Running a business that has a strong handle on costs and is fit to survive a future without subsidies should be the focus of all dairy farmers looking to prosper in the industry long-term.
As a dairy farmer, are you the best you can be? Do you understand your costs, challenge yourself to innovate and develop your farm team?
According to James Dunn, managing director for Promar, it is these skills which will underpin farm businesses which survive and thrive over the next five years. Failure to adopt such thinking could see businesses crumble in a post-Brexit world.
The ‘EU Dairy Towards 2020 Study’ carried out by Promar in 2015 interviewed stakeholders in the European dairy industry to establish attitudes that are still relevant in 2018.
The results identified four types of farmer: survivors; doers; managers; and entrepreneurs/leaders.
Survivors had a hands-on role with limited knowledge and saw high price as the only way to make profit, whereas entrepreneurs were focused on innovation, leadership and engagement.
Mr Dunn says to face the numerous challenges ahead (Read more: Challenges to plan for), all farmers need to be in the managers or entrepreneurs/leaders category.
He says: “There are quite a lot of survivors and doers in the UK, purely due to the legacy of UK family farms and the fact a lot are passed down from one generation to the next.
“In Holland, they argue they have few survivors and doers, as inheritance tax laws are less favourable and usually incur a cost, so they are more focused on financial success.”
It is these survivors and doers who, Mr Dunn believes, are going to have to adopt a rapid change of mindset if their businesses are to continue.
He says: “Consolidation will happen. It needs some kind of spark and that is likely to be Brexit.
“Brexit will cause reduced subsidy and there will be a big problem with labour.
“Entrepreneurs and managers will have the same problems, but they will have seen the problems coming and planned for them.”
Although subsidies are set to continue until 2021, with support likely to continue to 2027 on some farms, Mr Dunn sees this as an unhelpful ‘soft landing,’ which is only delaying the inevitable.
He says: “Farmers need to be thinking about it now, as it will come.”
On the average dairy farm, grants and subsidies make up 5% of turnover, which will contribute to net profit.
Mr Dunn advises drawing together a five- to 10-year business plan, looking at what profit the business needs to generate to make a profit when subsidies are removed.
For example, how much profit is needed to pay for:
Mr Dunn says: “A subsidy is an income source that is going to disappear, so for those guys who are just making a profit, they need to find a way to replace that income.
“Is it more cows or some kind of diversification? Should there even be an exit strategy? It may spark a succession conversation.”
It is important to carefully work out the cost benefits of any strategy designed to fill the income gap left by the removal of subsidies. For example, if you look to increase yield by 200 litres/cow on the same herd size, are those marginal litres economically viable? Can you produce that milk efficiently?
When looking at diversification options, consider the spend needed to diversify, whether you have the skills to do it or if you can use resources and skills already available on-farm, such as a maize maze.
In order to truly understand business performance, monitoring and tracking financial data is also essential.
This will enable profit to be understood on a pence per litre basis and how much Basic Payments contribute to that.
Mr Dunn says: “A lot of farmers collect data, but don’t use it.”
With the introduction of ‘Making Tax Digital’ in April 2019, every business paying VAT will have to submit a VAT return in a digital format, using software which is compliant with HMRC.
Mr Dunn says that makes it a no-brainer to upgrade financial recording systems.
He says: “If you are doing that, why not invest in software that can measure financial reconciled data to understand cost of production and how much revenue will be missing should subsidy go?
“It is important to use as much data as possible to understand your shortfall, then use that data to increase production or reduce cost of production through benchmarking. That will enable you to manage volatility and be sufficiently resilient to substitute forgone revenue.”
Drawing on external expertise to help buy-in knowledge and drive efficiencies is an important component to business performance.
Whether it is feed advisers, the vet, bank manager, accountant or breeding adviser, they are all vital components of the farm team.
Mr Dunn says: “For example, work with your breeding adviser to see if you have the right animals on-farm. Are you keeping enough heifers or too many? Does each pregnancy deliver a valuable product?”
The best farmers will be breeding from the best animals, producing the right number of quality replacements and investing in promoting good early growth rates to calve at 24 months.
Creating a strong team ethos which supports and develops staff is also a key attribute of these producers.
This ensures they have a framework which makes them an ‘employer of choice’ which will help them overcome future labour challenges.
At the same time, engaging with feed advisers helps ensure rations are balanced effectively, which maximises feed conversion efficiencies and limits environmental impact.
Mr Dunn adds: “It is a hunger for knowledge; that is what those managers and entrepreneurs are about. They are keen to innovate and use technology.
“It is then about attracting and retaining quality staff and engaging with your supply chain partners, while minimising impact on the environment.”