) compared with 1.82/ha (0.74/acre) this time last season. For the milking herd alone, stocking currently stands at 2.41/ha (0.98/acre).
As a consequence, annual yield per cow has increased from 5200 litres to 5300 litres. But this is well short of the 5627 litres achieved when Dowrich was on three times a day milking in the run up to vesting day last year.
In spite of these efforts, output is still targeted to reach 1.367m litres by the end of the current milk year, compared with the 1.122m litres of owned quota.
The plan is to acquire another 180,000 litres, taking the total quota holding to 1.302m litres. This is still short of projected output. But Genus consultant, Norman Ford, is advising the Lees to allow for a 5% quota threshold from Milk Marque. "Following the drought, I expect there to be a lot more producers who fail to reach their quotas this season," he says.
So far, 100,000 litres has been leased (much of it at 10p/litre in a pre-season deal) leaving another 80,000 litres to find. Although the Lees have only ever leased quota, they are now giving serious consideration to the purchase option.
Mr Ford believes Dowrichs dependence on leasing is "a weakness in the strategy".
"We can see from Genus clients accounts that milk producers in the top 10% of profits are those who have bought quota, while those in the bottom 10% are firmly in the leasing camp."
Last year was obviously exceptional, but the high price of leasing in quota meant that profit as a share of turnover came to less than 5% at Dowrich. This is on target to reach 12% this year, reflecting the lower quota cost and higher milk price.
Mr Ford estimates the economic lease cost at Dowrich to be 9p/litre or less. At this rate the profit to turnover ratio would increase to 20%. By buying quota and financing it over 10 years, he reckons the partners could lock into a fixed annual quota cost of 8p/litre.
But Anthony Lee is still reluctant to take what he sees as a gamble. "The biggest unknown is how long quotas are going to last and therefore how long we would have to write off the investment," he says. "Much as I would like to be paying 8p/litre if lease values shot up to 15p again, I would hate to still be paying for something that might not exist in five years time.
"And even if we lock in at 8p/litre, if milk prices start to fall in the next few years, as many pundits seem to think they will, we would then find our quota cost rising as a proportion of turnover."
Mr Ford counters that, even if quotas were to disappear, a larger dairy unit would be a more valuable asset in a free market anyway.
Time is clearly running short, but Mr Lee is hopeful the quota market will weaken further in the next few weeks and expects to lease in the final 80,000 litres this time round.
The Lees have also been taking a closer look at overheads in recent weeks, attempting to allocate them to the three different enterprises. This is never easy. For example, should muck spreading costs be born by pigs, dairy or potatoes?
At an estimated £140,000 for the dairy side of the business, one of the challenges for the future is to make fixed cost savings, although more work will be needed on deciding which areas to target.
"Meanwhile, it is easier to spread costs by increasing turnover, especially as we have a relatively low input, low output system," observes Mr Ford. "But again this means addressing the quota issue."
Dowrich has always had a relatively extensive system. "I take the view it is better to have more cows with less yield," says Mr Lee. "Then, if we lose one or two, at least it doesnt rock the boat so much."
"Reducing cow numbers would also be difficult with our staffing structure. There would be too much work for one cowman, but not enough for two."
The emphasis is also on increasing milk quality as a way of achieving a higher price. Genus Milkminder results to September put rolling average butterfat at 4.28% compared with 4.22% a year ago, and protein at 3.44% against 3.43%.
This has contributed to a milk price of 25.93p/litre compared with 22.77p last year, and a margin over purchased feed of 21.82p/litre.
Grazing is now run on a "paddock" system, with the cows moved on to fresh grass every day. Amongst other benefits, this leads to less poaching (especially near the parlour) and should help prolong the grazing season. *