Friday, 14 October 2011

Dairy Farm Profitability....All Fur Coats & No Knickers

Pasture based dairy farms are some of the most profitable farms in Europe. Profitability is a key component to any farming system. A farm has to be profitable to be sustainable. The low input systems & tight cost control makes these farms very sustainable & resilient to downturns in the market. What downturns you may ask? We are enjoying good times at the moment with buoyant milk prices & a relatively strong international market.
We have to be sure these profits are real & that the profitability measures are meaningful. If its not then its "All Fur Coats & NO Knickers"
I raise the issue about profitability for a number of reasons.
1. Europe faces a very risky economic future with a risk of a major crash which will inevitably affect dairy farmers.
2. Proposed EU CAP reforms (2014-2020) highlight a possible reduction in Single Farm Payments of 30-50% (compared to the direct payments of today) with some as yet unknown “green” payments also being available to those farms who implement environmental schemes.
3. I’m not convinced Pasture based dairy farm Discussion Groups are comparing the right “Profitability key performance Indicators”.
Europe in Crisis.
For weeks now we have read & seen on TV, clear indication that the PIIGS are in deep trouble. The debt of these countries is truly mind bloggling! (Gross understatement) & equally frightening is Europe’s apparent inability to deal with the crisis. Logic says that this can’t continue & that all hell is about to breakout. We now have magazines like Money Week warning investors to reduce personal debt, to get out of the housing market, to get out of much of the FTSE & to be very wary of Government Bonds as an investment. When these warnings are about its time to take cover & build resilience into your farm business.
EU CAP Reform (2014-2020).
The UK through Defra has been calling for radical changes in the scheduled CAP reforms.  The possible reforms announced this week….which will be much debated & maybe watered down still suggest a major reduction in the direct SFP payment to farmers from 2014 onward.
Although the overall reform won’t enhance the competitiveness of EU farmers it does seem to me that the suggested changes will be welcomed by pasture based dairy farmers. Firstly we are less dependent on the SFP for cashflow….many less profitable farms seem to be almost totally dependent. Secondly I believe that it will increase the opportunities for expansion as other farmers leave the industry. Thirdly it will hopefully reward the pasture based dairy farmers who are already taking significant steps to enhance the farm environment. However there is a very big BUT. You must be profitable & have a strong cashflow even in uncertain times.
£ Profit per hectare or per litre????(Not enough)
Farm business profitability comes from the “Farm Business” (eg milk) & from gains in the “Farm Property Business”.
The introduction of the "Business Scoreboard" & the willingness of Discussion Groups to openly share financial information are major factors leading to more highly profitable dairy farm businesses. If you don’t measure “it” you can neither control “it” nor improve “it”. By recording & being prepared for open analysis by fellow Discussion Group members each farm is well on the road to sustained improvement. However we must be comparing the right Business “Key Performance Indicators”. The Comparative Farm Profit (CFP) analysis was a giant step forward from nonsense metrics like Margin over feed costs. However Profit per Hectare or per Litre could be very misleading. Sure the farm business profit is a very important driver & yes the profit per hectare is more important than litres per cow, BUT its time to move on & concentrate on 3 other more important metrics (KPIs). Especially if we are either expanding our businesses or we are about to face very uncertain times including credit restrictions.
Prof. Nicola Shadbolt from Massey University & the NZ Dairybase has clearly set these out a number of times.
Special care needs to be taken during expansion & when you are trying to increase output not to have excessive capital spending.
The huge risk in a downturn is liquidity ……lack of available cash or a weak cashflow. Businesses need a strong cashflow. On the “Business Scoreboard” this is on the dreaded Page 2. FARM CASH SURPLUS is a vital KPI which most Discussion Groups ignore to their peril. Some farms have a positive CFP (Profit/ha or per litre) but a negative Farm Cash Surplus. This is a very risky position to be in. Often it is caused by a Profit/ha being inflated by non cash items like “Inventory Change” i.e. herd expansion. A dairy farm business must be in a strong cash position. As Christchurch based Accountant Peta Alexander must have told a thousand farmer audiences “Cash is king”.
Secondly we need to monitor very closely our Return on Equity (ROE) & equally the Return on Capital (ROC). Farm Businesses should be trying to maximize equity growth through sustainable profitability.
“A dairy farmer with money in his pockets (it’s always “His”/male) is a very dangerous beast”. The real risk is that as a business expands excessive capital is spent which could result in poor profits. The real breakthrough in the UK was having a very simple low cost system that had a low capital base. If the ROE & the ROC are not monitored & compared annually the risks are huge especially in uncertain times. You & your Discussion Group need to track both ROE & ROC very closely & learn from the businesses with the best business performance. 
Little will be gained by groups now doing CFPs only! Groups will spend time endless looking for the invisible. 
The Group League Table will tell us that the same farmers year after year are at the top. Its way over due that we look deeper into “Farm Cash Surplus”, ROE & ROC………all of which are seriously affected by the numbers that go into the cfp analysis. The secrets lie on PAGE TWO of the Business Scoreboard. To date Discussion Groups have not ventured to the core issue. If you don't use the best metric (KPIs) then it could be "All Fur Coats & NO Knickers"

Current UK Pasture Measurements 
Pasture growth still very different across country based on rain, temperatures & which nation you follow in Rugby.
Huge thank you to those farmers who offered feed to the farmers in drought stricken Midlands where it is still very dry.

Congratulations to Gavin & his family in North Devon on winning FW Dairy Farmer of Year Award. Well done! 

I must apologise for the lack of English data this week...apparently they are in hiding......The Welsh farmers have found full voice......surprised I haven't heard from my French mates 
TheAverage Pasture Cover (kgsDM/ha) & Pasture Growth (kgsDM/ha/day)
Northern Ireland,AFC 2515, growth 63, demand 40, very warm & wet. Thought rugby ended last weekend!
Nth Wales, 2400, growth 42, demand 40, Can't concentrate on farming. Go Wales! Bring the RWC home.
Gloucestershire, 2590, growth 60
Hereford, 2100, gr 25, Total de 45, grass demand 20, Very dry. Am now claiming to be Welsh!....ex English supporter!
Hereford, 2217, gr 20, de 22, Wales for RWC! Go Wales!
Hereford, 2392, gr 37, de 25, following planner well.
South West Wales, 2992, gr 56, demand 37
Cornwall, 2680, gr 75, de 50 Was supporting Ireland in NZ....ex English supporter!
Ireland, Limerick, AFC 2900, growth 48, demand 42, 2kg feed
Northern Germany organic, AFC 1930, growth 20, demand 25, had 2nd frost growth will slow. Great rugby weekend coming up...Go the ABs!

1 comment:

  1. Still v. dry at Welshpool ave cover 1750 growth 20 am concerned about having a high enough cover for the spring .Wales for the RWC