Database tackles milk costs

10 December 1999

Database tackles milk costs

HOW do the best specialist dairy herds manage to produce milk for 5p/litre less than the bottom 25% after drawings and tax? A new costs database aims to answer this question and to show how to cut unit costs of production.

The Spotlight series, launched on Monday by ADAS and HSBC Bank, is based on the audited or certified accounts of 100 specialist dairy farms, where more than 90% of the gross margin comes from milk production.

Its top 25% of herds produce milk for 19.77p/litre after all costs, leaving a profit of 2.4p/litre. But the bottom 25% can only produce it for 25.11p/litre and, because output is lower too, lose 3.95p/litre. The average Spotlight herds cost, at 22.49p/litre, means these herds are also making a loss.

Overheads offer more scope than the gross margin for cutting unit cost of production, said Bill Hall, head of economic analysis and business consultancy at ADAS.

For the first time in such costings, drawings and tax have been included as part of the calculation of cost of a litre of milk produced.

"Delicate and difficult as it is, drawings is an element that we cant ignore," said Mr Hall. "In tax terms it has to come out of profit, but in real terms its a cost to the business."

Wage costs are 59% higher (1.48p/litre) on the bottom 25% farms, but at the same time, drawings are, at 4.35p/litre, double those for the top performers. Power and machinery, property and sundries also offer scope for cutting costs.

The figures show that every management decision counts and has an impact on unit cost of production, said Mr Hall. "Its not simply cost management and cost control, but its related to output."

Steve Ellwood, head of agriculture at HSBC Bank, said: "Farmers are increasingly exposed to world markets. Incomes are under enormous pressure and whilst we expect to see some recovery in the market-place, farmers need to develop new strategies to cope with ever more volatile income streams."

Costs for different systems will also be compared to give more useful data. Work has already started to compare TMR herds with self-feed systems, and the costs of using the farms own machinery compared with contractors.

ADAS and HSBC Bank are keen to recruit many more producers into the database. Figures are treated anonymously, and it is hoped that the scope of Spotlight will broaden to include farmer discussion groups. Unit cost of production figures for pig producers and for arable farmers will be tackled next. &#42

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