Friesian Farm Update June 21, 2016 12:00 am Ahead of the Livestock Event at Birmingham on 6th and 7th July Andersons has updated its Friesian Farm model. The drop in milk price and the difficulties in the dairy sector have been well documented and this is shown in the figures below. But there are areas where producers can make cost savings to help weather the storm and put their businesses in a better position to take advantage of the upturn in prices when they do return. Friesian Farm runs 150 cows and their replacements on a year-round calving system for a liquid milk contract (but not supermarket-aligned). The farm comprises 100 hectares (of which 40 hectares are rented on an FBT). The proprietor provides labour along with one full time worker (plus casual/relief). Milk yields are around 8,000 litres per cow. The table below shows the farm’s performance for the previous three milk years, based on actual returns and costs. An estimate is given for the current 2016-17 year, and a forecast for 2017-18. ANDERSONS FRIESIAN FARM – Source: Andersons The Farm Business Consultants Pence per litre 2013-14 (Result) 2014-15 (Result) 2015-16 (Result) 2016-17 (Budget) 2017-18 (Forecast) Milk 32.4 29.4 22.7 20.9 22.6 Culls & Calves 2.9 2.7 2.6 2.5 2.7 Output 35.3 32.1 25.3 23.4 25.3 Variable Costs 14.7 13.2 12.0 10.3 10.2 Overheads 11.3 11.0 9.8 9.2 9.2 Drawings 3.1 3.0 2.9 3.0 3.1 Rent & Finance 1.6 1.7 1.8 2.0 2.0 Cost of Production 30.7 28.9 26.5 24.5 24.5 Margin from Production 4.6 3.2 (1.2) (1.1) 0.8 BPS / SPS (and ELS) 2.2 1.9 1.6 1.5 1.5 Business Surplus 6.8 5.1 0.4 0.4 2.3 The farm made good returns in the 2013-14 and 2014-15 milk years. This is something that should not be overlooked in the current downturn. Industry profits are poor at present, but they have been good in the recent past, and will be again in the future. The 2015-16 year saw the full effect of the milk price fall come through (although the slide started in 2014, it did not fully affect the 2014-15 figures). Variable costs continued to decline due to cheaper feed and fertiliser. Overhead costs were reduced through savings in casual labour, contract costs, repairs, fuel and electricity. Despite this, Friesian Farm dipped into a loss-making position from its farming activity. The contribution of support payments dropped in the year as well. Partly, as a result of the move to the Basic Payment from the Single Payment, and the effect of currency changes. But Friesian Farm also saw its ELS agreement end last year and it has not yet gone into the successor scheme, the Countryside Stewardship, so has lost scheme income. For the current 2016-17 milk year there is little optimism on milk prices. Without a supermarket aligned contract this farm is budgeted to see an average milk price for the year only just above twenty pence per litre. However, as the figures show, Friesian Farm is looking to take a robust approach to costs to minimise the impact on its bottom-line. Concentrate feed and fertiliser should be cheaper for the current year. Usage levels can also be looked at – whilst bearing in mind not to cut-corners and affect optimum output levels. There are also cost saving opportunities in the ‘lower profile’ categories of variable costs – vet & med, bedding, bulk feed, and dairy sundries. Overhead costs are also squeezed. This is acontinuation of the trends seen in the last year with reductions in fuel cost, electricity, contract charges and business administration. Some of this is a result of general price drops, but it also assumed that the proprietors of Friesian Farm will be pro-active in negotiating better deals and challenging all items of spending. The cost of production on the farm is cut significantly. Whilst this does not eliminate the loss from production, it is minimised. Just as importantly, it sets the farm up to benefit from any upturn in markets. Such an uplift looks like being slow to arrive. There is a sense that commodity markets may have ‘hit bottom’, but it will be some months before this becomes clear or not. Even then, with large amounts of milk products in store, it may be some time before farmgate prices improve. The sector may have to wait until after the spring flush in 2017 before significant increases appear. Thus, only a relatively small, and very speculative, price increase is factored in for the 2017-18 year. Costs are kept under control, meaning Friesian Farm returns to profitability before support payments, albeit at low levels. For more information on Friesian Farm figures Andersons will be on stand number BM-318 at the Livestock Event 2016.
