Start with fixed costs to raise milk production profits

6 March 1998

Start with fixed costs to raise milk production profits

ALLOW fixed costs to dictate your milk production system, because these are more difficult to alter than variable costs.

Then use the margin over fixed costs to show what is left for variable costs such as concentrates and quota leasing, Sinclair Mayne, of the Agricultural Research Institute of Northern Ireland, Hillsborough told the conference.

That approach would help producers decide what level of inputs was justified, and was better than margin over variable costs, which was misleading, he said.

"In New Zealand fixed costs are low at £72 a cow a year. At a milk price of 11p/litre, a 4000-litre cow gives an income of £440. After fixed costs the margin left for variable costs is 9.2p/litre.

"When output is higher at 6000 litres a cow, income is £660, but after fixed costs the margin left to cover variable costs is only increased by 0.6p/litre because fixed costs are low, so there is little incentive to increase output." And increasing output would result in less output/acre, said Dr Mayne.

In the UK proper winter housing is needed, however long you house cows for, and fixed costs higher at £360 a cow are difficult to reduce.

At an output of 4000 litres a cow and a 20p/litre milk price, milk sales would be £800, so after fixed costs there is 11p to cover variable costs. Increasing yields to 6000 litres a cow, worth £1200, the margin left to cover fixed costs is 14p/litre. That gives an extra 3p/litre to pay variable costs, such as concentrates.

"There is also limited scope to reduce fixed costs by increasing output a cow, which will increase profit providing variable costs are controlled. The danger is that when increasing yield from 6000 to 8000 litres a cow, the additional variable costs may offset any gain in fixed costs a litre," he said.

INCREASING PROFITS

&#8226 Start with fixed costs.

&#8226 Analsyse production system based on variable costs left after fixed costs.

&#8226 More grass in diet, lower production costs.