Joint dairy venture has four conditions
18 August 2000
Joint dairy venture has four conditions
By Suzie Horne
MERGING two dairy herds from entirely separate businesses to get better performance and cost savings is a big step to take, but it can benefit some producers.
Such ventures often mean milking the joint herd through one parlour, while the other unit rears the youngstock. This can free accommodation or buildings for other uses that may attract new income.
There are four fundamental requirements which must be met before such a joint venture is considered, warns Mark Hill, national agricultural partner at Deloitte & Touche.
"First, there must be mutual trust and a common philosophy on all the important areas such as breeding and quota management, otherwise it doesnt work," says Bristol-based Mr Hill, who has set up several dairy joint ventures in the past year.
Second, it is preferable for both producers to be good business managers; certainly the one selected to manage the joint business should be in the top 25% performance bracket.
"One of the producers must be appointed manager and given full responsibility, while the other is free to retire or pursue other interests, especially for the sake of the herdsman. You cant take instructions from two people."
The third criterion is that each party should make the move from a position of strength. If it goes wrong, the individual businesses should not suffer.
"This is not a negative point. A joint venture could fail for many reasons, and the consequence of this should not be that one business has to close down," says Mr Hill. "They should operate better as a joint than as individual businesses, but both should still be capable of operating independently if necessary."
Condition number four is that there must be savings and improved profitability from the move. The main saving comes in labour costs as the joint herd can usually be run with at least one fewer full time employee than the two separate herds required. Machinery and other overheads should also fall significantly (see table).
Other benefits that are less easy to cost in advance include the improved buying power of the joint business, as well as better performance from selected cows.
with the top 90% from the joint herds being selected to form the merged herd.
Merging herds
Provided the four basic conditions outlined are met, then the venture can be run very easily without the complication of regular meetings. If the philosophy of the two producers matches from the start, then it will work without these formalities, says Mr Hill.
Such ventures are usually run on a contract basis where the herd that moves farm is milked for a set fee covering the day-to-day management of the cows. One bulk tank is used, with milk receipts split between the two producers according to the proportion of quota they contribute to the joint business at the outset. "Each keeps his own butterfat base and quota. The tanker driver knows what the fixed split is and will allocate this to the separate producer numbers."
As well as the four main criteria, it is a prerequisite that the businesses are geographically close – better still, adjacent units, says Mr Hill. "It only really works where you can reduce paid labour, and it is the larger herds that are doing this. The figures in the table are real numbers, and I think there may be some potential for improvement in the example, through better feed buying.
"The joint business is £40,000 better off after one year as a result of cost saving. The figures are based on a 17p/litre milk price and both farmers will benefit from any upside."
Where joint ventures fail, the most common reasons include frequent changes of strategy and farmers being lured in the short term by over optimistic budgets, warns Mr Hill.
Trust and good management are vital if a joint venture is to succeed, says Mark Hill.
Dairy joint venture – financial implication (£000s)*
BEFORE
Farm A Farm B Total
No of cows 150 100 250
(1.2m litres) (0.7m litres) (1.9m litres)
8000 litres/cow 7000 litres/cow 7600 litres/cow
p/litre p/litre p/litre
Gross margin 120 (10.0) 74 (10.5) 194 (10.2)
Labour 34 (2.8) 27 (3.7) 61 (3.2)
Machinery &
other o/heads 72 (6.0) 45 (6.5) 117 (6.2)
Total costs 106 (8.8) 72 (10.2) 178 (9.4)
Profit (before rent,
finance & quota) 14 (1.2) 2 (0.3) 16 (0.8)
AFTER
230 cows milked through one unit, increasing yields to 8260 litres/cow, 20 poorest cows taken out
Farm A Farm B Total
p/litre
Gross margin 120 70 190 (10.0)
Cottage/bldg rent – 8 8
Total gm 120 78 198 (10.4)
Labour 48 48 (2.5)
Machinery &
other o/heads 77 13 90 (4.7)
Management charge (40) 40 –
Total costs 85 53 138 (7.2)
Profit (before rent,
finance & quota) 35 25 60 (3.2)
* All figures based on 17p/litre milk price