How careful cost analysis turned a loss into profit

28 June 2002

How careful cost analysis turned a loss into profit

NO time to look at variable and overhead costs in detail? Then think again because trawling through dairy accounts could be the best investment you make, particularly when margins from milk are low.

That is the view of Scott Kirby, farm manager at Harper Adams University College. Since arriving at the colleges 345ha (850 acre) farm two years ago, Mr Kirby has set about reversing the 215-cow dairy herds fortunes from a recorded deficit of £61,000 before depreciation in 1999/2000 to a projected surplus of £18,000 in 2001/02.

"As an industry, were still poor at looking at enterprise costs in detail. Yet they hold a lot of information on activities that impact on the bottom line of accounts and can highlight where technical performance needs to be improved," he says ( see table 1).

Although many producers will already feel stretched, setting time aside to tackle accounts must be a priority, he warns, albeit a rather unattractive diversion for some.

"Many farms have got to grips with using gross margins as an indicator of efficiency. While that looks at variable costs, were still not paying sufficient attention to overheads, which account for up to 50% of outgoings for a dairy enterprise," he says.

Allocating overheads on paper between enterprises will present difficulties, he warns, but be practical and use common sense to split the cost realistically.

At Harper Adams, the task of identifying costs proved lengthy, but has already delivered improvements.

"Having allocated labour costs between duties such as milking, animal care and cleaning out cubicles, the unit was spending 0.32p/litre handling slurry alone. Using information in our accounts weve been able to justify capital expenditure on auto-scrapers, reducing slurry handling costs for labour to 0.13p/litre."

Overall, the dairys labour bill has not decreased, but staff are now able to spend longer on more beneficial tasks such as animal care or three-times-daily milking; just one development that will help push milk yield from 7000 to 8000 litres/cow (see table 2).

"With a limitation on accommodation, the unit is unlikely to expand beyond its current 215-cow status in the short term. We need to lift output/cow to generate additional revenue," says Mr Kirby.

To achieve this goal, particular attention is being paid to targets that have greatest scope to improve profit such as increasing yield, reducing replacement rates, concentrate use and feed costs. These form the basis of targets set for new herd manager David Ellis.

"Certainly, the genetics are there within the herd and the feeding system is adequate, although in-parlour rather than out-of-parlour feeders would be a welcome addition."

But overheads have not been taken in isolation. "We must remember that they impact on variable costs and these need to be scrutinised. For example, bulk buying of sawdust for cubicle beds has more than recovered the cost of buying a dispenser. In fact, it took just nine months," he explains.

On a technical level, expenditure highlighted the need to tackle poor fertility and contain future operating costs. Setting targets has been essential to monitor progress and allow comparisons with industry benchmarks.

For example, staff aim to pull back calving index to 395 days to lift milk income over each lactation while reducing handling, AI and vet costs. Already, vet and med bills have fallen from 1.39p/litre in 2000 to 0.75p/litre in 2001, according to farm records.

"In effect, weve spent two years understanding our costs and looking at where we can drive expenses out.

"The aim is to get the units performance above the industry average. Even with this farms many varied roles we should be striving to match the top 20%.

"Its been an onerous task allocating costs and its a task that demands time. The fact that the dairy herd has gone from a significant loss back to breakeven over the two worst financial years in dairying in recent years speaks for itself."

Mr Kirby believes he now has more confidence to take the business forward as a viable operation. "Even as a 215-cow unit, the income earning potential looks good, particularly if the dairy industry can return to a sensible milk price.

"On comparable terms, the dairy has greater potential to generate income in future than the arable enterprise, which would need a significant increase in scale to achieve the same result." &#42

Table 2. Harper Adams winter dairy labour allocation

00/01 01/02

General 11% 12%

Administration 1% 4%

Direct animal care 10% 11%

Feeding 17% 12%

Milking (3 x day) 33% 50%

Slurry 28% 11%

Table 1. Harper Adams dairy financial effect of improvements in technological performance

Saving/gain p/litre £/cow herd

Yield/500 litre increase 1.01 59.82 8,133.00

Replacement rate/5% decrease 0.47 33.70 6,739.80

Concs/0.05kg/litre decrease 0.72 53.77 10,754.19

Conc cost/£5/t decrease 0.36 26.50 5,300.00

*The dairy aims to cut 6p/litre off production costs.

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