Making seasonality work harder for you

Published 21 January 14

Achieving level supply is often touted by some, as the Holy Grail to dairy farmers; nevertheless it’s counter-productive for those following the path of least-cost production through block calving and the optimisation of seasonal growing conditions. So what’s the best option given current seasonality payments and cost profiles?

Level profiles

From many processors’ points of view, level supply is what’s needed, but while it’s very simple to put the onus on the farmer to achieve this, it doesn’t have to be from a single farm.  There’s nothing stopping groups of farmers with complementary profiles getting together and organising the delivery of a level supply if that’s the processor’s requirement.  The processor gets what it needs, and so do the farmers who can attract level supply bonuses while still benefitting from the low cost base of producing seasonally.

In a way, this might also be a better solution for the processor. Seasonality payments have been used for years as a device to encourage production to meet the needs of the market.  To some extent they work, but often the price differential has been insufficient to override the benefits of seasonal production and create a widescale change in behaviour. The crucial thing is to do the sums – given the possibilities on the farm and the contracts available. The DairyCo Interactive Milk Price and Milk Forecasting calculators are two useful tools in assessing this.

Seasonality payments

Analysis based on typical constituents and standard volumes shows that on average over the year, on a basket of liquid contracts, an additional 0.33ppl income can be achieved by autumn-block calving compared with the flat profile of an all-year-round calving system.

While this difference is based on the same volume of milk, it remains consistent if it is recalculated based on the same herd size. Spring penalties increases this difference to 1.07ppl when autumn-block calving is compared with spring-block calving. The variation in the annual average milk prices of autumn and spring block increases on manufacturing contracts, with autumn block potentially realising an additional 1.07ppl over year-round calving, rising to 1.67ppl in comparison with spring-block.

Avg Milk Price

While there is an overall trend for a higher annual milk price on an autumn-block calving pattern, these figures may be less than expected. However, other contracts could substantially reward autumn-block calving, highlighting the importance of having the right system for the right contract and vice versa. For example, there is a 9% variation between the annual prices achieved by autumn and spring-block patterns on the First Milk contract, while other major contracts see less than 3% variation. Although the highest annual average price is usually paid to autumn-block, Dairy Crest is a major contract which sees the highest price for a flat year-round profile rather than an autumn block pattern.

Liquid Contracts

The variation in the potential annual milk price is higher in manufacturing contracts, although more variation can again be seen in the potential price of First Milk’s manufacturing contract.

Manufacturing

Evidently, the change in milk price that altering production profile can bring about could advantage the income of farms with an autumn-block calving pattern. But needless to say, this must be matched by an appropriate cost of production in order for this to be reflected in on-farm profits.

Cost considerations

We’ve all heard the anecdotal reports that both autumn and spring block calving patterns have lower total costs of production than year-round production, which is backed up by a small sample of data in the 2013 Milkbench+ report. 

Our evidence shows that despite similar milk prices for year-round, autumn and spring-block herds within the Milkbench+ sample, net margin varied by up to 2.8ppl, and therefore cost management was the key determinant of success for these farms. 

 

Year-round

Multi-block

Autumn

Spring

Financial performance (ppl)

       

Milk price

28.3

28.9

28.7

28.5

Revenue

30.0

30.6

30.4

30.3

Herd replacement cost

3.3

3.3

3.0

3.3

Total variable costs

12.3

11.5

10.8

9.3

Total fixed costs

13.6

13.7

13.0

14.3

Total costs of production

29.2

28.4

26.8

26.8

Net margin

0.8

2.1

3.6

3.5

Despite the likelihood of a lower overall annual milk price, spring-block calving facilitates the production of milk from grazing, driving down annual feed costs in comparison with TMR or similar diets. Limited data from Milkbench+ shows that the feed and forage costs of a spring-block system can be 2.5ppl lower on average than a year-round system. However, the dependence of this system on grass quality opens up the risk of a shorter lactation length if quality declines and feed supplements are not used effectively.

Changing calving patterns – other key considerations

Remember to include changes to labour skills, farm infrastructure and forage availability when considering the transition costs of changing calving pattern. It’s essential to collate milk sales predictions (see our Milk Forecasting Calculator) with budgets and monthly cash-flows to assess the viability.  

A full understanding of the risks in any system alteration or new business direction, financial or otherwise, is vital and should include thoughts as to what will be done if the changes don’t go as smoothly as anticipated, and what actions can be taken to mitigate any risk in the first place.

Whatever the calculations show as most potentially profitable in terms of income and costs, all evidence points to the fact that the greatest profitability benefits come from running the chosen system effectively, rather than the system itself.

DairyCo offer a range of workshops to help levy payers develop their businesses. Planning for Profit is one such workshop and is a great way for dairy farmers to work through real financial and management scenarios for their business and test options for change. For more information please visit the Planning for Profit pages.