Dairy farmers must avoid making damaging changes to their businesses as a knee-jerk reaction to the prolonged price downturn, consultants have warned.
Only those who were rational, resilient and who budgeted to do business in an industry that was resetting its base would survive the current volatility, said John Allen of Kite Consulting.
“Remain rational in the knowledge that things are going to change,” he told producers at AHDB’s Welsh Dairy conference.
“Be careful not to do things that will damage your business. In the case of a high-output farm, this could be cutting back on feed and damaging future productivity.
“Instead, work out what must be done to get through the next period before prices improve, whether that is six months, 12 months or longer.
“In the current climate there is a tendency for a lot of farmers to veer towards a mindset that this downward cycle is never going to end. This is unhealthy and destructive. A rational person will understand that markets turn.
“A resilient person doesn’t look for someone to blame, they don’t see themselves as a victim. They will look at ways to improve on what they are doing.’’
“We are in an industry that is resetting. As long as feed prices remain in the region of £160-£180/t, we are unlikely to see milk prices of 30p/litre plus.”
With feed and oil prices at current levels, farmers should be in a position to make a return from 25-27p/litre when budgeting for improved milk prices, Mr Allen suggested.
Dairy farming businesses must also plan how to recover lost net worth when milk prices rise again.
Referencing a new business scorecard that Kite Consulting has developed to pinpoint risk areas within a dairy farming business, Mr Allen said one of those threats was net worth change as a percentage of net worth.
“A business with a net worth of £1,000,000 that is projected to lose £100,000 of balance sheet value in the year will experience a projected net worth decline of 10%, in effect the business will lose 10% of its value within 12 months of trading.
“Taking into account future milk prices, a business must establish if that decline in value can be recovered or if the downward trend will continue.’’
A good business could stand that sort of risk because it would recover that value in an upturn and add more value too, said Mr Allen. “However you have got to be sure you can recover it – you can’t take too many years of balance-sheet burn.”
Other risk factors include the break-even milk price – the price required to cover all costs including depreciation, drawings and tax – and the existing supply contract.
The scorecard ranks farmers with dedicated supply contracts in the strongest position with those without contracts at the highest risk.