Facts and figures: How much does it really cost to switch to dairy farming

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

We analyse the figures to see if a 70-cow enterprise would represent a viable unit.
We analyse the figures to see if a 70-cow enterprise would represent a viable unit.
A 70-cow enterprise is a viable option

Martin O'Sullivan

In my article about dairy robots of two weeks ago I referred to the cost of establishing a 65-70 cow dairy enterprise.

To my surprise I received a deluge of queries, not necessarily about robots, but about the viability of establishing a 60-70 cow enterprise.

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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.

CASE STUDY

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:

  1. There are 100 owned acres and €60,000 in total farm debt, mainly comprising a stocking loan that is cleared and renewed each year when the cattle are sold.
  2. The current Basic Payment is €15,000 per year.
  3. The existing stock of cows and weanlings will realise €72,000.
  4. Dairy cows/in-calf heifers will cost €1,600 on average.
  5. The enterprise will be based on 70 cows from the outset producing 315,000L in year 1, rising to 385,000L in year five based on standard fat and protein.
  6. The projected price per litre is 32c, which is the maximum price that banks will currently run with.
  7. Existing cattle housing can be modified to accommodate 70 cows and replacements.
  8. Silage harvesting will be done by contractor.
  9. It is assumed that the labour requirement is met mainly by the farmer with occasional farm relief.
  10. A new parlour will be erected and a second hand 12-unit milking machine installed along with a second hand bulk tank.
  11. No grant assistance will be available.
  12. Total borrowings at commencement will amount to €198,800 (see table 1) which will be repaid on a fifteen-year term.
  13. Annual drawings from the farm are €30,000.
  14. There will be capital allowances of €24,000 per year for the first seven years on the initial capital spend on buildings. This will mean that the only tax payable in the first two years will be the minimum rate of PRSI.

CAPITAL EXPENDITURE

Table 1 sets out the breakdown of capital expenditure and resultant borrowing requirement.

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dairy start up 1.PNG

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.

CONCLUSIONS

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.

dairy start up 2.PNG

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.

dairy start up 3.PNG

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;

  • A milk price of less than 32c/L is not sustainable in the first two to three years to achieve a break-even cash flow
  • By year five, a milk price of 29c/L will achieve a break-even cash flow
  • Cash flow deficits in the first few years will have to be funded
  • Borrowings at the outset should not exceed €2,800 per cow
  • Each additional cow should add at least €1,000 to your net profit
  • Establishing an enterprise of less than 70 cows is not recommended.

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

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