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Liquid milk: do you stay or do you go?

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There is plenty of milk product building up.

There is plenty of milk product building up.

There is plenty of milk product building up.

In the past many dairy farmers involved in liquid milk were seen as trend setters and as an example to follow for ambitious young milk suppliers.

Many of these dairy farmers were located on the outskirts of cities and large towns, had large milk quotas and their units were very profitable.

However, since the 1990s margins in liquid milk have been under continual pressure and almost half of the suppliers have exited the business since 1995.

Where have all of these liquid dairy farmers gone? Some have exited milk production entirely, the rest have changed to spring milk production. Will the decline continue or could the trend stabilise - indeed, could we see liquid milk production come back into fashion again?

The Irish fresh milk market was valued of €531m in 2013. We consume 0.34l of milk per head per day in Ireland; this is the second highest in the EU and almost double the EU average.

Only 55pc (455m litres) of the milk produced by liquid suppliers is actually used for liquid milk, the rest is used for manufacturing. Milk supplies purchased under registered contracts exceeded processor milk sales by 8pc in 2013. A further 146m litres of milk was imported into the state for liquid consumption in 2013, primarily from Northern Ireland. It's likely that the liquid market in Ireland will be static for some time.

The uncertainty surrounding the fresh milk market and the national focus on spring milk production has caused liquid many milk suppliers to question their future in the sector.

The bottom line

"There is no money in it anymore." This is the most common reason offered for exiting liquid milk production.

Does this mean every liquid supplier is losing money and going broke? And if so what are their options? Contrary to the popular perception of the industry, there are four systems of milk production being practiced by dairy farmers on the island of Ireland.

The most common system of milk production among Ireland's 17,985 dairy farmers is still 'traditional spring' with milky Holstein/Friesian cows bred in the 1990s complete with inherent fertility issues.

Teagasc promote the second system - 'low-cost spring-calving' with the high EBI black and white or crossbred cows.

The 'liquid/winter milk' system typically has a 40:60 autumn/spring calving pattern and, depending on stocking rate on the grazing block, there may be buffer feeding at the shoulders. This is the system where the majority of liquid milk supplier dairy farmers ply their trade.

The fourth and final system of milk production - 'confinement dairying' - is where cows are diet fed all year round to maximise milk yield. This system is practiced by some liquid milk suppliers with limited grazing blocks in the Republic, but is the system of choice for many Northern Irish dairy farmers.

So what should the uncertain liquid milk supplier do, change to a new system of milk production or stick to the knitting?

There are good profitable farmers and there are those with low or poor profitability. This is very clear if we examine Teagasc eProfit Monitor results from 2009-13. Liquid/winter milk net profit per hectare is on a par and even beats spring milk most years.

Teagasc data shows that there is very little difference in profitability between spring-calving and liquid/winter milk production systems. This is the nugget of information to give the liquid milk supplier the confidence to stick to his present system.

However, the data shows that the differential in profit advantage which liquid milk suppliers formerly enjoyed over their spring calving counterparts has been substantially eroded over the years. This is evident from the decreasing differential between liquid and manufacturing milk price paid to suppliers. This trend is also apparent from the milk price data in Teagasc eProfit Monitor. In fact, it is the main reason for the decreasing differential in net margin per hectare between the two systems.

The decreasing bonus paid to year-round milk producers has been a common cause for complaint among committed liquid suppliers. They point out that year-round production carries greater risk due to the higher costs and management input. They argue that it should therefore command a higher return to justify this additional risk.

However, it must also be recognised that a variation exists in the profitability levels of liquid milk suppliers, and less efficient suppliers cannot expect their milk purchaser to cover the cost of their inefficiency. But, equally, milk purchasers must ensure that efficient liquid milk suppliers are rewarded in excess of the spring-calving system.

The hard questions

Liquid milk production is not as un-profitable as it is often made out to be but it has lost its traditional advantage over spring milk production. However, those considering quitting the liquid milk business must firstly ask why such a change is being discussed?

Is the farm business tight for cash or not making enough money?

Is it over borrowed?

Is the work load too heavy?

Does your successor want to do something different?

Are you bored/disillusioned and looking for an excuse to cease or are you simply just following fashion?

The above are not valid reasons to change a milk production system and switch from liquid milk to another system of milk production.

These may be valid reasons to exit farming altogether or perform some radical surgery on your farm business but not to change the milk production system.

Those who have changed from liquid/winter to spring milk production for such reasons have exactly the same problems today as they had before they changed. They simply are less efficient dairy farmers, not dealing with the root cause of the problems in their farm business.

It is no coincidence that some of the best low-cost spring milk producers today were former excellent liquid/winter producers.

How does one go about assessing the strength of your farming programme and/or the strength of conviction to your present milk production system?

The following is a process to help you and your farm business reach your destination:

Question your direction

Are you in charge of your direction? Do you have a clear picture of what your farm business and life will be in five years time? Have you identified what and whom you need to get you there? These are close to the bone type questions but must be answered.

Assess the farm business in terms of financial and technical performance

This is the bread and butter stuff for dairy advisors/consultants. Financially, the net profit and annual surplus (or deficit) of cash for your farm business must be quantified to see your cashflow position for past years to help project future years. Nothing concentrates the mind better than to be told you are facing a shortfall of cash for the next 12 months. This may be more common in 2015 with falling milk prices, but knowing you have a problem is half way to resolving it.

When you have the financial cash position of your farm business established, it is time to benchmark it against other farmers of similar size and milk production system.

If you are a 150-cow liquid milk producer with a 40:60 autumn/spring calving split, you should compare you net profit per hectare, per cow, per litre and per kg of milk solids to other similar liquid producers. Technically the farm business should be benchmarked by:

Stocking rate;

Grass grown and utilised per hectare;

Sales of milk and milk solids per cow and hectare;

Concentrate usage, feed produced from forage;

Fertility;

Matching of milk supply to your liquid contract in the expensive months of September-March.

These are the critical benchmarks for a liquid producer. Your advisor/consultant will be able to show how your farm business compares, and, more importantly, help you improve.

Put a plan in place

When the farm business is benchmarked financially and technically, it is now time to set targets and put a plan in place to meet those targets. These targets can be personal (e.g. hours worked or time off), financial (e.g. surplus cash of €50,000 per annum) or technical (to grow 14t of grass dry matter per hectare per annum).

It is important to remember a plan is done at a point in time and a change in circumstances, such as milk price drop, will test the robustness of the plan. Therefore, it is critical to monitor the plan and make appropriate adjustments to 'panel beat' it into shape.

This procedure is a tried and tested business procedure which sometimes can get lost in the jargon of business terminology, but an experienced advisor will cut to the chase and simplify the message for the undecided liquid milk supplier.

In conclusion, liquid milk suppliers should put the chest out and chin up again knowing that their business is as profitable as spring milk production - particularly for efficient producers. This will help some liquid milk suppliers to refocus and drive on their business.

But whether you exit or 'stick to the knitting' make sure you have made an informed decision.

Michael Brady is an agricultural consultant and managing director at Brady Group: Agricultural Consultants & Land Agents - email: mike@bradygroup.ie

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