Dairy herd expansion: calculate the benefits

Making the decision to expand the herd and by how much is a complex one.

Find out what the options are and how to calculate whether it’s worth it with this advice from Neil Blackburn of Kite Consulting.

Tips to help you decide:

1. Consider your motives

Will expansion help solve a problem in your current setup?

2. Consider all factors

You should think about capital requirements, implications on land availability and NVZ restrictions, labour resources and the management skill and time that a larger herd will need.

3. Consider the sensitivity of changes

What will changes to key factors have on the potential success or failure of the plan? If milk price drops or feed price increases, what will that mean to your future cashflow, ability to service debt and overall profitability?

4. Consider your current business first

Look carefully at your existing herd and ask yourself what can be improved on your unit first that would have an impact on profitability.

Rather than expand can you improve your existing unit? Neil Blackburn says, “Start by benchmarking your cost of production and physical performance against other farms.

“The difference between average and top 25% is generally around 3p/litre, so there is often plenty to do without changing herd size at all.”

Key areas to look at to improve your unit are:

• improving housing and cow comfort
  
• getting the basics right in all areas
  
• forage quality and yield
  
• cow nutrition
  
• fertility
  
• dry cow and transition management
  
• mobility
  
• mastitis
  
• age of heifers at first calving

If expansion is the right move for you, there are in most cases four options (see tabs at top of article)

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Option 1: Marginal cows

Adding a few more cows is relatively straightforward. Assuming an average yield of 8,000 litres a lactation, then an additional marginal cow would bring about £2,625 in income a year at a milk price of 30p/litre – as shown in option 1A.

If you account for variable costs associated with keeping that additional cow, then the gross margin a cow is about £1,054 a year as in option 1B.

Finally, you must allow for overheads to cover electricity and water, repairs, contractor costs, machinery and fuel, labour, land rent and interest.

This would typically add up to £471 a cow a year, giving a total profit margin of £583 for every additional cow (£1,054 gross margin minus £471 overheads) at current prices.

Assuming you can add 10 more cows without any significant capital expenditure or changes to management then this could return additional profits of £5,830 a year – something definitely worth considering.

Option 2: 50 additional cows

If cow numbers are to be increased significantly then the capital consideration becomes more important, explains Mr Blackburn.

“For most herds, adding 50 more cows will require additional housing, possibly a parlour extension, more silage and slurry storage, quite apart from the cost of the cows themselves.”

If this amount were borrowed over 10 years at 4% interest then the annual capital repayment would be £21,000 and the annual interest cost would be £4,430, giving a total annual cost of £25,430.

Assuming the same profit margin as the worked example in option 1 of £583 a cow a year, this would deliver a total additional margin of £29,150/year with a loan repayment of £25,430, giving a positive cashflow of £3,720/year and a profit (before tax) of £24,720. Again, this seems worthwhile at first glance, but that is where sensitivity analysis needs to be completed.

“In this example, milk price changes of +/- 1ppl equate to £4,000/year, so a volatile milk price could quickly make this example cashflow negative, resulting in difficulty servicing debt,” says Mr Blackburn.

Not all of this capital investment might be required on every farm. If you already have heifers in the pipeline and can cope with 50 additional cows with fewer changes to farm infrastructure, then the economics quickly become more promising, as shown below.

No capital cost for heifers and limited cost for new building works means total cash investment could be reduced to, say, £90,000.

Assuming the same additional margin of £29,150/year and a loan repayment of only £10,900/year (on the same terms as our initial calculation), then the positive cashflow becomes £18,250/year with additional profit (before tax) of £27,250/year.

“While overall profitability is not massively different in this example, the end result would be an expansion plan that was much more resilient, as the positive cashflow effect is far greater, making sensitivity to price changes less of an issue,” Mr Blackburn explains.

Option 3: Increase cows at the expense of another enterprise

On many farms there may be merit in considering increasing cow numbers while reducing another livestock enterprise that utilises similar resources – heifer rearing being a typical example.

If you assumed you had a 200-cow herd with a 25% replacement rate (50 animals a year) and calving at 27 months, then rearing your own heifers requires 56 livestock units.

Moving to a flying herd or having heifers contract reared would mean cow numbers could be increased to 250 with no additional land requirement, saving £156/cow in overhead cost compared to previous worked examples.

Assuming the same loan terms as above, this would result in a capital repayment of £14,000 a year and interest of £2,953, giving a total cost of £16,953 a year. With the increased margin of £739 a cow (because no cost for additional land), this would increase margin by £36,950/year, resulting in positive cashflow after servicing debt of £19,997/year and profit (before tax) of £33,997.

Option 4: Greenfield site

Perhaps unsurprisingly, this option is far and away the most complex to budget for, as there are so many potential variables, including the management system chosen.

The return on capital can vary enormously and the most important consideration is to choose a system that suits the farm and your milk buyer, as well as your own skills and preferences.

Trying to give a budget example for a greenfield site is almost impossible, explains Mr Blackburn, as every farm is different, but there are some key features of a new set up that must be got right. “A greenfield site must have sufficient space, light and ventilation. Cow comfort must be the priority and you must consider the cost of automation versus the additional labour required from a manual approach,” he says.

“The most common mistakes people make when embarking on a greenfield site project are under- budgeting, not being realistic on timescales, underestimating the requirement for management, not doing enough research on housing designs and not considering the implications on cashflow,” he adds.