Profitability of different UK production systems
The UK is almost unique in having a wide diversity of production systems; from once-a-day milked spring-calving herds – with almost no housing and no supplementary feed – through to herds producing 11,000 litres a cow, zero-grazing and housing throughout the lactation.
But, the ultimate profitability of any of these systems is far more dependent on the person running it than the system itself. Management success can be attributed 80% to the person and 20% to the system.
Nevertheless, there has been more divergence and specialisation towards one end of the spectrum or the other – albeit not necessarily to the extremes – in recent years. In order to assess the merits and likely returns from such variation in systems we will have to broadly categorise into groups (see table).
The financial permutations in the table are for illustrative purposes only and average figures hide a huge variation. And while such capital investment figures may be pertinent to newly-established dairies, clearly some systems are inherently more capital hungry than others. The key point is to be clear of your profit requirement and then ensure your dairy production system is structured to meet that demand, as well as your personal and social goals.
| Overview of systems | |
|---|---|
| High-output herds: | Block calving: |
| Suited to liquid market, AYR – level profile, however sufficient premium is required for additional costs incurred (3-5p/litre?). | Annual pattern of work defined peaks and troughs in the workload |
| High yield to dilute “fixed costs”, however be aware that all costs are variable in the long-run and that increasing feed cost by one unit will result in a more than proportionate increase in total cost (ie fixed costs may rise as a result). | Lower labour requirement overall due to the advantages of specialisation and economies of scale gained by doing the same thing all at once, ie calving, then mating etc. |
| The all-year round nature of the system may be a benefit: consistent labour requirement and cash flow etc, but the converse may also be true, where a constant workload and high level of individual cow management can place a significant cost and pressure on labour. | Simplification: the whole herd can in effect be managed as “one cow”. |
| Calving period depends on grass growth potential, milk contract, facilities/building etc. | |
| Requires discipline and excellent fertility; high component milk may be suited to compositional contract. | |
The fourth category, “somewhere in between”, is perhaps not one system at all, but instead represents most of the variation within the industry. And while several very profitable businesses may class themselves in this category, the average figures presented are a representation of what can happen when a clear strategy for profit is not in place. The potential for variation in both costs and income is huge – it is all too easy to have the high cost structure associated with intensive systems without the appropriate level of output (cow performance) to cover it.
High reliance on purchased inputs (feeds, fertilisers, fuels etc), equals more exposure to price volatility in these commodities; the general trend in rising input prices will continue and if producers do not adapt their system to maximise efficiency of input use, profit margins will narrow.
Whatever the system implemented, it is key to be “system trained” – make sure the whole team are aware of the strategy, goals and performance indicators (both financial and technical) and buy in to the ethos; use discussion groups and benchmarking as well as outside advice in order to monitor, motivate and inspire.
| Profitability of different production systems | ||||
|---|---|---|---|---|
| Intensive/high-output | Spring-block grass | Autumn-block forage | ‘Somewhere in between’ | |
| Calving period | AYR | Spring | Late summer/autumn | AYR/majority of the year |
| Yield/cow (litre) | 8,000-11,000 | 3,500-7,000 | 5,500-8,000 | 5,000-9,000 |
| Forage utilisation of total DM intake | Low 25-55 | High 70-100 | High 60-85 | Variable 30-70 |
| Average net margin (p/litre) after family labour cost and value | 2.5 | 5.5 | 4.5 | 0.5 |
| Capital requirement (livestock, parlour/dairy buildings, infrastructure) Total £/cow | High 5,000-7,000 | Low 1,500-3,500 | Medium 2,500-4,500 | Medium-high 3,500-7,000 |
| Possible profit requirement for 10% ROC (200-cow herd)) | £120,000 | £50,000 | £70,000 | £100,000 |
| Total litres required to achieve ROC based on average net margin | 4,800,000 | 1,000,000 | 1,555,555 | 20,000,000 |
| Exposure to input cost and volatility | High | Low | Medium | High |
Key action points
- Most systems have the potential to make sustainable profit when well managed.
- Management skill of people in charge is key to success; 80% person, 20% system.
- Beware of the high capital costs invovled and hte requirement to achieve a return; highly capitalised systems may struggle to cut costs if the milk price drops.
- Some systems have higher exposure to input costs/volatility and therefore risk.
- Benchmark and use discussion groups to ensure you are on the right track; within the systems and across systems for comparision, learn from everybody.