Dairy cost cuts dont stop profits plunging
By Jessica Buss
DESPITE reducing milk production costs by an average of 1.3p /litre to March 1999 to contend with lower prices, producers must still seek individual solutions to improve profits.
Average dairy farm profits for herds with 126 cows fell to £12,100 last year, according to Axients newly released Farm Business Accounts (see Business). But the bottom 25% of farms show a loss of £20,532 and net worth erosion of £23,640.
Reporting the results at a press conference last week, Axients Matt Sheehan said that average profits, equating to just 1.5p/litre, were unsustainable.
However, top 25% herds show profits of £46,058. These bigger herds of 136 cows also produce higher yields a cow at 7000 litres, compared with the average farm producing 6300 litres and the bottom 25%, 6100 litres.
FBA results suggest that increasing yield a cow is necessary, but it must bring extra profit, said Mr Sheehan.
He suggested adding value or seeking a higher milk price – changing buyer or maximising quality payments – keeping more cows and producing more litres a cow.
Achieving higher yields a cow was potentially complex, he said, involving a huge number of factors, such as genetics, health, fertility and nutrition.
"A 400-day calving interval, for example, reduces output by up to 400 litres a cow a year."
He believes an average FBA farm can improve margin over feed and quota by £16,000 a year by keeping six cows more and producing an extra 1000 litres a cow.
But Mr Sheehan admitted response rate to concentrate was critical to achieving that margin increase. Achieving the budgeted response rate to concentrate of 0.6kg/litre required improved management, not just extra concentrate feeding.
However, achieving those targets could increase profits to £28,000 for the average FBA farm, or from £6000 to £14,000 for an average herd of 65-70 cows.
But Mr Sheehan warned that bottom 25% farms would not become sustainable by improving yield alone. "These farms spend about 2p a litre more on overheads for the same production, so must review how cost-effective labour and machinery use are. They must measure themselves against others on a p/litre basis and look for additional income."
But Andersons managing partner Tony Evans told farmers weekly that increasing yield would not help all businesses – solutions may need to be more imaginative.
"Bottom 25% farms are losing £24,000 a year off the balance sheet and they must come up with a solution to stop that," he said. For most, increasing yields is not addressing the real issue.
"It is better to reduce overheads or gear businesses to cover overheads," added Mr Evans. Changes to business structure could make permanent improvements to profit that were not weather dependent (see page 40).
But he asked: Why go for increasing output if lower output can increase profit?
Quota doesnt always make it pay to increase output when employing labour. "If you have a full-time employee and can reduce labour needs to two days a week, you can save half a labour unit," he said. "Even if this means reducing cow numbers by 30 or 40, it could be more economic."
Mr Evans suggested sharing staff with neighbours, many of whom were in a similar position.
Another option in which lower output may be more profitable was to produce more from grazing and cut overhead costs.
Mr Evans described the survivability of producers as tremendous, but the bottom 25% profit farms should question whether to continue milk production if profits are not increased quickly.
"In a few years, you are going to lose quotas value and where balance sheet erosion continues, you must leave at some point." The sooner the decision to quit was made, the more money you would leave with, said Mr Evans.
• See next weeks Dairy Event Supplement for help on benchmarking your business. *
• Increase output?
• Challenge overheads.
• Avoid eroding assets.
Production costs (p/litre)
Bottom Average Top
Turnover 21.4 23.1 23.1
costs 10.9 10 9.3
costs 13.5 11.6 8.9
Profit -3 1.5 4.9