News

Decisions4Dairy - Thinking like a businessman not a farmer

Dairy farming just needs to make more money and with the milk price beginning to rise this won’t be a problem will it? The down turn we’ve seen over the last couple of years has meant that every business has had to look within to make cost savings. It goes without saying, those will be maintained as the milk price rises, won’t they?

The graph below shows the average Defra milk price with the full economic cost of production since 2007/8. What is obvious here is that every time the milk price increased so did the cost of production.

Story 3 Image 

When these costs of production trends are seen against the change in the average milk price in each year, it is shown that only the top quartile consistently kept costs lower than the average milk price. So how do we get from average to top 25% performers on cost of production and maintain the cost levels we have now while the milk price rises?

 

You’re a business manager not a farmer

Being good at individual aspects of practical dairy farming can be enough to get us through in good times but to ensure our businesses are sustainable through a cyclical market, we need to plan and build a robust business with robust budgets. If figures aren’t your thing, you don’t have to do the number crunching yourself but you do need to know what the plan is, how to stick to it and how to monitor your progress so that you can see if it’s not going in the right direction and make changes before your next session with your advisor. Budgets are not for the bank manager; they are for you and your business!

 

Understand where your money has gone to stop it running off again

Using your management and tax accounts you can make some assessment of what are the things that are costing your business the most money. In general, the big costs are feed, herd replacements, labour, power and machinery. However, the best way to look at what your key cost are (and therefore how you might manage them) is to complete some form of bench marking, if you haven’t done so already.

Comparable farm profit is one format to use for bench marking and a template to help you can be found here. This can be used to compare against other farmers you might be in a group with or national data such as that found in our evidence report and our 'Estimated typical costs of milk production' tracker. It is always best to compare yourself with the top 5% of operators to see what can be achieved.

 

Make a plan to keep a tight hold on money that comes in

Develop a budget for the current year and a 'normalised year', ie an average future year based upon current cost levels. Use this to establish your cost of production on a pence per litre basis and whether this is at a level that is sustainable, in line with the 5-year average milk price, ie in how many years would you generate a profit?

 

Check what happens if the bottom falls out of the market again or feed prices rocket

Apply some sensitivity analysis for key input costs and output prices, these could include:

  • Feed price +/- £25/t
  • Fertiliser +/- £25/t
  • Interest rates +/- 2%
  • Fuel +/- 10 ppl
  • Milk price +/- 5 ppl
  • Cull cow/calf price +/- £25/head

Once you have identified where improvements need to be made financially, it is imperative that you see how this can be done physically. The cost savings achieved between different businesses will be due in part to the farm system, the farm resources and the manager/owner of the unit. Day-to-day activities and processes influence farm costs, as can be seen in a short film that can be viewed here, which looks at the little things that make a big difference to the farmer’s business. It is far easier to 'see' these changes by visiting and talking to farmers who run profitable systems or have changed their farming business for the better, rather than just reading or being told about them.

 

If you do what you’ve always done, you’ll get what you always got

Make the changes on farm physically to deliver the financial changes/results! Simple to say but this may include the sale of farm machinery, the investment in cow tracks or installing parlour or out-of-parlour feeders and removing the need for a feeder wagon, weighing calves, making silage a week earlier or picking up feet of lame cows quicker. Whatever the changes, it is critical to make the link between the physical change and the financial result.

Complete a cash-flow forecast for the business for the next three years or whatever period is envisaged to change the business from its current form to the new plan of working. Talk to your lenders to ensure you are able to access any working capital required to support your business plan. A demonstration of active change as a result of identifying business improvements should be viewed favorably.

 

Stick to the plan!

Once your budgets are finalised, ensure you have a system in place to be able to monitor it on a monthly or quarterly basis, to ensure you stay on track. You must stick to the plan!

During the process of monitoring actual results against the budget, ensure you identify and justify any deviations from the plan. If deviations occur, ensure they are rectified, eg are they just timing differences or does the plan need to be re-visited, to ensure it is still realistically achievable.

 

This is one of a series of articles on mindset.  Read more on this and Decisions4Dairy – an industry-wide initiative to support farmers in challenging times so they can become more robust for the longer term at dairy.ahdb.org.uk/d4d.