Mike Brady: Highly profitable dairy farmers are willing to take calculated risks
It is now over ten years since the announcement of the removal of EU milk quotas in 2007. The March 31, 2015 is often referenced as the end of the EU milk quota regime, but the reality is that highly profitable Irish dairy farmers were planning for the 'no milk quota world' immediately after the 2007 announcement.
So how has this expansion affected and influenced Irish Dairy farmers?
Here, I look at seven defining characteristics of highly profitable dairy farmers (HPDFs) in this era.
So what constitutes an HPDF? There are many financial indicators which measure farm business profitability.
Net profit per hectare of all land farmed is emerging as the key performance indicator (KPI).
Teagasc Moorepark have a target for net profit of €2,500 per hectare for all land farmed for dairy farmers.
However, the other side of the profitability equation is the number of hectares owned and farmed. The average dairy farmer owns approximately 37 hectares; therefore the potential whole farm net profit is €92,500 using the Teagasc target (37 ha x €2,500 per ha).
1. Scale - farm a lot of land
The first characteristic of HPDFs is the amount of land they own.
However, often the amount of land owned is not a reflection of the financial or technical performance of their business but that of previous generations of the family.
The simple equation is, more hectares farmed (preferably owned) equals higher profits.
Of course, this land must be in the grazing platform for Irish grass-based systems.
Often farmers who farm at a large scale are criticised, but those who are good at running their businesses make very high profits.
2. Focus - know the system of milk production
Systems of milk production in Ireland can be broken into four general categories. Over 90pc of producers in the Republic of Ireland are spring-calving milk producers.
Teagasc eProfit Monitor benchmarks the financial performance of spring producers versus winter/liquid producers.
The below compares seven years of data, and the average difference between the systems is only €66 per ha per annum in favour of winter producers.
HPDFs know and understand the system of milk production. They stick with it and practise it to the best of their ability.
There is a wider variation of financial performance within systems of milk production than between systems.
3. Financially savviness
HPDFs understand the combination of risk and bank finance.
A dairy farmer with a plan to grow and increase whole farm net profit will need to borrow money to invest in livestock, buildings, machinery and land.
When planning a project firstly, they thoroughly examine the various options available.
Then they choose one option, prepare a business plan, carry out a stress test/contingency plan, apply and obtain finance and execute the plan.
A dairy farmer intimately familiar with the finances of the farm business will identify opportunities and weaknesses earlier; this will ensure a better relationship with their bank while giving the farm business an edge on competitors when making important decisions.
HPDFs understand farm business finances and they are prepared for the Worst Possible Scenario (WPS).
4. Leadership skills - manage labour well
The successful dairy farmer of the future must have excellent leadership skills.
With average herd size approaching 100 cows, employed labour will be required on many farms, and there is a major gap in the skill level of Irish dairy farmers in management of employed labour.
HPDFs are good leaders and can manage labour well.
5. Technical efficiency - physical performance
Technical efficiency is critical to the financial performance of a dairy farm business.
However, Irish farmers have a habit of over-emphasis on fashionable technical efficiency factors to the detriment of financial and other important factors, eg yield per cow.
HPDFs identify and prioritise the key technical performance efficiency factors that drive the profitability of their system of production, ie, tonnes of grass utilised per ha farmed.
It is vital to have a trusted sounding board for decision making on major projects and the day to day running of a dairy farm business.
Every business owner needs a core team of trusted advisors/mentors.
The team should consist of a good discussion group, dairy advisor/consultant, accountant, tax advisor, legal advisor, banker and possibly a person outside farming.
HPDFs have a long-standing trusted team around them and understand that the team is stronger than the sum of its parts.
Dairy farmers are full of ambition and pride; this is the fuel that drives them to grow and improve their dairy businesses.
These values are good, but some fail to control this ambition and pride - to the detriment of family life, their health and ultimately the success of their business.
HPDFs are very ambitious and full of pride, but they have a good work life balance, which is critical to the success of their businesses.
The grass-based systems of milk production in Ireland are conducive to producing highly profitable dairy farmers and farm businesses.
The combination of high net profit per hectare and farming a lot of hectares will produce dairy farmers with multiple units in future years.
This will mean fewer dairy farmers but more dairy cows, unless environmental legislation halts the progress.
However, it is critical such farmers factor in a good work life balance to ensure the sustainability of their businesses and personal lives.
Mike Brady is managing director at Brady Group agricultural consultants & land agents; email: firstname.lastname@example.org
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