22 March 1996

Think ahead before signing a contract

WITH a number of liquid milk dairies offering contracts which specify only minimum levels of butterfat and protein at a flat rate price, it is vital to assess how the contract will affect the business, writes Genus consultant Max Sealey.

On a farm level there are several factors to consider when evaluating potential flat rate contracts:

lThe flat price paid should be compared against the price obtainable on other contracts paying for butterfat and protein given a whole years milk quality.

lExamine the practicalities of reducing butterfat. The effect on feed costs and changes to feeding systems should be carefully costed.

lWhat is the effect on quota? The potential to exploit quota released by dropping butterfat to gain trigger points is vital. This can save marginal quota leasing and allow the production of more milk.

lPurchased/leased quota with a lower fat base is often better value.

lConsider seasonality, transport, likely bonuses and services offered by the dairy or milk group.

lKnow what the dairies do with their milk.

The table compares three producers with the same cow numbers and yield but very different milk quality. All are producing above their butterfat base and currently leasing quota thus reducing overall herd income. The effect on incomes if butterfat was reduced is shown.

The milk price obtainable on the constituent-based contracts at typical values is lower for producer A than that obtainable on the flat rate. Producer B would receive a lower price on his base production on the flat-rate deal. But he/she can increase yields by using quota released by the butterfat trigger points to boost the herds income.

Producer C can do the same but would be better off on a constituent-based contract if the high milk quality is being produced economically. In all cases if butterfat was dropped further the difference between the two contracts falls. &#42


Herd revenue comparison between constituent and flat-rate pricing

ProducerABC

Cow numbers808080

Yield (litres)6,2506,2506,250

Output (litres)500,000500,000500,000

Butterfat (%)3.904.104.50

Protein (%)3.203.353.50

Farm quota (litres) 500,000500,000500,000

Butterfat base (%)3.803.904.20

CONSTITUENT VALUE CONTRACT

Leasing required (litres)9,00018,00027,000

Leasing cost (@12p/litre in £)1,0802,1603,240

Leasing cost (a litre sold)0.220.430.65

Value butterfat (@2.85 per %*)11.1211.6912.83

Value protein (@ 4.36 per %)13.9514.6115.26

Milk value (p/litre)25.0726.2928.09

Less leasing cost (p/litre)24.8525.8627.44

Existing herd income (£)124,255129,295137,185

FLAT-RATE CONTRACT

Fat reduced to (%)3.803.804.00

Milk price (p/litre)25.7525.7525.75

Milk revenue (£)128,750128,750128,750

Surplus quota (litre)09,00018,000

Increased margin on farms surplus

quota only (@ 20p/litre in £)018003600

Gross herd income (£)128,750130,550132,350

Plus quota leasing saved (£)1,0802,1603,240

*All prices are illustrative only.