26 October 2001

How planning plays vital role in building new unit

Investing in a new dairy unit is a tricky process – it should start with initial ideas and

end up with a profitable unit. Richard Allison met a team of experts who successfully designed and installed a large dairy unit in Glos

MAKING a return on capital is the main reason for investing cash in a dairy unit, so it is vital to ensure the project is viable.

Back in 1998, two dairy units on the Kemble Farm Estate near Cirencester needed upgrading, explains farms manager David Ball. "This provided an opportunity to merge both herds onto one site."

The first stage in the two-year planning process was a feasibility study, says Kite Consultings John Allen. "A feasibility study must be based on accurate costs, avoiding textbook figures or rough calculations. We even asked the local builder for prices of materials to give us extra confidence in the figures."

It showed the new unit was viable using existing quota, sufficient for 350 cows yielding 8000 litres. But buying extra quota to expand cow numbers would have made the project uneconomic due to high quota prices at that time, he explains.

The unit was, therefore, designed for 350 cows plus followers, says Mr Ball. "This allowed an option to expand the herd to 700 cows by moving young stock to another site when quota costs fell back to reasonable levels."

Assessing the current business was also a good indicator of likely success of the new unit, says Mr Allen. "Remember that putting a lot of capital into a dairy unit does not necessarily make it become profitable."

Both units were predicted to become unprofitable in the near future with the expected fall in milk price. Mr Ball then believed it would fall as low as 18p/litre, which later proved realistic.

In addition, equipment and machinery were being moved between sites, particularly for feeding. "By merging the 240 and 150-cow herds, milk production costs could be reduced by about 3-4p/litre."

A new unit that produced milk at low cost would virtually guarantee a profitable business on the estate and a 10% return on invested capital, added Mr Allen. "This needed to be achieved without relying heavily on grazing, as growth is often poor here during summer."

The five-span building cost £2000/cow, including a parlour, handling facilities, staff area with showers, bull pen and calving pens. "Cow accommodation was a mixture of loose straw yards and cubicles to allow flexibility for rearing young stock."

With the predicted fall in quota prices, the 240-cow herd and quota was sold to fund the new building, says Mr Ball. "It was purely a business decision, with nearly 1m litres sold at 35p/litre and then bought back two years later at 16p/litre."

The capital return on additional capital for typical large dairy units looks favourable, exceeding 10% in some cases (see table). However, herd size and milk yield influences actual return, explains Mr Allen. "Ultimately, the more litres of milk produced, the better the return."

BUSINESS PLANNING

* Undertake feasibility study.

* Assess current business.

* Use accurate costs.

TABLE

Return on capital (%) for a new dairy unit

Milk yield

Herd size 7000 litres 8000 litres 9000 litres

400 4.6 7.3 10.3

500 7.8 11.6 15.5

600 9.7 14.3 19.0

Assuming milk price of 20p/litre and £1.78m capital invested.

Building a new dairy unit at Kemble Farms has seen production costs fall, say John Allen and David Ball.

Return on capital (%) for a

new dairy unit


Herd size Milk yield, litres

7000 8000 9000

400 4.6 7.3 10.3

500 7.8 11.6 15.5

600 9.7 14.3 19.0

Assuming milk price of 20p/litre and

£1.78m capital invested.