Milk Matters


By Christine Pedersen Senior Dairy Business Consultant The Dairy Group


christine.pedersen@thedairygroup.co.uk www.thedairygroup.co.uk


CASH IS KING One thing that farming businesses can always be certain of is uncertainty. That maybe continued indecision regarding Brexit, proposed changes to direct payments, future milk price and the weather! Whilst the objective of all businesses is to generate sufficient profit to increase the net worth or value of the business over a period of time, in the short term, cash is king. Having sufficient cash keeps farmers in control of their own businesses and allows them to continue trading – if they run out of cash, control is effectively passed to someone else, usually the bank. Of course, profit is very important – a high profit per litre, per


cow or per hectare may be impressive but doesn’t necessarily mean that sufficient profit is generated by the whole business to meet its cash needs. Cash needs include private drawings, tax, loan capital repayments and re-investment. Understanding whether a business can meet its cash requirements is a key aspect of business planning and one that we regularly work with our clients to achieve through budgeting and cashflow forecasts. Whether re-negotiating an overdraft facility or seeking finance for a specific project, demonstrating that a business can meet its cash needs is a key part of the financier’s decision-making process. The EBITDA, or earnings before interest, tax, depreciation and


amortisation, is a method of financial analysis increasingly used by banks, investors and other lending services. It is used to assess the business’ ability to generate sufficient operating profit to service debt and will often be included in the assessment of applications for finance. EBITDA can be expressed as a financial amount and as a percentage of operating profit. A figure below 100% means a business is not generating sufficient operating profit to service the cash requirements. Using this metric means businesses can understand the implications of different finance options, e.g. term of finance and can also be used to ‘stress test’ budgets in ‘what happens if’ scenarios e.g. the milk price falls by 1 ppl. There is a real need for all businesses to understand their cashflow


and peak borrowing requirements going forward to aid decision making with regard to capital investment, loan capital repayments and finance requirements. Monitoring the cashflow is just as important as it provokes action when things start to deviate from the plan.


COST OF PRODUCTION Brexit, the weather and milk price are largely outside farmer control, so milk producers are encouraged to focus on things within their control so that their businesses can withstand the challenges being faced. Cost of production analysis can be used to highlight strengths and weaknesses and more importantly identify opportunities for potential cost savings.


PAGE 20 NOVEMBER/DECEMBER 2019 FEED COMPOUNDER


A year ago, the Dairy Group forecast that the average cost of


production would rise by 3ppl due to the drought in 2018. The good news is that the average cost of production only increased by 2ppl to 33.7ppl in the year to March 2019. Clearly, this is not good news with the average milk price rolling at 29.7ppl to March 2019, and even with 2.3ppl of income from culls & calves meant that the average farm lost 1.7ppl after unpaid family wages:


Year end


Dairy costs Milk sales


The Dairy Group : Cost of milk production analysis AVERAGE AVERAGE CHANGE 2017/18 ppl


2018/19 ppl


Livestock sales Valuation change Total output Feed


Forage


Vet & med AI/recording


Bedding & sundries Total Variable Costs Gross Margin Wages paid


Power & Mach Property costs Administration Rent & finance


Total overhead costs


Profit before unpaid wages Unpaid family wages


Profit after unpaid wages Total costs


28.4 3.2


-0.3 31.3 9.2 1.6 1.1 0.6 2.0


14.5 16.8 2.1 6.9 2.1 1.0 1.9


14.0 2.8 3.2


-0.3 31.7


29.7 3.0


-0.7 32.0 10.2 1.6 1.3 0.8 1.9


15.8 16.2 2.8 7.0 2.2 1.1 1.9


15.1 1.1 2.7


-1.7 33.7


ppl 1.2


-0.2 -0.3 0.7 0.9 0.0 0.1 0.3


-0.1 1.3


-0.6 0.8 0.2 0.2 0.1 0.0 1.1


-1.7 -0.4 -1.3 2.0


The main cost increases last year were purchased feed (+0.9ppl)


and wages (+0.8ppl). Our forecast for the year to March 2020 is for a reduction in the average milk price of around 1ppl, but with feed cost expected to reduce by 0.7ppl. The net effect is for the profit after family labour to remain at -1.7ppl. (Note: the table shows rounding differences).


FARM ASSURANCE There have been a series of announcements from dairy companies and farm assurance bodies over the last few months introducing new requirements to farm assurance schemes or conditions of supply and tightening up existing requirements. The risk-based approach to audits introduced by the Red Tractor assurance scheme in the spring are leading to farm assurance inspectors taking a stricter line in their interpretation of the standards. In some cases, unannounced audits have been triggered and in the worst-case scenarios milk collections have been suspended. This is a risk not worth taking. Our advice to farmers is to review their farm assurance standards and ensure their farm is ‘audit ready’. Ensuring that paperwork is correct and up to date is a significant


task and it’s easy to overlook records that are required. For example, many might not know that a recent change to Red Tractor means that from 1/10/19 a parlour plant cleaning protocol must be available and on display, including all aspects of the plant cleaning routine. One of the areas that is definitely receiving much more attention


is the visible appearance of the farm and the importance of this should not be underestimated. It is clear from feedback we have received from


Comment section is sponsored by Compound Feed Engineering Ltd www.cfegroup.com


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