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SCRUTINISING COST OF PRODUCTION


Cutting production costs can be hard, with many essential inputs and services hard to do away with, but by at least calculating your costs of production you can be a step nearer profitability, says James Webster of James Webster Consultancy Ltd


COST OF PRODUCTION With commodity prices in free fall over the last year due to a massive imbalance of supply and demand in dairy products, farm gate prices have dropped to sub 20p a litre for many and those who aren’t there at the moment will be soon.


It is clear to see 99% of dairy farmers will be making losses at these prices. With a recovery in milk price seemingly some distance off what can be done to stem loses and make dairy businesses sustainable at these prices?


The starting point is to calculate your cost of production. How much does it cost you to produce one litre of milk? Various people will tell you averages, but it is crucial to understand where your specific cost of production lies. Only then can you target areas in which to improve and to cut cost.


Firstly what is cost of production? In basic terms it is all of your costs divided by your milk output, specifically the costs which you are invoiced for plus depreciation. This will give you a cost of production on a profit and loss basis. This is the basis of tax / management accounts.


Unfortunately that isn’t enough in the current crisis. You also need to take into account business commitments, these include loan and HP repayments, drawings, tax and reinvestment. Once this is included in the cost of production figure from above it will give you a cash neutral requirement.


Most people ignore the above when calculating cost of production, this is a mistake as


Forage intakes are fundamental to achieve 3000 litres from forage.


this could contribute between 3p and 7p a litre cost to businesses. Cash is king to dairy businesses and every business should be calculating their cash neutral requirement and including other income such as calves, cull income etc expressed as pence a litre. Assuming a cash neutral requirement is met then the businesses will be profitable and won’t see overdrafts rise. Naturally that would be an excellent achievement at sub 20p a litre prices.


REDUCING YOUR COST OF PRODUCTION


The million dollar question. After calculating your cost of production and cash neutral requirement the next step is to benchmark against industry top 25% pence a litre figures. It is important to benchmark all areas of your business and be as specific as possible in your costs breakdown.


This will give you an instant indication of areas in which you’re strong and areas you’re weak and crucially where to focus your efforts.


When reviewing costs I would suggest taking a shorter term view than normal. A lot of farming decisions can be made on a medium to long-term basis and can take several years to bear fruit. I suggest moving away from this and taking actions which will yield much quicker, almost immediate results.


Most of a dairy farmer's costs are typically feed, forage and labour and can vary from 10 to 15p a litre. It is crucial these costs are low in order to turn a profit.


FEED


Feed use is undoubtedly a farmers single largest cost. I would suggest that purchased concentrates, including youngstock, needs to be under


JAMES WEBSTER James Webster Consultancy ltd


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