As the amount producers are paid rises, Tony Evans considers how to make the most of any extra income.
The milk year ending 31 March 2014 will more than likely be a record payout for milk price.
A price increase of up to 3-4p/litre is being received on many farms – whether they sell to the liquid sector or the manufacturing market. But, how much have you held on to and what are you doing with the extra income?
For many producers the first 1-2p/litre received this year went towards paying for additional feed and housing costs incurred last spring.
After this payment, the additional income which could total up to a further 2-3p provides a return on your investment and time as a milk producer you need to hold on to it very tightly.
At the moment, the world market for milk is very bullish and at least the UK has been able to keep retailers on their toes by having an export market as a viable option. However, this history of milk pricing has always been cyclical and like all other principles of economics is driven by the balances of supply and demand. There is a strong indication milk price could reduce as we move into quarter three of 2014 just as the southern hemisphere producers start calving again.
It’s worth considering the following dos and don’ts when working out how to hold on to your hard-earned milk cheque:
- Invest in your business where you get at least a 10% return (after depreciation).
- Pay down debt on areas where your return is low as interest rates will rise at some point.
- Continue to run your milk production business in a simple way and ensure any investment does not complicate life and increase cost.
- Watch your farm expenses to make sure you are not paying over the odds for your inputs. Invest where you can to improve longevity, such as length of cow life and reduced replacement rate, and people’s quality of life that work in the dairy business.
- Replicate what you brought, you are successful – do not experiment at your own risk.
- Review your milk buyer – everyone can sell produce into a market where supply is less than demand – but are they fit for the future?
- Review your farm investment programme and consider bringing forward any investment you were going to do anyway.
- Review your own business and personal goals (in your family and with your employees).
- Take some time off, have a holiday – reward yourself and those around you that have helped you be successful.
- Listen to any salesperson who wants you to produce the marginal litre with their product.
- Listen to your accountant advising you to invest in machinery to reduce your tax liability.
- Change a profitable system unless returns will go up on a lower payout as well as the current high payout.
A period of opportunity?
Some of the most successful dairy businesses use periods of high milk prices to fund growth and with both a domestic and international market under-supplied by UK dairy products this is where we are now.
Observing expansion in manufacturing of milk in the UK for cheese, butter and powder allows a fantastic opportunity for profitable milk production in the UK to continue and motivate the current capital owners who have the opportunity to receive a return.
With feed, fertiliser, fuel, interest rates and inflation all lower than they have been, this generates a wonderful opportunity but ensure that any business plan prepared does not rely on the current milk price being maintained. However, the returns from dairying, even with lower milk price sensitivity, can successfully compete with beef, sheep and arable farm businesses.