Cost of production – how do you shape up?

Published 17 January 18

Net margin performance in dairy businesses tends to be more closely associated with milk production costs than milk price, according to data from GB dairy farms. This is why AHDB Dairy considers cost of production to be a Key Performance Indicator (KPI) for dairy farms, whether block or all year round calving (AYR), as part of its new Optimal Dairy Systems work.

 Dairy net margins v cost of production 2013-17

Optimal Dairy Systems aims to provide information to help farmers assess their production system (i.e. block or AYR) and look for ways to make competitive gains. The bands below provide a guide to farms when using full economic cost of production* as a business performance indicator.

Good or target performance

AYR – under 25ppl

Block – under 22ppl

Average performance

28.5ppl

Poor performance

Over 32ppl

These bands are based on four years of annual data from around 300 GB dairy farms. It is recognised that some key cost drivers will change from year-to-year depending on market conditions. However, the bands above should be used by farmers to assess their long-term financial performance.

In 2016-17, nearly 15 per cent of the herds achieved costs in the good performance bracket. More than half of the farms lay between 25ppl and 32ppl, i.e. at the average performance level. However, around one in four herds fell into the poor performance category, carrying production costs of more than 32ppl.

Achieving at least the good cost of production performance is more likely to mean that herds will make a reasonable net margin despite volatility in milk price. Over the last 5 years, the GB milk price has averaged 28ppl, but the majority of herds in 2016-17 had costs higher than this. However, more block calving herds had costs of production lower than the 5 year average milk price than on AYR calving units.

AYR herd annual costs 2016-17

Block herd annual costs 2016-17

AHDB’s optimal Dairy Systems asks farmers to hold a mirror up to themselves, and, in particular, those who fall into the poor performance category need to ask themselves a few questions:

1. Does their milk price compensate them for the higher production costs?

2. Are they able to improve their cost of production on their current system?

If not, then they need to seriously consider whether they are operating the system that is right for them.

Comparing your own figures against the cost of production KPI, and the other KPIs in the series, may help highlight the strengths and weaknesses of your dairy business. In turn, this can inform decisions and strategy for the farm going forward. This strategy should be built around the system which allows your business to compete, matches the market you sell your milk to, complements your mind-set and accounts for any on-farm limitations or opportunities.

Over the coming weeks, AHDB Dairy will publish a series of articles examining the KPIs used in Optimal Dairy Systems, aiming to help farms benchmark themselves and explore possible ways to improve their competiveness.  

 

*Full economic costs are all variable and overhead costs, and include a value for unpaid family labour, rental value of owned land and depreciation.