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Tight cost control needed to offset fall in milk price

Last year’s negative margin from production looks like being repeated this year at the Friesian Farm model, and is minimised only by even tighter control of variable costs and overheads. According to the predictions from Richard King, at Andersons Farm Business Consultants, we won’t see things bouncing back until next year.

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Cost savings are vital to help dairy farms weather the downturn, according to Friesian Farm figures.
Cost savings are vital to help dairy farms weather the downturn, according to Friesian Farm figures.

Milk prices could well remain low for at least another 12 months, but there is significant scope for costs savings to help dairy farms weather the downturn, according to figures for our Friesian Farm model.

 

Just to remind you, the Friesian Farm model runs 150 cows and its replacements on a year-round calving system for a liquid, but not supermarket-aligned, milk contract. The farm comprises 100ha, of which 40ha are rented on an FBT. The proprietor provides labour along with one fulltime worker (plus casual and relief). Milk yields are about 8000 litres per cow.

 

The table (right) shows the farm’s performance for the previous three milk years based on actual returns and costs. An estimate is given for the current 2016-17 year, and a forecast for 2017-18.

 

The farm made good returns in the 2013-14 and 2014-15 milk years, and this fact should not be overlooked in the current downturn. Dairy farming is now a cyclical business – industry profits are poor at present, but they have been good in the recent past, and will be again in the future.

Full effect

The 2015-16 year saw the full effect of the milk price fall come through, and although the slide started in 2014, it did not fully affect the 2014-15 figures.

 

Variable costs continued to decline due to cheaper feed and fertiliser. Overhead costs were reduced through savings in casual labour, contract costs, repairs, fuel and electricity. Despite this, Friesian Farm dipped into a loss-making position from its farming activity.

 

The contribution from support payments dropped in the year as well. Partly this was a result of the move to the Basic Payment from the SPS, and the effect of currency changes. But Friesian Farm also saw its ELS agreement end last year. It has not yet gone into the successor scheme, the Countryside Stewardship, so has lost some scheme income.

 

For the current 2016-17 milk year, there is little optimism on milk prices. Without a supermarket aligned contract this farm is budgeted to see an average milk price for the year in the low twenty pence per litre. However, as the figures show, Friesian Farm is looking to take a robust approach to costs to minimise the impact on its bottom line.

Table 1

Table 1 ANDERSONS FRIESIAN FARM

Concentrate, feed and fertiliser should be cheaper for the current year. Usage levels can also be looked at – while bearing in mind not to cut corners and affect optimum output levels. There are also cost saving opportunities in the ‘lower profile’ categories of variable costs – vet and med, bedding, bulk feed and dairy sundries.

 

Overhead costs are also squeezed. This is a continuation of the trends seen in the last year with reductions in fuel cost, electricity, contract charges and business administration. Some of this is a result of general price drops, but it also assumed the proprietors of Friesian Farm will be proactive in negotiating better deals and challenging all items of spending. As a result the cost of production on the farm is cut significantly. While this does not eliminate the loss from production, it is minimised. Just as importantly, it sets the farm up to benefit from any upturn in markets.

Slow

Such an uplift looks like being slow to arrive. There is a sense that commodity markets may have ‘hit bottom’, but it will be some months before this becomes clear or not. Even then, with large amounts of milk products in store, it may be some time before farmgate prices improve. The sector may have to wait until after the spring flush in 2017 before tentative increases start to appear.

 

Thus, only a relatively small, and very speculative, price increase is factored in for the 2017-18 year. Costs are kept under control, meaning Friesian Farm returns to profitability before the inclusion of support payments, albeit at low levels.

 

The efficient running of your business is the one thing dairy farmers can control. In tough times, low costs of production are the difference between success and failure.

 

  • Andersons will be available in the Business Management section (Stand BM-318) to discuss how dairy businesses can prosper now and in the future.
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