30% PLUS PROFIT FALL…
Emphasis must be turned to reducing production costs as milk price falls. Suzie Horne reports
FALLING milk prices and rising fixed costs are set to reduce profits on most dairy farms this year.
Genus is basing budgets for the year to the end of Mar 98 on a milk price 10% lower than that for 1996/97, giving a profit forecast of £16,563 for a typical 120-cow herd on its costed farms.
This represents a fall of almost 32% on the year and follows a budgeted drop of 34% in the current years profit after depreciation. Less cash available in the business means an increase in borrowings, and the net worth of the business is expected to dip slightly.
This turnaround after years of rising milk prices is going to demand more attention to detail in both husbandry and financial planning to try and minimise the likely drop in profits, says Genus development manager Tim Harper.
"We hope what the budget shows wont happen, because producers will be able to make some adjustments to avoid such a big drop," says Mr Harper.
"The effect of lower milk prices is only just starting to hit home at the moment. History suggests that the reaction will be to increase yields, but in the past this has been the response on the back of rising milk prices. When milk prices are falling, holding on to cows might be a better option."
Despite lower cow numbers and a drop in future milk prices, the budget (see table) shows an overall increase in milk output because of better yields from the realisation of genetic potential as new animals come into herds.
There is some scope to improve milk price by ensuring that production is in the top quality and hygiene bands, but quota costs will have to come under particular scrutiny, he says.
"The figures are based on an assumed 16.5% leased quota and a reduction of around 1.5p/litre in the lease price compared with the current year.
"If you are leasing in quota, make sure you dont make the mistake of allocating the cost of that quota across all your litres because that would make any leasing price look viable. Look at the cost of that leased production."
There is realistic scope for either improving milk yield from the same amount of feed, or maintaining production but achieving it from lower cake use.
More attention can also be paid to forage production on many farms, maintains Mr Harper. This does not necessarily mean cutting costs, but rather employing sensible use of fertiliser and producing better quality silage.
Improving the forage crop mix to introduce maize silage as well as grass is an option which some producers have resisted so far, even though they are in a position to do this and their margins will see a benefit from this change.
Labour is a difficult cost to tackle, but a Genus survey shows that the most profitable farms also employ more highly paid labour, with more full time employees and fewer casuals.
These farms have lower vet costs because many of the tasks where the vet might be called in on other farms can be done by staff. "The main focus should be on how efficiently the labour is being used. If you have one man who has a few months slack in the year, perhaps you should be looking at your balance between employed and casual labour or contractors."
Power and machinery spending on dairy farms tends to reduce if things get tight, says Mr Harper, as will property maintenance costs.n
Greater attention paid to forage production and grazing will help reduce costs and maintain profits says Genus development manager Tim Harper.
FALLING MILK PRICE
How to counter falling milk price:
• Ensure milk in top quality and hygienic bands.
• Dont allocate cost of quota across all litres.
• Improve use of forage.
• Dont skimp on skilled labour – use efficiently.
Dairy budget (years ended in March)
Yield (litres a cow)6,0756,2606,420+2.5
Milk price (p/litre)25.1225.3722.80-10
Concentrate use (kg a cow)1,7051,6351,570-4
Concentrate price (£/t)147154147-5
Dairy gross margin budget (£ a cow)
Herd replacement cost82126100-21
Other purchased feeds282828-
Vet and medicines393940+3
Office and sundries105108111+3
Total variable costs637681646-5
Gross margin a cow919863818-5
Source: Genus Management Development.
Farm gross margin to profit budget (years ended March)
Dairy herd gross margin113,974105,28698,160-7
Total farm gross margin131,114120,811115,608-4
Power and machinery19,88119,88119,881-
Total overhead costs94,64396,57299,045+2.5
Profit after depreciation36,47124,23916,563-31.7
Dairy budgets – key assumptions for 1998
• Milk price down by about 10%.
• Milk yields continue to rise – by around 2.5% because ofgenetic improvement in herds.
• Lower cow numbers because of higher yields and effect of selective cull.
• Lower concentrate use because of lower milk price – concentrate price also likely to fall.
• Quota leasing prices to fall by 1.5p/litre – could be more -in response to lower milk prices.
• Overheads higher because of higher interest rates, higher borrowings, rise in wage rates and cost of sundries.