Fixed milk price scheme reduces losses on Greenfield demo farm
Published 18/05/2016 | 02:30
The 347 cow Greenfield demonstration herd is set to post a cash loss of €8,500 this year, despite having its bottom line boosted by €37,000 from fixed price milk schemes.
While the projected loss may be avoided if the farm experiences exceptional grass growing conditions similar to 2015, the late spring has made this possibility less likely.
The herd, which was set up in 2009 in conjunction with Teagasc and Glanbia, is hosting an open day tomorrow, exactly halfway through the 15 year-long project to demonstrate the returns from a large-scale tillage-to-dairy conversion.
However, management is hoping that the demo farm does not experience a tough grazing season similar to that experienced in Kilkenny in 2013.
"We fed huge amounts of meal that year because we were effectively in a drought until October. That type of a year could leave the farm with losses of up to €40,000 this year," said Teagasc's head of livestock systems, Padraig French.
However, Mr French pointed out that the farm will still return a paper profit this year when capital repayments were factored into the calculations.
Teagasc is projecting an average base price of 22c/l for the 75pc of its 1.5m litre milk sales that is not covered by fixed price schemes with Glanbia.
"We will not be able to avail of the shareholder bonus payment from Glanbia because they are a shareholder in the business, which will be worth close to 2c/l for the year," said Mr French.
However, the losses would have been much higher without the forward price contracts that now account for 25pc of the farm's output.
"The fixed price scheme was one of the long-term strategies that we are employing to cope with low milk price years like this one," said Mr French.
While management are happy with the performance of the project, with returns still ahead of the original targets, Mr French acknowledged that the level of volatility experienced during the first 7.5 years of the farm's operation was even higher than expected.
"There's been a lot of challenges along the way, not least the level of volatility. So while we banked a lot more than we expected in recent years, the returns this year are much lower than forecast," he said.
The 120ha farm has put aside €125,000 from surplus profits over the last three years as a rainy day fund. This is another key part of the management's strategy to deal with volatility.
"There's long-term and short-term options open to every farmer to deal with volatility.
"The long-term options we chose were availing of every opportunity to fix milk. In this regard, Greenfield didn't get any preferential treatment over any other Glanbia supplier.
"Creating a cash reserve, ensuring that the herd was producing high levels of milk solids to add an extra 5c/l to the base milk price, and implementing a low-cost system that ensures that we are protected from major losses when milk prices drop," explained Mr French.
He said that the team had succeeded in reducing the costs of production by 4c/l to 24c/l over the last number of years.
"It took longer than expected to get the herd to bed down, which had a knock-on impact on culling rates, and disease control. But they are performing well now, with an average of 3.7-3.8pc protein across the herd."
Farmers attending tomorrow's event will also hear about short-term measures that they can undertake to cope with the current downturn.
"The first thing they need to do is a cash flow. If this shows that they are making a loss of less than 5c/l, then they are still viable long-term and already operating a low-cost system.
"These farmers should focus on securing extra credit to get themselves through this period.
"Producers losing more than 5c/l may be suffering from the consequences of funding farm expansion out of cash flow. If this is the case, they should look for a term loan on the back of that investment.
Mr French said: "Farmers that are losing more than 5c/l that have not undergone expansion from cash flow have a bigger problem. Their systems are high cost, so long term strategies come back into play. Can more milk be fixed? Can a cash reserve be created during the good times? Can costs be reduced?"
Meanwhile, Lakeland Dairies launched its first fixed price scheme last week, for farmers that lock in either 5pc or 10pc of their milk supplies over the next 31 months, starting this June.
The price on offer is 28.5c/l for the summer months, and 29.5c/l during the winter.
However, farmers are still wary of fixed price milk schemes, as evidenced by the 30pc of Dairygold suppliers that opted not to avail of the co-op's first offering this spring of 30.2c/l for 18 months.