Optimising returns not maximising output – does this matter? The answer is yes, writes Tony Evans, head of business consultancy, The Andersons Centre.
With rising commodity (milk) prices, efficiency can often be thought to be less relevant and, therefore, maximising output can give good profits. But as commodity prices fall, it is vital that all businesses decide the point at which returns are optimal for profit.
Let’s not beat about the bush. The whole point of being in business is to be profitable and the whole point of being profitable is because it gives you choices. Some people want to have choices before they are profitable, but that invariably means trouble. Get the sequence right – profitability, then choices.
Head of business consultancy
The Andersons Centre
Production is vanity and profit is sanity. Think about what is optimal for you, your business and your financial structure. Maximum production does not always result in maximum profit – very often optimal production is maximum profit. About 90% of your business potential may well be maximum profit. This needs to be considered.
The last 10% is exceeded by the lost 10% of marginal cost and at 100%, everything, including you (as business owner), the animals and those that work with you, are under real pressure and, therefore, you have to ask if it is sustainable. Sometimes working at 90% efficiency is where the business works best for all resources concerned.
In the dairy industry, optimum results may result in better returns than maximum output for sustainable profits in the following areas, where increasing spend can result in falling proportional returns (see Figure 1).
The key message in the table below is the more concentrate a cow receives, the poorer the milk yield response is. Clearly these results are affected by the genetic potential of the cow being fed alongside many other factors, but as the milk price increases relative to the feed price, the more likely the milk producer is challenged to produce the marginal litre.
|Concentrate feed level: milk yield response|
|Yield level (litres a cow)||Marginal feed rate response (kg/litre)||Return/litre after concentrate feed cost but before all other costs (milk price at 32.5p/litre and feed cost at £230/t)|
It is well recognised that dairy herd fertility (Figure 2) is negatively impacted with increased calving interval as milk yield increases. This is brought about by higher levels of feed energy being apportioned for milk production at the expense of energy for reproductive activity.
Trial work from New Zealand – Dairy NZ and Moorepark in Ireland (Figure 3) – has shown that nitrogen application and grass growth rate responses are optional in respect of kg of N applied at lower levels and more frequently – about 20-30kg/ha of N after each grazing.
Often dairy businesses apply nitrogen in line with contractor efficiency and apply large amounts less frequently, resulting in poorer response rates and more leaching.
UK dairy farming has many production systems that generate differing profit levels over different time periods according to milk price levels and input costs. Often high output: high-cost production systems rely on smaller profit margins a litre but high volumes sold.
Conversely, lower-input businesses can sustain profitability over more years in a trading environment where there tends to be more volatility in returns than expenses.
However, it will not matter how efficient you are if you do not have sufficient critical mass – your gross income needs to be at a certain level. Where this level is depends on the business driver, but a lack of sufficient physical and financial scale in many businesses can be a major business risk.
We all read about production and profit drivers in dairy farming and there are a number of them such as grazing management, different feed initiatives, livestock genetics, new technology, improved machinery, top grasses, production gains and the like.
Never forget though that the number-one production/profit driver is actually six feet above the ground – in farming men and women’s minds. All and any driving progress and good results start at this source. It is easy to forget this, but it has the single most significant impact on profitability.
Remember the 80:20 rule – you will deliver 80% of your profit from 20% of your time and chase the remaining 20% using 80% of your time. Optimum returns can be more sustainable than maximum output.