10 September 1999

Improve profits by taking axe to overhead costs

By Jessica Buss

MILK producers must look for more than technical solutions for their businesses to improve profitability and address overhead costs.

Speaking at an MDC Focus Centre meeting at the Royal Agricultural College, Glos, Andersons consultant Tony Evans said there were businesses still making 4p and 5p/litre profits, after rent and finance. That was despite receiving a milk price of just 17.5p/litre.

"Farms with high overheads are going out of business rapidly, as are those with low gross margins that wont cover their overheads."

In 1997/98 even the best farms were spending 20.5p/litre to produce a litre of milk, which would produce little profit today.

But it was not enough to just look at technical performance and make technical changes. Those may not improve profitability enough, he warned. MDC figures for 1997/98 show little difference between the variable costs of top and bottom 25% producers; 10.1 and 9.4p/litre, respectively.

"While milk from forage is important, and producers should aim for an increase, improving it by 500 litres will only save 1p/litre." But those small changes could be destroyed when poor weather meant silage quality was low, he warned.

There is more scope to make permanent changes to profits with overhead costs, such as labour, that were not weather dependent, he said. The difference in overheads, between the MDCs top and bottom 25% of farms is over 5p/litre, according to the MDCs Controlling Overhead Costs report.

Reducing paid labour can improve profit, but that was not an easy decision to make, admitted Mr Evans. But it could make a big difference to profit.

He believes all-year-round calving is one of the least cost effective practices on farms that employ labour. Block calving herds, where tasks fit in with other labour needs on the farm, or labour is brought in only when needed, are the most profitable he sees as a consultant.

Deciding to use contractors for tasks and not to reinvest in machinery could save on depreciation and labour, he added.

There are also opportunities to save 10 to 15% on electricity costs through changing supplier, yet few producers have investigated this possibility. Changing from mains water to a borehole could also save producers 0.4p/litre, or more in the south-west where water charges were higher, he said.

Producers should also investigate finance costs and consider selling assets to repay debt, then making that money work for them.

IMPROVING PROFITS

&#8226 Consider nothing as sacred.

&#8226 Find out where you are.

&#8226 Use MDC reports: Understanding Your Tax Accounts and Controlling Overhead Costs.

&#8226 Identify areas for improvement.