Is a 50-cow dairy start-up a better bet than a loss-making drystock farm?
I recently received a phone call from a young farmer looking at the option of converting from drystock farming into dairying. However, he only had 40ac around the yard and he wasn't sure if he had sufficient scale for the project to be financially viable.
I arranged to call out to the farmer's place later in the week to assess the land quality, facilities and to complete a five-year business plan to assess how realistic his ambition was. The land quality was good, free-draining soil and while old permanent pasture dominated, all fields contained reasonable levels of ryegrass and little weeds.
There were little or no farm roadways present. There was a beef slatted shed alongside an old cubicle house which could have been upgraded easily to accommodate 30 cows. A new milking parlour and dairy were required.
The farmer's main motivation for converting to dairying was that his current system of farming was not delivering a profit. His system of farming at present involves purchasing weanlings and carrying them through to fattening. He also works off farm.
We completed a business plan at the kitchen table and after much discussion we decided that a gradual increase in stock numbers was probably the most prudent way to approach the conversion.
This way the debt levels could be kept relatively low. It was decided that he should purchase 30 cows to start with and we budgeted €45,000 to do this.
The construction of the parlour, dairy, purchase of a second hand 10-unit machine and second hand bulk tank were all costed and he is confident that he can complete all works for a further €45,000.
This left the farmer with an initial start-up cost of €90,000, all of which has to be borrowed.
If this amount was borrowed over seven years at 4.5pc interest then this would lead to an annual repayment of €15,000 approximately. The sale of existing stock will be used to construct a new 20-cow cubicle house in 2017.
I have summarised what the farmer's five-year cashflow plan looks like.
In the plan we made a number of assumptions: milk price of 30c/l; we used the profit monitor average costs; we put output per cow starting at 5,000 litres (400kg milk solids) and rising to 6,000 litres (500kg milk solids); cow numbers are 30 in 2017, 40 in 2018 and 50 every year thereafter.
There are a few points to be noted. The farmer only has 15ac outside of the milking block that used mostly to cut silage from. Therefore, he has decided to buy in replacements from one source annually.
A whitehead or Angus bull will run with the herd, with all calves sold. The targeted output per cow is high, but the budget allocated to purchase cows is generous and John is confident of hitting these targets. Capital allowances and bank interest are looking after the tax bill until 2020, when it starts to climb.
So is it feasible to run a 50-cow dairy herd in Ireland in 2017?
The farmer will not draw any income from the farm for the first three years. For the following four years he will earn an income of €6,000-€8,000 annually.
When the loan is fully paid off after seven years, there will be a further €15,000 available as drawings. Coupled with this, he intends spending €10,000 annually for three on reseeding and roadways which should be sufficient to reseed the entire farm and provide adequate roadways. When this work is complete this €10,000 will also be available for drawings.
However, the tax bill will also be higher at this stage. We have also taken a worse case scenario regarding culling and purchasing replacements and hopefully the reality is that this bill be much lower in practice.
By 2024, there is potential for John to be making a pre-tax income of €35,000. But by then he will have spent 7 years working for a relatively modest income. Is this enough reward for a person who will be milking cows early in the morning before heading off to the day job and repeating the exercise late in the evening when he returns home?
Joe Kelleher is a Teagasc advisor based in Newcastle West, Co Limerick
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