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The most asked question of dairy farmers up and down the United Kingdom?

The most asked question of dairy farmers up and down the United Kingdom?

Do you know the cost of production on your dairy farm? This must have been the most asked question of dairy farmers up and down the United Kingdom during this lengthy and severe dairy crisis. From politicians to financiers, it has been a topic of great interest and, at times, heated debate.

Neil Wilson, HSBC Regional Agriculture Director for Scotland, looks at longer term planning as part of the Decisions4Dairy Cost of production theme.

One of the major problems with calculating the cost of production is deciding how to work it out. There are a myriad of methods to calculate it on dairy farms and it appears that the industry cannot agree on a standard calculation.

However you calculate it, it’s important to make sure you absolutely understand what is contained within the calculation that provides you with the end figure. The only thing worse than having no information on which to base a decision, is having the wrong information.

The method used is a debate that continues, but there are few things truer in business than it takes cash to pay the bills. Cash is effectively the difference between total income and total expenditure. Considering the limited control over income streams that dairy farms have, as highlighted over the last couple of years, the focus has to come back, once again, to costs and expenditure to maximise cash generation, or indeed, minimise a cash deficit during difficult times.

Cost analysis is quite business specific, so what can be considered as some of the behaviours and requirements around disciplined cost management rather than specific items?

The chart below demonstrates why a disciplined approach to cost management is vital to ensure the longevity and success of your business. In its simplest form, an efficient cost base allows you to maximise cash generation at the top of the cycle, make more than your competitors throughout the price cycle and, arguably more importantly, give your business a robustness at the lowest ebb of the cycle.

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Over the years, the most successful dairy enterprises I have seen have been those fixated by cost management. They display attention to detail on every cost. However, cost management or lower cost of production is not just about slashing any cost that you think is too high, it needs to be much more strategic than that.

On a dairy farm, cost management is about efficiency. Are the costs incurred helping to drive the maximum output from your farm? It’s easy to say, extremely difficult to do, but that is one of the key skills required to operate a dairy farm in this modern farming era of globalisation and support reduction. It is all about getting the balance right between what you spend and what this gives you.

I would caution any business against cutting costs for the sake of it, even in a downturn. It must be a measured process and undertaken on an ongoing basis. Short-term cost-cutting can have severe long-term effects on a business, particularly in the farming sector where it can actually cost more in the long run, especially in hidden costs such as fertility and involuntary culling. Keeping a cost focus at all times means that enforced cost-cutting should be significantly reduced.

Tackling the cost base of a business can be daunting. The starting point has to be considered long-term business planning. To get started, AHDB Dairy has a number of resources that can point you in the right direction (Decisions4Dairy Decision tree and budgeting templates). Liaise with your advisers for guidance and if you don't have any trusted advisers, AHDB Dairy hold a list that have offered to help you seek the support you require. These can be found at dairy/.ahdb.org.uk/d4d. At HSBC, we also have a number of resources that can help. Our Forward Planning booklet provides some benchmarks to compare against as does the AHDB Dairy Evidence report GB Dairy herd performance 2014/15 and Estimated typical milk production costs tracker. We also have our free business planning tool here: HSBC Business Plan Tool. Benchmarking with other farm businesses is also a great way of comparing performance, as it offers the opportunity to discuss best practice with farming colleagues.

It is possible to make the industry more cost effective and resilient in the face of increasingly cyclical prices. Long-term planning and strategy can help you achieve resilience in your business and I would argue that it is a requirement for long-term progression and survival in these toughest of times.  

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