Now is the time to review milk production costs
Over the past six months, three factors have had a significant impact on many dairy farms; the increase in milk price, climatic effects on pasture growth and the availability of finance.
When faced with such fluctuations, how have you coped? Have your decisions leaned towards a focus on profit or production? Have you identified any cashflow problems early and taken suitable remedial action?
At 30c/l, some farms will be just past breaking even, with a small amount of surplus cash. For others who have lower costs of production, significant profits will be generated, where tidying up short-term expensive borrowings, and a sensible provision for tax, will be a good use of this extra income. I would like to pose a question; are you the former (small cash surpluses) or the latter (large cash surpluses), and if not the latter, why not?
As many dairy farmers take a break sometime this summer, some will reflect on what they have learned over the past two volatile years. Essentially, cash is king and any future business growth relies on repeated annual cash surpluses. For those eager to protect their business from price volatility, now is the time to review your costs of production.
- Are your monthly cashflow records up to date?
- What is the variance on items between the actual and the budget?
- Will you exceed your overdraft facility in the next year?
The remainder of this year will test a farmer's financial management ability.
The big question is also whether the farming system being implemented is capturing as much cash as possible, and where are the losses occurring? What are the options for the extra income generated this year to secure your future?
Questions to consider are:
- Do you need to reduce your debt, especially overdrafts that have built up, and expensive credit from suppliers? Is the ratio of debt to equity suitable for your business now that land values have decreased?
- Are you maximising the growth of your cheapest resource -- pasture? Use soil tests to determine whether pasture growth is limited by nutrient status or pH, and apply compound fertilisers or lime where required. Are you getting a good response from nitrogen fertiliser? Drainage and pasture-renewal programmes may also need serious consideration after three wet years. Assess whether paddock size, fencing, water and roadways are adequate for your herd size now and in the future.
- Are you maximising the usage of pasture and using supplements wisely? Use supplements strategically in periods of clear feed deficits and harvest surpluses. Avoid leaving grass behind in the paddock by regularly monitoring your farm pasture cover and reacting accordingly.
- Do you have adequate winter feed provision? Determine your winter feed requirement and have a surplus of winter forage as an insurance against unexpected feed deficits.
- Is your overall stocking rate and annual feed demand per hectare in balance with your pasture growth and usage per hectare? A 550kg cow producing 350-400kgMS/year requires 5.4-5.8tDM/year. As one cow equates to one livestock unit, an overall stocking rate of 2.5LU/ ha will require 13.5tDM (2.5LU x 5.4t) to 14.5tDM, harvested or bought in, per hectare.
- Do you need to increase your annual production? Are you improving the genetic merit of the herd, expanding in stock numbers, compacting calving spread and increasing stocking rates? Focus on investments that reduce the cost of production by matching the feed demand curve to the pasture growth curve. More litres or cows does not always equate to more profit.
- Is your animal husbandry reducing profits? What is your disease status and vaccination policy, and do you suffer from large numbers of mastitis and lameness? Problems will multiply as herds expand.
- Is capital expenditure to structures, plant or machinery required? Consider long-term options that minimise the investment required on these depreciable items.
- Is your business providing enough free cash to give you an adequate lifestyle for a holiday or other discretionary spending or savings?
Debt repayment will be high on the wish list of many farmers. For a lot of farms, overdraft levels or working capital need attention.