19 September 1997

TURNOVER IS KEY TO SURVIVAL NOW

The most profitable system of milk production will depend on whether you are dairying on an arable or grassland farm but the over-riding factor will be the need to increase turnover, as Andersons consultants Tony Evans

and Matt How report

MILK price is dropping for the first time since quotas were introduced. As well as significantly lower milk prices this year, dairy farm profits will also be affected by lower cull cow and calf prices. But on a positive note most input costs have fallen and forage supplies are plentiful.

World trade liberalisation, EU expansion, and the focus away from food support and towards direct payments will probably keep future prices lower than we have previously experienced.

Improvements in technical performance through better forage utilisation and reducing concentrate costs are not, therefore, going to maintain profits at previous levels and will not suit every dairy business.

For this reason, all businesses must review their milk production system, and most importantly look at the dairys overhead costs in conjunction with the rest of the farm, where applicable.

If the dairy business is going to thrive and not just survive it is likely that turnover will have to rise – by selling more milk – and each farm will have to adopt the most profitable system of production based upon lower returns a litre.

In the UK, with two contrasting bands of weather and farming type, alternative systems of milk production will become more apparent. Each business will do what suits it best, and it is essential to consider all costs in the business.

Dairying on the arable farm

Increased yield from forage usually employs more land with lower stocking rates but in an arable area where arable overheads must be spread over more acres and there is a real arable opportunity cost. Margin an acre must be considered alongside an increase in yield.

Such a system may well include complete diet feeding, making use of its advantages of available labour, machinery, storage and cheap bulk feeds and straw in conjunction with the arable unit. Disadvantages for the dairy unit are the competitive alternative enterprises and lower rainfall with less grass growth potential.

With the recent drop in margins both arable and livestock enterprises will be trying to ensure maximum use of their respective overheads. With falling bulk feed and cereal prices it will pay for some businesses to continue to maximise stocking rates and increase milk yield from concentrates/purchased feeds. This means that the maximum arable acreage can be cultivated and the dairy herd should justify its forage acres.

Even with lower cereal prices, when combined with the cost of forage production, bulk feeds can be very competitive (see Table 1).

It would appear that increasing profit on the arable farm depends on increased yield per cow and increased concentrate/straights and bulk feeds fed a cow.

Dairying on the grassland farm

Two systems of milk production tend to predominate on the grass farm: Silage – self-feed or easy feed – plus concentrate/straights; or silage and purchased feeds fed through complete diet feeders.

Historically, the most profitable grassland dairy farming systems have been: Self-feed silage, with concentrates or straights fed in-parlour and have calved in the spring – despite seasonality pricing.

Advantages have been low labour requirements, low machinery requirements, the need for quality management, and simplicity. Disadvantages are that the system cant always make use of cheap alternative feeds.

Within the last five years, however, with increased milk prices and more available cash, some dairy farmers have adopted new milk production practices by moving to complete diet/forage box systems. This investment has not been cheap on the predominant grassland farm – in some cases investments of £50,000 plus have taken place. Cash has been spent on feeder wagon and tractor; loader; straights storage; feeding out area; and additional labour. This route offers improved performance benefits but the drawbacks, especially the extra costs, must be considered carefully.

Where to from here?

Table 2 indicates the relative importance of every cost involved in milk production and whilst it is essential to focus on improved grass and forage use and lower concentrates it is also critical to establish the overhead structure needed. Many UK producers have not sufficiently addressed the area of overheads and truly confirmed the correct system of milk production on many farms for the autumn.

As cereal prices fall along with falling area aid support, some grass farms with cereals will consider using their own cereals if they have a feeder-wagon system. If not, it may well pay to stop growing cereals completely and focus on milk from grass and expansion of output and release capital from machinery and from a then marginal enterprise.

Maintaining profits on the dairy grassland farm despite the falling milk price will depend on:

&#8226 Improved grassland efficiency

lOptimum milk from grazed grass in preference to silage

&#8226 Low overheads

&#8226 Increased yield a cow

Looking ahead farm structures will have to change. Profitable milk production will be achieved by both of efficiency and growth. &#42


Table 2: Andersons costed farms: results to spring 97

p/litre

Output:

Milk price25.3

Calf/Cull

– replacement0.3

Total output 25.6

Feed3.8

Forage2.424%

Vet0.7

Office0.4

AI0.5

Misc0.9

Total variables8.7

(34% of output)

Labour3.0

Power 2.430%

and machinery

Depreciation 2.4

Sundries1.5

Property2.0

Total overheads11.3

(44% of Output)

Total Costs20

Profit/litre5.6*

*This excludes considerable one-off cash introductions in 96/97.


Table 1: Costs of forage production for dairying on the arable farm

Gross margin

(£/acre)

Cereal margin: 3.8 tonnes wheat/acre @ £75/tonne389Arable area aid payment

Seeds/sprays/fertiliser116

Machinery costs (stubble to stubble)102

Margin171

Less set aside opportunity cost @ 5%8

True margin 163

Cost of forage production (3 year ley)

(£/acre)

Seeds/sprays/fertiliser84

Machinery costs119

Re-seeding cost33

Total costs236

Plus opportunity cost of cereal margin163

Yield @ 4.8 tonnes dry matter/Acre£83/tonne

10.8MJ = 0.77p/MJ

Cost of growing maize

(£/acre)

Seeds/sprays/fertiliser97

Machinery costs113

Area payment104

Set-aside (5%)21

Total net costs127

Plus: opportunity cost of cereal margin163

Yield @ 5.7 tonnes dry matter/acre£51/tonne

11.00 MJ = 0.46/MJ

Without area payment cost per unit of MJ = 0.63p/MJ

£/tonnep/MJ

Brewers grains25 (10% waste)0.9

Pressed pulp160.6

Wheat (rolled)870.7

Sugar beet pulp850.7

Grass silage83 (per t DM)0.8

Maize silage51 (per t DM)0.5 (0.6)

Andersons Tony Evans… profitable milk production will be achieved by a combination of efficiency and growth.