SELL AN ASSET: SAVE A HERD
What can be done to cope
with lower returns and
increasing costs on dairy
units? Emma Penny reports
BETTER financial and herd management is the key to surviving the milk price squeeze.
According to Shropshire-based Axient consultant Giles Coley, although many producers blame the falling milk price for their profit demise, there are other factors involved.
Between 1993 and 1998, two-thirds of profits have been wiped off the bottom line even though the milk price was the same – about 21p/litre – and concentrate costs are similar (see Table 1).
"We have no control over factors such as quota leasing costs, cow sale prices and calf sale prices. But we can exercise some control over property and rent charges, interest and depreciation."
Cost of borrowing is one of the key business handicaps. "Over the last five years, average borrowing on Axient costed farms has increased by £55,739 – 29% – to stand at £189,260 this spring."
To remedy that, Mr Coley suggests selling assets to ensure debt is capped or removed altogether. "If you are taking a slice out of the system, take a far bigger one than you think you will need as it is much more difficult to do that a second time."
Identify non profit-making or available assets for removal, he says. Stock, machinery, land and property – parcels of land, for example – are all worth considering.
Where there are no assets to strip, increasing output is an option. "But if you are increasing output then you must acquire additional quota either through leasing or buying.
"Leasing saves tax and is less demanding on cash requirements in the short term, but its a high risk strategy, whereas buying means you end up with an asset until at least 2006. Remember too that your staff are also worried about the future of the business – buying quota can demonstrate your commitment to the business and can be an important motivational factor."
Poor return on investment is another area for concern, says Mr Coley. "If your capital every year is greater than your profits consider whether you are making poor decisions. And increase efficiency to make better use of investments – look at whether you could specialise in an area such as contract rearing, and dont stop investing in genetics."
Tackling low cull prices hinges on reducing the number of culls out of the herd (see Table 2). "Theres no other way of doing this – cows must have greater longevity as low stock turnover is the key to profit."
For an average 120 cow herd, he suggests that a current cull rate if 25% should be reduced to 18%.
"Of the 25% currently replaced each year, about 18 go for fertility reasons, six for mastitis, three for poor feet and three for other reasons. I would suggest that only 13 should go for poor fertility – nutrition and management are key reasons for fertility concerns – four for mastitis, two for foot concerns and three for other reasons. This should help save £3760 a year," explains Mr Coley.
Property repairs and rents – which have increased by almost a third over the last five years – should be under better control too, he says.
"Use this as an opportunity to reduce expenditure on non-essential repairs – if you dont spend it you dont have to make it."
Rents currently under review should also be challenged, he says. "I havent heard of any rents coming down yet, but there are some informal reductions being negotiated at the moment. Challenge the rent you are paying when you get the opportunity."
Grass lets are often over-priced and of poor quality, and could easily be replaced by other feeds, he suggests. "Purchased bulks such as brewers grains could be a better option. Also, consider using more fertiliser and taking three cuts of silage – this would be cheaper than taking keep at £100/acre – and avoids the difficulty of having land well away from the farm."
Cash flow is another crucial area, and cash requirements should be planned to help even out peaks and troughs, advises Mr Coley. "Plan cash requirements such as rent, tax or contractors charges and use the plan to help alleviate demand."
Restructuring borrowing so it is spread over a longer timescale may help, as will selling some assets. "Time big purchases carefully – spread insurance costs, go for 365-day credit facilities and negotiate to pay your contractor in, say, 10 equal instalments. Also, look at alternative cash sources, but remember that you must remain fully in control so dont go for hire purchase. It will also help to discuss cash flow with your bank manager."
Table 2. Replacement cost
Table 1. Whats changed?
1993 1998 IMPACT
Quota leasing (ppl) 5.0 9.0 -£5,000
Cow sale price* (£) 532 360 -£5,160
Calf price (£) 128 108 -£2,400
Property charges/rent 10,404 13,760 -£3,356
Interest 14,362 17,142 -£2,780
Depreciation 11,418 14,685 -£3,267
*Cow price included in-milk and cull cows.
Source: Axient Farm Business Herds
SEVEN LAWS FOR PROFIT
1. Any system not constantly emphasising profit will make a loss.
2. Any activity managed on the basis of technical criteria will be unprofitable – its likely to be over complicated.
3. Any organisation, system or procedure left undisturbed for three years will become inefficient.
4. Left to themselves, people will elaborate rather than simplify systems.
5. No justification study will bear any resemblance to costs and features of final system.
6. Nine tenths of resources are spent on tasks which have minimal impact on profitability.
7. Optional extras will double costs and timescale for developments.
PLANNING FOR PROFIT
• Consider quota acquisition.
• Know your marginal performance.
• Look for technical improvement.
• Reduce culling rates.
• Manage your cash.
• Involve others who can help.