Herd expansion can be a vulnerable period for a dairy farm. The expansion phase is tough on cashflow and a business that expands from a position of weakness could be in trouble long before any additional milk volume is produced.
Business growth should leave a farm in a stronger position not jeopardise its financial and physical performance.
Here we consider how to avoid six of the most common pitfalls if you are growing your herd.
1. Choose the right business model
Tying up capital in assets can starve a young business of the cash it needs to grow.
John Allen, managing partner at Kite Consulting, says dairy farmers who generate wealth in the long term often start with a very small asset base.
His advice is to grow tenanted assets in the early part of a career before growing more sustainable assets, such as the land base.
Avoid buying land in the early phase of your career, grow cow numbers instead. Make money in yearly phases by building up trading and when you get to a certain size you are likely to be generating sufficient profit to buy that farm down the road.
Farmers in their twenties who expand by borrowing a million pounds to buy the farm down the road will often starve themselves of cash while not adding much income.
Successful dairy farmers Kite Consulting has worked with have grown their landlord’s assets first before buying more land because these give them a return on investment of 20% compared to 2% from buying land.
2. Expand from a position of strength
For expansion to be successful, a business must be sustainable with a strong balance sheet and good technical performance.
Expansion built around assuming a high and consistent milk price is not realistic.
A sensitivity analysis of the expansion plan will demonstrate if the business can cope with a low milk price.
If the expansion plan includes a breakeven milk price of 28p a litre, what would the effect on the business be if it dropped to 20p/litre? Build expansion around a low milk price, advises Mr Allen.
Targets and goals must be realistic, he adds. “It doesn’t matter which system you are in; a business must have a realistic outlook to flourish post-expansion.”
Consider all the strengths and weakness of the business. “You might be good on finance and staff management but not so good on the environmental scorecard.
If insufficient slurry storage capacity or cow lameness are issues, these must be addressed as they are possible barriers to meeting market and consumer requirements.
3. Take a long-term view
Don’t expand with a vision for the next five years; look at where you want the business to be in 10-20 years.
Part of the expansion process is to have a vision that is realistic, says Mr Allen.
Consider how the business might develop over a longer period of time to ensure scope for further expansion.
Kite Consulting often sees situations where expansion plans are based on the “extension to the extension” without standing back and looking at where the business will go in the long term.
Take a look at what has changed over the past 10 to 20 years and put your current business and your plans in perspective.
When planning the infrastructure, consider how the unit might develop over time. Make sure there is scope for future expansion should the opportunity arise.
4. Plan ahead two years’ in advance
Developing the physical and financial aspects of expansion is complex and needs to be carefully considered so start the planning phase at least two years before you expect to be milking the bigger herd.
Mr Allen describes this as the “fun phase”.
No money is spent and the farmer can look in detail at what is going to work best for them.
For instance, this may involve, planning a housing and slurry system so that you maintain and improve technical performance.
5. Avoid over-optimistic budgeting
Combine an enthusiastic farmer with a naïve consultant and a bank that fails to challenge the expansion plan and the business could be heading for trouble.
“It is OK to have a ‘glass half-full’ mentality but invite someone who is more cautious to look at the plan,” Mr Allen cautions.
Correctly budgeting for capital costs is important but poor technical performance is more likely to kill an expansion plan, he reckons.
If you budget for a yield of 9,000 litres but only achieve 8,000 it will blow a big hole in financial performance.
Don’t overlook the cost of carrying additional heifers during the expansion phase and the potentially lower milk output associated with a young herd either, he warns.
And remember to factor in a short-term reduction in performance due to this.
The business plan should include the likely cashflow during the conversion years and the farm operating costs in the years before the herd is in full production.
6. Develop protocols to manage staff
The bigger a dairy farm grows, the more reliant it is on staff so having the right people on board is important, as is managing those people.
“You move from being a ‘cow manager’ to a ‘people manager’ and that does not always suit everyone,” says Mr Allen.
The successful businesses we work with that have grown have adjusted to managing and motivating staff. That in t, in turn, reed them up to enjoy a good quality of life.
When a dairy farm expands beyond family labour, protocols take the guesswork out of the day-to-day routine. This is key to managing staff.
As cow and staff numbers grow, the business owner shouldn’t expect to always watch and direct all employees.
Having proper protocols in place, such as calving cows, milking routines, clamp management, calf rearing, will enhance the performance of both the workforce and the herd and can simplify how a farm is run.