Evidence still highlights low cost advantage

Published 18 February 16

Mark TopliffMark Topliff of AHDB’s Market Intelligence team examines the continued suggestion that the country’s best performing herds, by net margin, are those with the lowest cost base and looks at other key traits of the top 25%...

The aim of the latest Evidence Report of GB Herd Performance, published by AHDB Dairy, in addition to the presentation of the latest set of physical and financial performance data for dairy herds in Great Britain, is to examine long-term viability and sustainability through:

  • Showing UK costs of milk production in context of other countries around the world
  • Investigate selected European ‘typical farm’ net margins over the last five years
  • Presenting 2014/15 figures in a longer-term context
  • Examining the sustainability of top performing herds against the background of milk price changes.

It’s important to recognise that the report covers the 2014/15 year, so stops just short of the worst of the falls in milk price, explains Mark. “Nevertheless, the findings from these costings from 325 dairy farmers across GB suggest that while revenue has an impact, the main differentiator between top and bottom performers remains cost.” 

Evidence Still Highlights Low Cost Advantage

Cost of production still critical 

“Mapping the distribution in milk prices across the whole sample shows some dairy farmers in the top 25% received prices as low as those in the bottom 25%, and some in the bottom 25% received prices as high as those in the top. 

Full economic net margin received versus milk prices for accounting year-ends between December 2014 and June 2015

Full Economic Net Margin Received Versus Milk Prices For Accounting Year -ends Between December 2014 And June 2015

Cost of production is where the real differences kicked in, says Mark. “There was a difference of 6.2ppl in cash costs and 3.3ppl in non-cash fixed costs, resulting in a total difference in economic costs of 9.5ppl between the top and bottom 25%.” 

So on a cash cost basis, this meant the top 25% of herds managed to produce milk in 2014/15 at 24.5ppl, with a full economic cost of 27.6ppl; the top 5% were producing at 22.3ppl and 25ppl respectively. 

Range in financial performance of GB dairy herds 2014/15

Range In Financial Performance Of GB Dairy Herds 2014-15

Aligned v non-aligned

To understand whether having an aligned contract affected costs of production, Mark analysed and compared the data from the farms on aligned contracts versus those on non-aligned contracts. 

“The split in the sample group was around 30% on aligned contracts and 70% on non-aligned,” he says. “Broadly, those on aligned contracts had higher costs of production per litre than those on non-aligned – 32.5 versus 30.3ppl across the whole sample.

He says data shows the 2014/15 costs are higher for those on aligned contracts is that annual investment and capital expenditure is greater on those units – by some 0.3ppl. “Another could be that the requirements of the aligned contract cost more to meet – but we don’t think that would explain the full difference.” 

However, the situation is reversed when examining the net margin data on a £ per hectare basis, where those on aligned contracts were achieving lower feed and lower total costs per hectare in 2014/15 – £1,398 and £4,166 respectively compared with those on non-aligned contracts at £1,506 and £4,286. This could be down to cow yield and/or stocking rate.” 

Characteristics of top 25% 

So while low cost of production is strongly connected to the top 25% of dairy farmers in 2014/15, does type of contract also have a bearing on the outcome? Not really, says Mark. 

“I broke down the data on the top 25% performing herd by net margin per litre and found no patterns other than low cost of production. Farm size ranged from 58 to 540ha and herd size from 64 to 904 cows. System didn’t play a role either with a range in housing period from 8 to 52 weeks and yield from 4,000 litres to 10,000 per cow. There was a split roughly representative of the national average on conventional and organic, and tenants, owner-occupiers and combined. There were almost twice as many non-aligned contracts as aligned and calving pattern leaned heavily towards year round. 

“Milk price is outside of our control, so the only conclusion we can draw is that controlling costs is the only clear element connected to being a top 25% performer.” 

Description of top 25% of GB dairy herds (2014/15) 

 

Min

Max

Farm size, ha

58

540

Herd size, cows

64

904

Housing period, weeks

8

52

Yield, L

4,000

10,000

Stocking density, LUs

0.7

5.92

 

 

 

 

Number of herds

Conventional

76

 

Organic

4

 

 

 

 

Tenants

23

 

Owner occupiers

21

 

Combined

37

 

 

 

 

Liquid contracts

55

 

Cheese contracts

22

 

 

 

 

Non-aligned

51

 

Aligned

30

 

 

 

 

All year round calving

65

 

Spring

5

 

Autumn

11

 


The global picture
 

Mark says that it’s useful to look at how GB performs against other competitor countries. “We get this data from the International Farm Comparison Network (IFCN). This global benchmarking reveals opportunities and threats, and as a member of the IFCN, AHDB Dairy has access to data from 55 major milk-producing countries around the world, compared using a typical farm model approach and updated annually.” 

He says that in 2014, the average cost of milk production in the network was 27ppl of Energy Corrected Milk (ECM), which is standardised to 4% fat and 3.3% protein. “This was similar to 2013 with no major changes to feed costs in most countries. But the record peak in milk price in February 2014 meant farm profitability proved to be better in 2014 than in 2013, but the downwards trend at the end of 2014 as milk prices fell gave an indication that a difficult situation was to follow in 2015.” 

Cost of milk production ranged from 3ppl milk in extensive farming systems in Cameroon (where beef is the major output and milk is a side product) to 70ppl for an average sized farm in Switzerland. Of note was the cost of milk production in China, where it was higher than the EU due to dairy farming depending heavily on purchased feed and forage. In addition, China had a significant increase in salaries and appreciation of its currency by 24% during 2014. The combined effect of these factors drove the costs in China from a level of 24ppl in 2008 to a level of 35ppl in that year.   

“In the USA, the smaller farm types in the Eastern Region of USA, ie Wisconsin and New York, had a cost of 27 and 35ppl, respectively. In the western region, a large farm in Idaho had the lowest cost of about 21ppl. 

“For Oceania the cost level was about 22ppl. Cost of milk production in Australia was in the range of 18-21ppl while in New Zealand, higher feed prices, land costs and exchange rates took costs to 24ppl ECM for the seasonal year July 2013- June 2014.” 

Closer to home, says Mark, Western European costs of production were 37ppl on average. “Overall, The UK, typically at 32ppl, had reasonably low total costs of milk production compared with Western Europe, although, not as favourably in global terms as it was in 2012. 

“In the group of EU countries represented in the data – France, Germany, Denmark, the Netherlands, Ireland and Poland – the ‘typical farms’ achieved a positive cash net margin in each of the last five years. However, during most of the last five years, net margins after full economic costs were negative. 

“In comparison, the UK typical farm has fared best with three out of the five years returning a positive margin, albeit small, with some of the reasons including amount of paid versus own labour, owner occupation levels, and levels of depreciation or investment,” adds Mark. 

Net margins, after full economic costs, for 2010-2014 in selected EU countries

Net Margins , After Full Economic Costs , For 2010-2014 In Selected EU Countries