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Independent.ie

Monday 22 January 2018

Facts and Figures: The true costs involved in setting up a dairy farm

To succeed in dairy farming you need expert knowledge and expertise
To succeed in dairy farming you need expert knowledge and expertise

Martin O'Sullivan

Readers may recall my article of some weeks back on the feasibility of expanding a dairy enterprise.

Curiously that article prompted a number of queries, not so much about expansion, but rather about establishment.

Given that milk price is on the rise it is not to be unexpected that the green shoots of new start-ups would soon start to appear.

It is worth noting that between 1975 and 1984, milk production in Ireland grew at an average of 5.99pc per year but unfortunately that came to a shuddering halt with the introduction of European milk quotas in 1984.

Now that quotas are no more we may be back to those heady days. It is an undisputed fact that dairying, apart from the exceptional very large beef or tillage units, is the only mainstream farm enterprise that can possibly support a viable business model that offers the farmer a comfortable living from full time farming.

Needless to say there are lots of caveats, constraints and conditions attached to the foregoing statement. Embarking on a new dairy enterprise requires serious thought, planning, analysis and assessment.

Apart from the financial considerations and lifestyle demands, if one is to succeed in dairying there will be a requirement for expert knowledge and expertise and one simply cannot expect to convert from being a drystock or tillage farmer to being a dairy farmer overnight.

If you think it's as simple as that, you are in for a big shock. In my opinion, no farmer in his or her right mind should consider a new start-up dairy enterprise without proper training and experience in managing a dairy herd.

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Along with the essential training and experience pre-requisites there are a number of boxes that also need to be ticked in order to determine if the project has a realistic chance of success. The primary one is land availability and suitability. In common with most business enterprises, the trend of having to expand in order to maintain profitability is unlikely to change so even though your land base today may seem adequate now it may prove to be a major constraint in the future. Labour availability is second only to land availability in terms of importance.

The viability threshold for a dairy enterprise in terms of scale is rapidly approaching the limits of a one person operation which is evidenced by the fact that average herd size has grown by 3.4 times between 1984 and 2014. This trend is not going to be reversed and further consolidation will mean that the average dairy herd of the future will have a far greater dependency on labour.

Given the succession deficit and the age demographic in farming (average age 61), farmers may have to be open to collaborative structures such as partnerships, share farming, share milking and contract cropping and rearing if both the land and labour constraints are to be satisfied.

Notwithstanding the limitations outlined above, dairying can offer a very attractive career choice, particularly for the younger trained farmer. On the opposite page I outline a scenario which is a fair representation of the typical start-up proposition that I have been confronted with in recent times.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and auditors. www.som.ie. Ph: 051 640397

STARTING FROM SCRATCH

The following scenario is based on a green field site and makes the following assumptions:

  • The unit will be based on 80 cows initially producing 336,000 litres in year 1, rising to 120 cows producing 600,000 litres in year 5.
  • Milk yield per cow in year 1 is 4,200 litres rising to 5,200 litres in year 5.
  • Milk production will commence in Spring of 2017
  • 125 acres are owned and a further 25 are rented from year 2.
  • Existing farm machinery range is adequate.
  • Existing cattle housing can be modified to suit.
  • Silage harvesting will be done by contractor.
  • The Gross Margin per cow reflects a 10pc replacement rate applying up to year 3 and 20pc thereafter.
  • The Gross Margin per cow reflects a veterinary cost that will be 20pc higher in the first two years.
  • Non family labour requirement met by farm relief at 8-12 hours per week.
  • Start-up dairy stock in years 1-3 are based on 80 bought in (from proceeds of sale of suckler herd ) and 40 home reared. Thereafter replacements are contract reared which is reflected in the projected Gross Margin 
  • Total borrowings will amount to €309,000 based on a fifteen year term with a moratorium on principal in years 1 & 2.
  • Basic Payment was €19,000 in 2016. This level of payment is considered typical for a farmer who previously operated a suckler enterprise on 50 hectares.
dairy farm establishment costs.PNG
dairy farm establishment costs 2.PNG

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