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Decisions4Dairy: Revenue - Little things make a real difference

Published 22 July 16

Optimising revenue and cash returns makes absolute sense, but the devil is in the detail, says Rachael Chamberlayne, AHDB Dairy technical manager.

In a series of #Decisions4Dairy themed articles, the focus has been on optimising revenue and the factors dairy farmers should routinely consider, as well as the online tools available, to help inform their decision-making.

Having a grip on the detail and making the most of the relationship with milk buyers is never more important than at a time when the going is tough. Dairy farmer Joe Delves says “the little things make a real difference” and he’s right.

Milk contracts, by which farmers are bound, not only contain details of incentives but also contract penalties, including those for high Bactoscan and SCC readings, which vary, depending on whether aligned, standard manufacturing or liquid contracts. It’s important the consequences of these penalty clauses are fully appreciated and interpreting this level of detail to the circumstances of the individual businesses and then producing milk accordingly will ensure producers don’t compromise their position. In some cases, the penalties, when imposed, can prove expensive, as one piece of AHDB research shows applying average penalties or bonuses to the volumes of milk delivered at the various levels of hygiene suggests roughly £40m (or more than 0.3ppl) was lost in milk payments due to hygienic quality.

Equally important is making the most of what milk buyers want as this is the best way to optimise contractual positions, depending on whether the milk is destined for the manufacturing or liquid markets. Incentives, up the value of constituents, such as butterfat and protein which will deliver extra value and much welcomed cash, as well as help the milk buyer, serve the chosen markets. Don’t presume though – check what your contract is incentivising for, it may not always reflect where your milk is going.

Business resilience – the low milk prices of the last two years finally seem set to steadily improve, if the recent small upward price trends, which result from a drop in production, continue. Given these price fluctuations, market volatility, the impact of weather and the long-term nature of dairy production cycles farmers have limited options for being able to respond quickly to commodity market signals. Therefore, analysts, bankers and business consultants are united in believing it’s crucial for farmers, who are not already doing so, to adopt a longer-term business planning strategy, to attempt to even out the peaks and troughs, making businesses more resilient, using a five year average.

Dough Jackson, Director of Savills Food & Farming, suggests that now is time to brain storm.  ‘It is often helpful to try to involve friends, business partners, family members and even independent advisors to help you with this process. Split your thinking, and ideally piece of paper, it into two headings:

  • What do you want e.g. 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.
  • What do you need e.g. 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?’

Doug says 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 equally reliant on one single but different revenue stream. When considering non-dairy revenue do not discount anything at the early stages – if you think it....write it down.

Top tips

  • Use the AHDB milk price calculator to inform decision-making
  • Use the five-year average pence per litre figure
  • Plan longer term
  • Assess you and your farm for alternative revenue streams

 

 

The online AHDB milk price calculator (MPC) is an online tool which assists milk producers in achieving the best milk price possible. The tool allows farmers to input farm-specific data to see where changes can be made to improve the milk price paid, taking advantage of the different payment schedules.

The MPC can be used in conjunction with the Milk Forecasting Calculator to see how changes to herd size, yields or calving patterns will impact the business and allow for a comparison of milk prices paid across a range of contracts.