Archive: Structuring your business to a manage a volatile milk price

Published 21 November 14

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Structuring your business to manage a volatile milk price

Milk price is, and always will be, one of the most volatile aspects to dairy farming that is out of your control. Minimising the impact of this on the overall business is crucial, said Alicia Newport, speaking at the LIC Pasture to Profit Conference last week.

Although rising populations indicate a strong demand for dairy products in the future, having a sound business able to weather milk price volatility going forward will be key. As a farmer, there is a need to ensure your farm is profitable in an average year, not just in the good years.

Research and data from across the world show that, in any farm system, those who achieve consistent profit have a strong focus on cost control and maximising pasture growth and utilisation.

In general terms, and we tend to see these across the globe, when milk price increases so does the average cost of production. The last few years of higher milk prices means cost control has not necessarily been a priority.

How do you as grazing, ‘low cost’, farmers regain focus for next season and strip these extra costs out of the system when milk price falls? It can be useful to see how UK grazing costs compare to other low cost producers from around the world, and see what lessons can be learnt from the volatility countries such as NZ experienced in the last 15 years.

How does the UK compare to the rest of the world?

Alicia correlated the below figures from 2013 for 50 of the grazing herds she worked with across the UK, a mix of split calvers, seasonal calvers and once a day milking herds.

  • 310 cows on average
  • 4,636 L/cow (range 2,820-6,750)
  • 385kg MS (range  250-540)
  • 300kg  – 1,800kg concentrate per cow
  • Imported feed included maize, silage and winter crop
  • Most import between 20 – 45% feed to each cow.

She then compared their figures with the whole of NZ, as well as producers in the Southland, which is very similar climatically to the UK.

Table 1: Grazing herd comparison UK and NZ 

 AN table 1

Graph 1: Breakdown of cost of production 2013 UK Grazing Farmers

AN pie 1

 

Graph 2: Breakdown of cost of production 2013 NZ farmers (2012/13)

AN pie 2

The pie charts above show that, in both the UK and NZ, the three major costs are the same; feed, labour, and maintenance and running costs (contracting costs, energy costs, bedding, etc), and, in fact, the proportion of where those costs sit is also very similar.

Table 2 below compares the costs of the average NZ farmer (season 2012/13, which was a hard drought season in NZ) with the costs for the average UK grazing farmer for 2013. I have included summary points from Southland in NZ for the 2012/13, season to see how the climate affects the costs seen in NZ.

Table 2: NZ v UK cost comparisons

AN table 2

With income almost 12ppl lower than the UK, and a cost of production 9ppl lower than the UK you will see that the average NZ and Southland farmer achieves a slightly better profit per hectare to those in the UK. Interestingly, it’s not one cost that stands out as the primary contributor to the difference in costs, but lots of smaller differences across the business.

With milk price plummeting, should we aim for a cost of production similar to what NZ achieved? How many of our costs are those accidental little slippages across every aspect of our businesses? How can we ensure we cut these out of the business going forward?

You may have overspent last year, due to the temptation of a higher milk price. Don’t be tempted to start with last year’s budget and try and take costs out, start your budget with a blank page and add your costs on. It helps to focus the mind and really concentrate on what’s important.

Budgeting for next year will be the most important thing you do in preparation for a lower milk price, so start now.

Those farms that are highly profitable all have a strong focus on cost of production, know their systems and targets well, analyse their costs and business regularly and don’t drift far from their key management principles. They do the same things better and better each year, rather than change their entire farm system. Focus on getting the basics right and the rest will follow.