Friday 30 September 2016

To build or not to build? Milk price shouldn't affect your decision

We meet a young couple who took the plunge into expanding their dairy farm despite the risks

Mike Brady

Published 11/11/2015 | 02:30

UCD's new state-of-the-art 40-unit rotary parlour was part of a €2m investment in new facilities on its Lyons farm this year
UCD's new state-of-the-art 40-unit rotary parlour was part of a €2m investment in new facilities on its Lyons farm this year

Dairy farmers love a new building project. It's a welcome diversion from the daily routine of milking cows, spreading fertiliser and record keeping.

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The buzz of the heavy plant turning the first sod in the green field alongside the farmyard, the panic around the pouring and levelling of concrete and, of course, the new shed rising up into the clouds are new satisfying experiences and even milestones in the history of the farm business.

The neighbours find excuses to call for a look, agribusiness sales reps appear like bees on honey all the while fuelling the needs and wants of the farmer project manager.

The month of June used to be a very dangerous time for the commencement of spontaneous farm building projects - first cut silage in, cows back in calf, children on holiday from school for cheap labour and that big May milk cheque putting some welcome spending power into the current account.

Many badly planned farmyards and farm buildings have resulted from such urges. Today's farm building projects require a lot of forward thinking and planning, with local authority planning permissions, grant applications and raising finance all taking long periods of time for approval.

However, many dairy farmers out there who are 'all ready to go' in 2016 now have a big question mark over the decision to give the builder the call to go ahead due to the significant fall in the milk price.

Farm business financial plans done for those applying for bank finance were calculated on a base price of 30c/l, which seemed conservative at the time, but with base milk price around 25c/l, the surplus cash available for repayment of a new loan in many cases has disappeared. So should the new building project be put on hold?

Edward and Nora presently milk 145 spring calving cows, rear all replacements and run a small beef enterprise on a 220ac holding in Co Tipperary.

They both work full-time on the farm with a little casual help, they have two children attending national school.

They looked at options for the future early last year because a) the removal of milk quotas presented an opportunity to expand in cows; b) they felt they were presently overworked with three different enterprises and; c) they have only a 10-unit milking parlour.

They chose a plan to expand to 220 cows and contract out the rearing of 50 replacement heifers commencing in 2016.

The attraction of this plan was that it maximised their income by focusing on a cow-only system and also it would simplify the workload as they plan to employ a student to help with calving next spring.

Financial approval was obtained from the bank for a term loan of €300,000 over 15 years to complete a new 22-unit milking parlour and some additional cow housing.

Planning permission has been granted and a TAMS grant application is pending. The developed business plan for 220 cows done at a base price of 30c/l shows a heathy surplus of cash of €32,640 per annum and significantly more (€82,140) at 35c/l, which was the base price at the time the plan was written (see table).

Edward and Nora were looking forward to some spare cash as they have invested a lot of time and money into the farm and building a new dwelling house in the last 10 years. In any case, the base milk price was high since 2010.

Then the Global Dairy Trade (GDT) Index started to fall and effectively has continued to fall ever since they made the big decision. Edward and Nora asked their dairy consultant should they defer their dairy expansion plans, the revised figures at a 25c/l base price showed a big deficit of funds of €16,860 per annum.

The advice

Edward and Nora sat down with their consultant and revisited their decision to spend in excess of €300,000 to expand to 220 cows, build a new dairy parlour and additional cow accommodation.

They questioned why they were planning to go ahead with the project in the first place - did they want or need it?

Too many farmers have commenced building projects or purchased machinery where the motivating factor was 'I want that', as opposed to the farm business actually needing the particular development project.

However, Edward and Nora needed a better milking parlour and reducing down cow numbers was clearly a backward step when they are young, motivated, wish to be full-time farmers, and own all their land.

They were satisfied they needed the investment in their business when they looked forward at the next 30 years of their working lives. So that left the milk price and the projected deficit for 2016 still to be resolved.

The historical milk price was better than 30c/l. A lot of our international competitors on the world market cannot make ends meet at 30c/l, not to mention 25c/l.

Finally Edward and Nora realised they have a lot of scope to improve financial and technical performance.

They know this will not solve the 2016 deficit but they are confident they have learned and put in place the breeding, grassland and profit-focused technologies that will help move them up the profitability ladder in the years to come.

They called their bank manager to outline their concerns and he agreed an interest-only payment on the new loan for 2016 and an extension to the overdraft to cover the projected deficit.

Hopefully the milk price will have recovered sufficiently for them to commence full interest and capital repayments in 2017.

The key point from Edward and Nora's story is that if you have properly researched and planned your decision to embark on an expansion project or farm development project, the milk price at the time - whether it is high or low - should not affect your decision.

Mike Brady is a consultant at Brady Group, Cork. Tel: 021-4545120 or email: mike@bradygroup.ie

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