Livestock production cost management vital with uncertain SFP future

Getting to grips with costs of production is going to be vital for every livestock farm as the future of Single Farm Payments becomes uncertain. Jeremy Hunt takes a look at the state of the livestock sector and what can be done to boost the bottom line

As markets become more volatile and the future of Single Farm Payments uncertain, livestock producers need toget  a handle on on-farm costs to ensure a sustainable future.

A recent Farm Business Survey highlighted the widespread reliance on Single Farm Payments to keep businesses going. “The fact these payments cannot be relied upon should be the biggest incentive of all to tackle costs of production,” says Carol Davies, senior analyst with AHDB.

“Take the variable cost of feed. Feed costs can have less impact on margins when every effort is made to use it more efficiently.

“There’s still a lot of potential for beef, dairy and sheep producers to use bought-in feed more efficiently by only buying what’s necessary – and that means making full use of forage analyses.

“I have to say I’m amazed by the number of farmers who buy low-cost feeds just because they are cheap without being aware of their feed value. Many farms could make big savings on feed by being more precise about meeting the nutritional needs of their stock,” she adds.

Sheep

Sheep sector key facts (figures EBLEX)

  • Top third of non-SDA sheep producers achieving a net margin of £30/ewe higher than the average (£18.34 for top third and just £12.65 for average)
  • £20 difference in fixed costs between the top third and average lowland producers
  • Total costs of production – including replacement costs for lowland flocks – was £117.24 for top third compared with average of £98.82
  • Average LFA flocks losing just under £16 a ewe and the top third making £14
  • Higher output accounted for at least one third of the net margin difference
  • Top third of flocks producing with 157 lambs reared from 100 ewes compared with average of 145

Fixed costs are a major issue affecting profitability in the sheep sector, says EBLEX beef and sheep scientist Liz Genever.

“In both Less Favoured Areas (LFA) and lowland flocks it’s the fixed costs that have the biggest impact. The most profitable lowland flocks had 57% lower fixed costs than the average and in LFA flocks there was a 40% difference between the top and the average.”

Dr Genever says the lamb market outlook remains positive for the year ahead, but improving performance and driving down variable costs to improve margins in 2014 must be a priority.

“Increased output is the key to higher margins across both lowland and LFA flocks. It’s not measured only in terms of the value of lambs sold, but accrues from higher lamb growth rates, higher lamb sale values, more lambs reared and fewer unproductive ewes. Optimising lambing percentage and reducing lamb mortality is critical. Margins hinge on maximising the number of kilos being produced,” she adds.

Beef

Beef sector key facts (figures EBLEX)

  • Top third of lowland suckler herds are losing £58 a cow
  • Average herds show a loss of just under £240 a cow
  • Figures to March 2013 saw the top third of lowland suckler herds achieve a calf output figure of £554, compared with £508 for the average herds
  • Top lowland herds using half as much bought-in feed (£63 compared with £28) and in upland herds those comparative figures were £168 and £209
  • In upland herds the impact of variable costs between the top third and the average was marked – £168 for the top compared with £209 for the average

Although cattle values have been higher throughout the beef production chain, EBLEX says there’s an urgent need to address both fixed and variable costs as well as herd output.

“There’s a difference in output between the upland and lowland herds as well as a difference in variable costs, but the biggest difference is the fixed costs. That’s what makes the real impact,” says Dr Genever.

“Labour efficiency, in terms of how a beef system is run, warrants attention while questions should be asked about how many cows one person should be responsible for,” she says.

Dr Genever suggests looking at physical performance and consider the number of calves born live to every 100 cows and heifers put to the bull.

“The major driver to output in a suckler herd is the number of kilos produced a cow, so farmers must ask themselves if enough is being done to achieve the full potential of those calves. It’s all linked to cow performance, bull performance and herd health, while fertility must remain in sharp focus.

“The big decision to reduce the number of cows by a few isn’t necessarily going to help reduce costs. It might reduce variable costs but not fixed costs.

“Small percentage improvements in performance combine to make a big difference, so use genetics to improve calving ease and increase growth rates.”

Pigs

Pig sector key facts (figures BPEX)

  • By September 2014 finished pig margins are expected to reach a record high of £21
  • Predicted BPEX costings expected to have doubled in the last six months – from £11 to £19 a pig
  • Current costs of production are about 143p/kg – giving a margin potential of about 27p/kg
  • Top third of producers’ feed costs are £31 a pig compared with £43 for average herds
  • Best herds were achieving a daily gain of 918g a pig compared with 800g for average herds
  • Cost a kg of weight gain was 46p in top third compared with average herds at 72p

Despite higher prices in the pig industry this much needed period of confidence for pig producers must not trigger complacency, says Stephen Winfield, northern knowledge transfer manager with BPEX.

In fact BPEX advises an even more rigorous appraisal of costs to maximise and sustain improved profitability.

“Producers need to be even more accurate about their recording and look closely at every figure to make sure the data they are collecting can be applied to the business to improve efficiency. This will achieve even better business planning for the future. Only by using costings to provide figures that can be acted upon will pig finishers really benefit in the long term,” says Mr Winfield.

He cites a high standard of gilt management as critical to profitability.

“Every stage of gilt management is important. Be strict about serving gilts at the right age; be meticulous about vaccination programmes and after care. Treat them like princesses because they are the future of the business.

“Some producers talk about a replacement rate of 47%, but our figures show a lot of gilts never make it to farrowing, so the rate for many herds is more like 60%. This is a very important aspect of the system and really needs a new focus.”

Mr Winfield believes there’s huge potential to improve “born alive” and “piglets weaned” figures, as well as piglet liveweight gains, while also trying to reduce piglet mortality.

“Many units have spent very little on buildings because there hasn’t been the cash available. Now may be a good time to look at where environmental improvements can bring a further lift to margins through better efficiency and lower losses.”

Dairy

Dairy sector key facts (figures DairyCo)

  • Fixed costs account for 70% of the difference in total cost of production (ppl) between top and bottom 25% farms on grass-based systems
  • Higher replacement rate resulted in significantly higher replacement costs a cow for the bottom 25% farms. Coupled with lower yield, this culminated in a 1.3ppl higher replacement cost for the bottom 25%
  • Margin a litre varying from -5.4ppl to +6.6ppl

The latest Milkbench+ data from DairyCo indicates a wide range of profitability across dairy farms – something that highlights significant opportunities for reducing costs of production and increasing margin a litre.

An analysis of performance between the top and bottom 25% of milk producer margins has identified four cost areas that have the greatest impact on the improved performance of the top 25%.

“These costs are responsible for a minimum of 60% of the difference in net margin between the top and bottom 25% of farms costed. They cover feed and forage variable cost, herd replacement cost, labour costs (paid and unpaid) and power and machinery cost,” says Rachael Chamberlayne, senior economist with DairyCo.

Cost control is achieved through effective management – ensuring all inputs are used efficiently in the production process and that investment is directed at improving production efficiency and reducing cost of production, says DairyCo. Strategic management should involve benchmarking and setting realistic targets; recording performance regularly and monitoring and evaluating to ensure targets are being achieved.

“Dairy farmers must make sure investments in machinery are going to either reduce unit costs or improve production efficiency,” says Ms Chamberlayne.

And she says the price paid for feed needs to be carefully based on the margin a litre being earned. “Farmers should be sure the feed they are buying warrants the price being paid. Buying and using feeds that are costing more than the margin can support will drive down profitability.”

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