23 January 1998

Dairy profits set to

plunge

By John Burns

PROFITS for the average Axient-costed dairy farm this year are predicted to fall to little more than a third of 1992/3 values, when the milk price was about the same as todays.

"But beware of focussing only on the milk price, especially when it is unlikely to improve much," Axient boss, Tom Kelly, warned at a meeting organised with FW in Devon this week.

He said it was better to analyse individual businesses in detail to identify what else had changed besides the milk price. But he was confident profits could be made at the current milk price if the right method was adopted, and said there was still scope for technical improvement and increased efficiency on most farms.

Some milk producers might decide to give up dairying now and some might start preparing to give up in a few years time. But others could move forward by specialising more, and many would choose to progress by increasing milk output. Whatever the decision it should be based on analysis and careful thought and a plan and timetable made.

SW regional Axient consultant, Derek Gardner, highlighted the six key changes (table 2) on the average Axient-costed farm since 1993, and suggested ways of coping with them.

Mr Gardner also warned farmers not to brood alone about their difficulties. "Involve your family, your staff and a consultant."

Beware of focusing only on milk price, warns Axients Tom Kelly.

Coping with key profitability changes

&#8226 Higher interest charges due to increased borrowing (from £133,593 to £189,260): Solution; sell assets (surplus livestock, machinery, land, property) to reduce borrowing, or increase output (buying or leasing extra quota).

&#8226 Low cull cow prices: Solution; reduce culling rate, which averaged about 30% in the past two years, with 5-year average of 25%. But it could be reduced to 18%, saving up to £60/cow or 1p/litre. A lower culling rate would marginally reduce the rate of herd genetic improvement, but with cull prices so low the savings from reduced culling rate far outweighs the slower genetic gain.

&#8226 Increased spending on property repairs and rents: Solution; only do essential repairs; review land area allocated to dairy if there are alternative profitable uses; take less grass keep (it may be cheaper to use more nitrogen at home or buy in brewers grains or citrus pulp); negotiate harder at rent reviews.

&#8226 Poor cash flow; 1993: -£7,735, 1998: -£18,187: Solution; plan cash requirements carefully, try to move bills, and explore different sources of credit. Restructure loans eg switch some of a large overdraft to a long term loan, so reducing bank charges and annual fees. Sell assets to reduce loans. Discuss problems with your bank preferably before they happen. If you decide to sell land do it while prices are still good.

&#8226 Higher quota prices: If you want to increase output you have to have more quota. These are business risks about which no one can give firm advice. Reduce risk by knowing what your marginal costs are – they will vary according to alternative uses for your land. Negotiate better quota prices or get someone else to do it for you.

Table 2: What has changed since 1993?

1993 1998 £ impact

Quota leasing (p/g) 5.0 9.0 5,000

Cow sale price (£) 532 360 5,160

Calf price (£) 128 108 2,400

Property charges and rent (£) 10,404 13,760 3,356

Interest charges (£) 14,362 17,142 2,780

Depreciation (£) 11,418 14,685 3,267

Table 1: 1993 and 1998 compared

Year ending Year ending

31/3/93 31/3/98

Milk price p/litre 20.81 21.16

Concs price £/t 139 137

Profit 30,000 11,442

Source: Axient

Reduce culling rates…low cull prices mean savings from lower replacement rates far outweigh the slower genetic gain.