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27 Nov 2017

The challenge of the bottom line

The latest data from Promar’s Farm Business Accounts (FBA) for the year-ending March 2017, shows that the upturn in on-farm milk prices came too late in the year to hugely impact the bottom line, as profit after depreciation for the average farm in the sample fell by 20% to £43,404, compared to the year-ending March 2016.

Reporting from Promar’s annual data briefing, Nigel Davies, Promar’s National Consultancy Manager, identifies that a big factor in this fall was a decrease of £90 per cow at gross margin level.

However, he remains more optimistic about the March 2018 year-end outlook, which should report improved profitability for most. “The sustained milk price increases in the year to date are feeding through to notable improvements in gross profits so far into the year,” says Nigel. But he adds that a comprehensive approach to financial performance and planning remains key, as gains this year are likely to be diluted by increased overheads and inflationary pressures, and post-March 2018, milk price volatility is likely to continue.

He also encourages producers to review every aspect of their business to drive efficiencies and ultimately increase profitability. “This is something that the top 25% practice continually and one that with help, the majority of farmers can also employ.

“The data identifies huge disparities in the performance of the top 25% of the sample. For instance, the operating profit per cow is more than double compared to the average, at £885 per cow, this amounts to a staggering difference of over £90,000 in resulting profit for an average sized business in the sample.”

He adds that with the average herd size increasing by four cows, and farm land increasing by 2.4ha per holding, many producers are driving economies of scale. “Scale is important, but critical to profitability is a need to continually improve technical efficiencies across the business.

“Interestingly the top 25% of farms have eight fewer cows than the average. And their profitability is also not primarily linked to their milk price, which accounts for just £88 per cow.

“Yield helps, but not at all costs,” adds Nigel. “Reviewing gross margins is key, for instance the top 25% reported feed costs of 0.33ppl less than the average, and marginal improvements in herd fertility, culling rates and death.”

It’s not just about focusing on the milking herd, says Nigel. “Management of grassland and forage crops gives the top 25% an £18 per cow advantage. Better youngstock management can add a significant £28 per cow advantage too.”

He also adds that overhead costs shouldn’t be viewed as ‘fixed’. “A striking £216 operating profit per cow difference in the top 25% comes from efficient overhead cost management, which is the equivalent of 2.53ppl.

“Predominantly this difference is made in labour efficiency and machinery related costs, and all producers should be considering how they can improve these two areas.

“And, with inflation currently at 3%, oil prices increasing and a shortage of quality labour, we forecast that overhead costs will rise rapidly into 2018,” says Nigel.

He adds that every enterprise should be carefully considering the dynamics of their own financial performance. “Using data such as Promar’s Farm Business Accounts or MilkMinder, will help producers identify key areas for investment and build a clear sense of direction and focus for the future.”