Are your costs under control?

By John Allen, managing partner, Kite Consulting

The dairy industry is facing a very challenging environment. The NFU estimates that average costs of production are about 29p a litre.

And, while help is coming to some extent in the form of increasing milk prices, just a few weeks ago the relationship between milk price and feed price was the worst it had been for almost 20 years for some farmers.

But it is not all doom and gloom – the long term still holds opportunities for efficient farmers. However, UK dairy producers will need to be competitive in world terms and that will increasingly mean being able to compete with US farmers and their cost structures. Cost control will therefore become even more important.

There is a huge range in performance in terms of cost of production. Among Kite’s clients the range from top 25% performers to bottom 25% performers is about 9-10p a litre. This is huge, and shows the potential savings that can be made for many farms.

So how do the top performers achieve such low costs? The reality is that there is no silver bullet.

In most cases farmers that are achieving the best cost performance are the ones with attention to detail – not just to cost, but also to every element of the running of their dairy business. They are always challenging their current performance and looking for ways to improve.

However, applying this approach to costs only is not always the answer. Questioning every single penny may result in lower costs in the short term, but there is the potential to be ‘penny wise and pound poor’ if necessary costs are removed due to over-zealous cost control.

The opposite is also true. There are many farmers who have an ‘insurance mentality’ – purchasing things because they once had a problem and that particular purchase solved it, so it has now become a standard purchase for the farm. While in some circumstances this approach makes sense, it can also lead to unnecessary spending.

The best way to deliver sustainable cost reduction is to embark on your own ‘austerity plan’. The first step should be to go through your expenses and question every item. Why are you buying that? Is it the best price/ value? Could you buy something else that would do the job as well, or even stop buying it altogether?

The next step should be to question farm management practices. This is not about making knee-jerk reactions about your production systems, but making calculated business decisions that help you deliver your strategic aims.

Does your current feeding system work well or could you reduce cost without losing output? Can you really justify having your own silage-making equipment or would a contractor be more cost effective?

At the end of the day, every farm is different and a line-by-line comparison of costs will only ever give half the story. A family-run unit with plenty of labour may have much higher equipment costs than a unit run with employed staff and contractors. But that may be the best solution for that business, so it is important not to throw the baby out with the bathwater.

Try to establish a culture on farm where you look at every cost with a critical eye to see whether it really does deliver best value. This critical eye must also become part of your ongoing management, rather than a one-off review of costs, or any savings made will only be short term.

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