A minimum milk price of 32c/l and a 70-cow herd are essential in the initial phase of a dairy start-up, writes Martin O'Sullivan
I received a deluge of queries, not necessarily about robots, but about the viability of establishing a 60-70 cow enterprise.
All of the enquiries were from beef farmers who were considering a dairy start-up which would provide them with an acceptable return that would enable them to work full-time on the farm.
With this in mind, I decided to analyse the figures to see if a 70-cow enterprise would represent a viable unit.
The farmer who intends to convert to dairying is a 45 suckler cow beef farmer who sells the progeny at a year and a half. I will make the following assumptions:
Table 1 sets out the breakdown of capital expenditure and resultant borrowing requirement.
It is assumed that the farmer's only capital contribution will be the proceeds from the sale of suckler cows and weanlings.
It is assumed that the proceeds from the one to two- year old cattle will be used to clear the working capital loan.
As this scale of operation is never going to be a hugely profitable venture there has to be a high emphasis on capital cost savings to confine the debt to a sustainable level.
As a rule of thumb, for every €10,000 borrowed over a 15-year term, the repayment is slightly less than one tenth or just under €1,000 per annum.
The first question that this case study needs to answer is whether a 70-cow enterprise is a viable proposition?
The answer is yes, but in that the projections demonstrate a milk price of 32c/L is required for viability.
It is evident from the projections set out in Tables 2 and 3 that while the farm yields a net profit of €36,663 in year one, there is a cash flow deficit of €4,432 incurred when account is taken of personal drawings, bank repayments and income tax.
There is a further deficit of €3,261 incurred in year two, but by year five the profit has risen to €57,877 leaving a cash flow surplus of €8,052.
At this level, overhead costs will not be impacted significantly by a 20pc variation in cow numbers so each cow is contributing approximately €1,000 to €1,300 in profit.
For example, a 60-cow herd will fall short of achieving a balanced cash-flow at full production and hence will not be a viable enterprise.
The absolute minimum viability threshold is met at around 65 cows but taking all risk factors into account, 70 cows should be the minimum starting point.
An important message for those planning to switch to dairying is that the first few years will be challenging.
But things will come right with good management if the project has sufficient scale, milk price holds up and borrowing is held at manageable levels.
In this particular case borrowings are working out at approximately €2,800 per cow which is approaching the limit for a start-up project. Generally, banks will run with projects that require up to this level of loan funding but the farmer's track record will be crucial.
A poor beef producer is unlikely to make a good dairy farmer and banks will judge you on past performance, regardless of what your enterprise was.
I would summarise the main findings of this case study as follows;
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