News

Decisions4Dairy: Non-milk revenue

Published 21 July 16

Doug Jackson, Director of Savills Food & Farming, writes the 4th article in the Decisions4Dairy Revenue theme.

So you have used the AHDB Dairy decision tree model and got as far as what are your alternatives and you are not sure what to answer? This article talks you through the process to try to identify what your options might be.

How is your core business?

You have decided you might want to give up dairy, or do something in addition, but that does not necessarily mean you do not have a strong business. But, if there are weaknesses in the business you need to address them alongside identifying other business options.

The main focus will be to assess your balance sheet. Questions to ask: what is your net worth as a percentage of your fixed assets (equity percentage)?  How much long-term debt do you have as a percentage of fixed assets (gearing)? What are your current assets as a percentage of current liabilities (current ratio)?

Targets should be:

-       Equity – minimum 50%
-       Gearing – maximum 50%
-       Current ratio – minimum 200%

If your business does not meet the above targets, this is not necessarily a problem but you may need to consider restructuring the business or reducing debt alongside plans for diversification.

What actually is diversification?

It is important to remember that diversification is not just farm shops and campsites. Other farming enterprises can be diversification – a very common option for former dairy units is heifer and cattle rearing.

Diversification is about having a good balance of revenue streams. One of the challenges for the dairy sector is that incomes, are usually mainly milk, which is one reason current low prices have such a significant impact. Therefore, try not to become reliant on one single revenue stream.

How much do you have to spend?

A new business or enterprise will almost inevitably require capital investment. Although there might be grant support, you need to be very realistic about how much money you have to spend. You might be selling your dairy herd which will provide the funds to develop your new business.

However, you might need to borrow money. So first assess (or even ask your bank manager) how much money they might be able to lend you – they will of course say it depends what you spend it on; but try to tie them down to a broad figure that they consider to be acceptable, based on the current business.

Now about YOU and your FARM

Now is the time to brainstorm. It is often helpful to try to involve friends, business partners, family members and even independent advisors to help you with this process. Get two pieces of paper.

On the first piece – split it into two headings:

a)     What do you want
-       what are the things you would like to see happen such as livestock still on the farm. You would like to keep the field behind your house as grass.

b)    What do you need
-       how much money do you need to earn, how much money do you need for debt repayments, rent, etc. Are there restrictions on your tenancy?

On the second piece of paper – split into four sections:

a)     Location
Where are you?  Are you near a village? Are you near visitor attractions? Are you near main roads? Do you have good internet? Are you easy to find?

b)    Land
What type of land do you have? What is the soil type and what is it best suited for? What could you grow, what could you not grow? Would neighbours be interested in your land? Is it steep slopes or flat? Does it flood or become waterlogged?

c)     Buildings
What buildings do you have? How old are they? Do they need repairs? Are they specialised e g farrowing houses? Where are they in relation to houses? Would a neighbour consider renting them for their farming business?

d)    People
What skills do you and your family, staff and business partners have? What are your interests? What are your dislikes? Would/could you go and work for someone else?

What does this all mean?

Do not discount anything at this stage – if you think it....write it down. Look at what others are doing, look at examples on the AHDB Dairy website, look at case studies in the farming press. Which might suit you?

Then ask yourself more specific questions and think about how each option might fit with your ‘would like’ and ‘need’ list.

 -          Are you suited as a visitor location?  You need to have easy access – ideally near a main road.  Are you close to towns or cities?  Do you have flat fields near the road with a water supply, suitable for camping?  Could you convert your barns to holiday lets?

-          What about converting buildings to offices or commercial units? Some of the access questions still apply, plus – do you have good broadband, as this is a prerequisite for most other business purposes?

 -          Residential development? Would you consider developing redundant buildings into residential dwellings?

 -          Adding value to produce. Do you have an interest in processing and then marketing produce?  Would you enjoy attending farmers’ markets? Do you have good internet connection for online sales? Could you develop a website?

-          Try other crops? Look around at what others are doing. Could your farm grow fruit, potatoes, vegetables or cereals? Do you have the buildings to store the crop? Do you have the knowledge and equipment?  Would you rent the land or do a contract farming agreement with a local farmer?

-          Other livestock? Do you have buildings suitable for livestock? Would/could you provide contract heifer, beef or pig rearing? Or would you like to try your hand at sheep, goats or niche livestock? How and where would you sell the stock?

Next Steps

By now, hopefully, you have shortened a long list to a few realistic and possible options. The next stage is to think about feasibility and the business plan. You will need to consider the following questions – but treat this as a two-stage process – (1) do a very broad assessment initially to identify the preferable options (or rank them in terms of your preference)  (2) do a more detailed assessment of the preferred options:

  1. How much will it cost to set up?
  2. What are the potential income and trading costs – how much profit will it make?
  3. What other costs – drawings and debt repayments?
  4. What are the working capital requirements i e cash flow?
  5. What is the sensitivity to changes in income, price or costs?
  6. Marketing
     i.          What is the size of the potential market?
     ii.         How many customers are there?
     iii.        How will you advertise/promote the new business?
     iv.        What are the costs of marketing?
  7. Do you need planning permission?
  8. How will you fund it?
    i.        Cash?
    ii.        Loan?
    iii.        Grants?
    iv.        Business investors/partners?

Impact factors to consider

Planning – are you restricted by planning constraints – national park?  Are there permitted development options?

Tenancies – gaining the landlords consent before you progress is essential.

Tax – also speak to your accountant as diversification may affect your tax status.

 Summary

  1.  Is your business resilient before investing in new business enterprises?
  2. What resources do you have to invest and how much would the bank lend you?
  3. What do you want and need?
  4. What are the attributes of your farm?
  5. Identify the potential options and do initial feasibility
  6. Carry out a more detailed review of the preferred options

Written by Doug Jackson, Director of Savills Food & Farming. Savills has a team of expert consultants across the country who are able to provide advice and guide you through this process. Contact Doug on 01444 44 60 66 or 07568 351704.