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Saturday 3 December 2016

Analysis: What it costs to expand from 80 to 160 cows

Martin O'Sullivan

Published 19/11/2016 | 06:00

A milk price of 31c/l will be required to sustain large scale dairy expansion
A milk price of 31c/l will be required to sustain large scale dairy expansion

The abolition of milk quotas in April 2015 looked set to herald a rapid and significant expansion in milk production.

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Many producers or intending producers were relishing the apparent opportunity that lay ahead. However, their plans came to a screeching halt as milk price started to tumble.

Some might argue that such a reality check was opportune as it may have 'cooled the heels' of many over ambitious producers.

However, now that milk price appears to be on the road to recovery, those same individuals will soon again start turning their thoughts to expansion once more.

Hopefully, having recently experienced the stresses and pressures of 'below cost production' any thoughts of expansion will be properly assessed in terms of cost and the milk price required to sustain the project.

In this, the first instalment of a two-part series on entering or expanding a dairy enterprise, I will detail a not untypical scenario where an 80-cow producer is planning to expand to 160 cows.

The following factors are the basis for my analysis:

  • The existing unit will be expanded from 80 cows currently producing 400,000 litres to 160 cows producing 800,000 litres by year 5;
  • Thirty additional hectares are to be rented in from year 2;
  • Expansion will commence in the spring of 2018;
  • The existing parlour and collecting yard are to be extended, with a new bulk milk tank installed;
  • Additional and upgraded winter housing and slurry storage will be required;
  • Additional paddock fencing, roadways and water tanks will be required;
  • The existing farm machinery range is adequate;
  • Silage harvesting will be done by contractor;
  • One full-time worker will be employed;
  • Additional dairy stock will be sourced from a combination of home-bred heifers and purchased animals;
  • Total bank term borrowings on the expanded enterprise will amount to €323,000, repayable over 15 years with a moratorium on principal in year 1;
  • The average milk yield of the new stock will be 4,200 litres in their first year;
  • The Basic Payment is in the region of €17,000. This level of payment is considered typical for a farmer who previously operated a dairy and beef enterprise on 50ha.

Conclusions

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  • Doubling the size of an existing 80-cow dairy enterprise will require a milk price in the region of 31c/l to sustain a balanced cash flow based on a borrowing requirement in the region of €355,000;
  • Based on an average milk price comparison of 31c/l the expanded operation will yield an additional net profit of €16,896 based on a similar price comparison. However, the expanded operation will provide the benefit of an additional labour unit;
  • A 1pc annual variation in milk price at full production will amount to €8,000 as will a 1c/l variation in production costs.
  • Servicing a €100,000 variation in debt is equivalent to 1.25c/l in cash-flow terms.

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Summary

An expansion project of this nature will require a detailed management and financial appraisal and expert professional assistance should be sought from an experienced advisor/consultant who should be able to provide mentoring through the entire process from the initial planning stage right through to production.

A financial plan incorporating a loan application should be drawn up and analysed in detail before being presented to your bank well in advance of any construction. Such a plan should chart a stress tested course for the first five years in order to ensure that the project will be adequately funded from both a capital and cash-flow point of view.

Expansion may not be for everybody and is probably best suited to those farmers who have a ready successor.

The age profile of the farmer coupled with labour availability are vital elements that cannot be overemphasised.

Total dependency on hired labour into the future may not be ideal and alternative collaborative arrangements may be worth considering.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors. www.som.ie. Ph: 051 640397

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