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Independent.ie

Sunday 4 December 2016

How to cope with the impact of falling milk prices

MaryKinston

Published 29/07/2015 | 02:30

Diarmuid McCarthy and his son John, and Norman Perrott (right) from Barryroe making their way up a steep hill 700 feet above sea level during the recent Carbery/Teagasc farm walk on the lands of Tim and Breda Hurley, Caherbeg, Rosscarbery who were the Carbery milk quality award winners for 2015. Photo: Denis Boyle
Diarmuid McCarthy and his son John, and Norman Perrott (right) from Barryroe making their way up a steep hill 700 feet above sea level during the recent Carbery/Teagasc farm walk on the lands of Tim and Breda Hurley, Caherbeg, Rosscarbery who were the Carbery milk quality award winners for 2015. Photo: Denis Boyle

With milk prices under pressure, I can't help but feel that farmers' milk incomes will be significantly affected next year, never mind the remaining milk months of 2015.

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While most dairy farmers have accepted that milk incomes will be tight for the foreseeable future and have made some small changes to spending especially in areas such as capital expenditure or repairs and maintenance, the extent and duration of this price fall is still unknown.

The potential short and long term impacts of this low milk price will very much depend on an individual farm's efficiency, cost of production, business scale and structure, debt servicing and drawings requirements. If you are already feeling the pinch and are wondering where adjustments can be made, here are a few dairy farm business health checks to consider.

1 Cash is king

Protect your working capital. Working capital is the difference between current assets (often in the form of cash and stock, but these can include machinery, surplus silage etc.) and current liabilities (such as merchant and co-op debt, unpaid bills and overdraft).

If you are prudent, the current assets and liabilities can be managed in such a way as to provide a financial cushion in the lean times.

Selling surplus stock above your replacement needs is an example of how a farmer can provide a buffer to working capital.

And back in the days when we were getting 39c/l, it would have been good practice to operate without an overdraft, and to have aimed to bank potentially €200 to €250 per cow by the end of the year.

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This would allow for adequate working capital to run the farm at the start of the next milking season.

Unfortunately, this approach is not followed often enough, and your ability to do this will also be determined by the age and development stage of the business.

More often farmers choose to take these available cash surpluses and reinvest them in capital developments such as cattle housing, roadways or land improvement.

Capital investment out of cashflow is not a good option when the milk price is low.

New entrants are particularly vulnerable and often fail to consider the need to borrow additional capital to provide working capital.

2 Low production costs

It's essential to keep your costs low by buying inputs at the right price and only buy what's needed not what's wanted. A low milk price means you must focus on the essentials. In a commodity industry like dairying, the low cost producer is the successful producer.

3 Efficiency and productivity

Your dairy herd must be more than just low-cost - it must be productive and efficient.

A low cost structure alone will not drive profit; it must be coupled with a productive system.

Identify areas within the farm where you are under performing which are reducing your income or inflating costs.

For example, if production per cow is less than 350kgMS per cow supplied to the co-op, then identify where and how you can increase this.

If your somatic cell count is high at greater than 200,000 assess you milking routine and identify problem cows etc.

Is your grassland management up to speed and are you feeding meal because it's needed or because you always did?

Whilst there are indications that we are getting paid around 8-10c/l less than last year, the worst of the financial pain is yet to come so it's time prepare and plan ahead.

4 Make every acre count

It's important to maximise your assets. This is particularly important for rented land, especially where the rent is high and/or where the overall stocking rate is low.

Unless you can find a way to make more money within at least two or three years by renting land - for example by producing the silage to milk more cows and rearing their followers - then it's costing you money.

5 Restructuring debt

While farmers always have an ambition to repay debt quickly, short-term repayment schedules can put undue pressure on cash flow when milk price is low.

In recent years money lending has been on shorter repayment schedules compared to historical trends, with many loans closer to 10 year rather than 20 or 30 year term.

It could be suggested that the agriculture sector needs to put pressure on the banking sector to lengthen out these term loans especially where a substantial amount of agricultural land is purchased by the business.

Mary Kinston is a discussion group facilitator and consultant, and farms with her husband in Co Kerry

mkinston@ independent.ie

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