12 March 1999

Top 10% comparisons raise more questions

WORKING out production costs in p/litre will allow performance to be compared with the top 10% of producers, but may raise more questions than it answers.

Martin Coward of Midland Bank said Axient figures commissioned by the bank found the top 10% of producers achieved a profit of 5.4p/litre compared with an average profit of 2.4p/litre.

"The difference in overhead costs was far greater than we expected. So, how come we spend so long looking at variable costs and less on overheads?" he asked. The top 10% spent 0.8p/litre less on labour, 1p less on power, machinery and its depreciation, 0.7p less on interest, 0.5p less on property charges and 0.4p less on sundry overheads.

Despite this they had only nine more cows and produced only 500 litres extra a cow compared with average farms. Top producers also had fewer enterprises, suggesting they were more focused on dairying, he added.

But the exercise has generated more questions about how these top farms achieve higher profits.

One query the bank has solved is that of lower interest charges on the top 10% farms. These result from lower borrowing. But these farms balance sheets show that, a few years ago, borrowings were as high as other farms, but they have used extra profits to cut borrowings during that time.