Surviving low milk prices - Tony Evans

Published 25 September 15

Making evidence-based decisions and challenging everything done on farm is more important than ever for dairy farmers as they face milk price falls and uncertainty, said Tony Evans from Andersons, speaking at a recent series of AHDB Dairy ‘Surviving low milk prices’ meetings across the country.

The meetings used an informal, audience participation format to explore the reality of today’s volatile milk prices, to look for ways forward and at the tough decisions that might need to be made.

“Take a long, hard look at the situation we are in today regarding milk price,” said Tony. “We have been here before. In 2012, the average milk price was 22-23ppl, and the table below shows that many of our input prices were much higher.”

Basic input prices 2012 v 2015, comparing like with like

 

2012

2015

Oil $/barrel

88

42

Tractor diesel $/barrel

78

40

Cake £/t

226

172

Fertiliser - Ammonia nitrate £/t

300

233

 

“Make sure you’re aware what your input costs really are. Your suppliers need to get the message that, in light of these input costs, their costs should not be going up. For example, with the price of diesel falling, so should vet call-out costs. In fact, what delivery cost should not be going down?

“Negotiate with your suppliers. Use the information about input costs to make informed decisions about what you bring onto the farm and at what price. AHDB Dairy Market Information is available via the website and the Dairy Market Weekly newsletter, and has the latest information about input costs.

“When negotiating with suppliers be professional and credible. Explain what you need, and why, and give them a chance to compete. Explain it is their only chance to come back to you with a price, and see where you get then. No one wants to spend half the day going back and forth trading off prices with each other. Only trade with people who you think will enhance your business.

 “But, crucially, just because inputs are cheaper it doesn’t mean you should use more,” stressed Tony.

“Do your budget and communicate it with your suppliers. One of the ways to tackle your budget is to look for a 10% reduction for every cost on the farm. Just as you are looking at the efficiency of your business, so must your suppliers. Review your processes, ask yourself where you can save that 10%. Should you be paying your scanner by the hour or by the head? This, of course, will depend whether you have large numbers of animals to scan in a few sessions or fewer but each month across the year, so work out which option saves you money.

“Use 10% less of everything on farm too. Manufacturers’ recommendations tend to be bomb proof, keep reducing amounts until you see an affect. Find that line in your business.

“Look for that 10% rule in everything. Forage utilisation is key to keeping costs down. It’s cheaper to have cows outside, so graze them for 10% more each year. 10% of 365 days is 36 days across the whole year. The main point is to make the most of the grass you grow whether you graze it or conserve it; challenge yourself and your cows.

“Milk volume has risen in the last few years due to the increase in milk price but it is important not to run your budget at the peak price, do it at the average price over the previous five to six years. Have you invested into a high-cost business?

“The recent RABDF Survey suggests more all-year-round calving producers are considering leaving the industry as they have high-cost businesses. As an industry, we already have the second lowest cost of production in Europe but you still need to focus on lower cost businesses.

“Make a list of what you need to find, drawings, tax, loan repayments and rent, and divide that by your milk price to find out how many litres you need to produce to meet them. Use that as your starting point. Every other expense after that is a choice. You may choose to feed your cows concentrate, but you need to choose that because it will make more money. You make those cost decisions or sometimes your farm, due to its location, setup or circumstances, makes that call for you,” explained Tony. Sadly, if the farm does not present you with a structure and opportunity to make money on the average price you either accept that and bring in outside income to match the gap or consider moving on, with time and age on your side.

“Decisions need to be evidence-based. Challenge everything you spend and ask yourself why do we do it this way? Don’t underestimate what you save if you cut out or rationalise a job. How much do you save in labour and fuel by having one full day on the post knocker not two or three afternoons?

“Practice bottom up budgeting. Start with the cash number you want at the bottom of the spreadsheet and work your way up, adding costs as you go. Put notes beside each cost, with your justification/thinking behind that decision. Fold it up and carry that budget with you, so when suppliers call you in the middle of a field, you can negotiate from an informed position.

“Crucially, don’t make unrealistic budgets. They need to be justifiable and quantifiable – that is where the notes will play an important part.

 “If your budget highlights a shortfall, you have three options:

  • Review and rework your budget
  • Sell assets
  • Borrow money.

“But, most importantly, address your options. Make sure you are the one in control and are fully informed of the situation. Once you have a budget in use then it is essential to monitor actuals against it and enjoy the times when you are ahead and address it when you are behind, do not let the troubles build up.

“With uncertainty over milk price it is unacceptable to be average. Challenge everything you do and look to where that 10% can be found. With low input prices there is a real opportunity to save and improve profits,” concluded Tony.