Low milk prices challenge virtual farm’s expansion plans

The challenges on the Savills model dairy farm are similar to those faced by many milk producers. Suzie Horne reports on how low milk prices have affected plans to expand the herd

Low milk prices have had a serious impact on cash availability at the 200-cow Savills model dairy farm.

As on many other holdings, this has forced the family partnership to review the business, including its three-year plan to expand from 200 to 300 cows.

See also: Business Clinic: Ways to lower dairy replacement costs

Some costs have been reduced, but not by enough to be able to manage cash requirements.

“The situation the model dairy farm is in is a common one – it is not the size of the loss it will make this year but the availability of cash that presents the biggest immediate challenge,” says consultant Adrian Matthews of Savills Food and Farming team.

Trading loss

Budgets prepared in March this year, based on a milk price of 20.5p/litre, showed a trading loss of more than £20,000 before private drawings of £25,000 and loan repayments of £54,000, which are due this year.

This would have the effect of increasing the overdraft requirement by more than £110,000, pushing it above £130,000.

This increase is equivalent to 4.5p/litre of milk output, a cash figure the business plan would not deliver to cover its capital commitments.

Part of this was due to the planned increase in herd size, which would have tied up working capital. 

So the family reviewed the business, and its plans, and found:

• The balance sheet is strong, with net worth of more than £4m.
• The long-term strategy is still the best option for the family to remain farming.
• The trading loss of £20,000 in itself is not severe, but a cash deficit of £110,000 would be. If the current year’s budget was repeated for the year to 31 March 2018, there would be a further cash shortfall of a similar amount and so very quickly the business would have close to £250,000 additional debt.
• If the original business plan of 300 cows is revised and based on an average milk price of 25p/litre instead of the original 28p/litre, although the business will be profitable, the cash surplus will be eliminated and the farm will not be able to afford any additional debt.
• The business has to look for ways to manage the cash position.

“The milk markets and associated production costs have meant the family has had to really challenge all enterprises and costs of production, as well as challenging the original strategic plan to expand the herd to 300 cows,” says Mr Matthews.

“They need to be confident that they can still achieve what was set out.

“Milk price has remained static this summer overall – at least now there are signs that the bottom has been reached but recovery will take some time.

“Some costs, such as feed, fertiliser, fuel and the cost of borrowed money have eased a little, but not enough to offset the fall in milk price.

Budget shock

“The preparation of the initial budget and the realisation the business would be generating a loss and significantly increasing the overdraft was a shock for the family.

“This led them to question their long-term strategy and whether the plans and investment made a few years ago were right for them,” says Mr Matthews.

Following the review, the plan is still to expand, but at a slower pace until the family can be sure of the future (see ‘Model dairy farm plan’, below).

© Paul Wootton

While these changes will have little impact on the overall budgeted loss, improving it by £5,000 to a loss of £16,000, there is a far more significant effect on the overdraft, says Mr Matthews.

It will mean an increase of about £51,000 at the year end to £70,000, representing an improvement of £60,000 from the original budget and a level which the family feels is manageable.

Model dairy farm’s winter challenge

This winter the family will work on how to increase milk from forage, after the business review also highlighted scope to improve technical performance, potentially increasing output without increasing costs.

The herd feed rate is 0.33kg/litre, with a yield from forage of 2,500 litres a cow. Increasing this to 3,000 litres a cow without changing the purchased feed cost would add 100,000 litres of output. This is a realistic target, says Mr Matthews.

Recent business history

Following a review of the business three years ago a decision was made to build up the dairy business.

This was through a long term investment plan and to rear additional heifers to grow the herd from own breeding to 300 cows.

Budgets were prepared, assuming a milk price of 28p/litre. These showed a profitable plan and that there would be surplus cash to repay the loans that would be required for the expansion.

The total cost of expansion was estimated at £400,000 in facilities, plus additional working capital in the region of £150,000 related to the extra cows.

An initial £250,000 was committed and spent on the parlour, bulk tank and some of the cow accommodation. Further expenditure would be required as the herd expansion progressed.

Sensitivity applied to the budget showed that the plan could work at a milk price of 28p/litre, about 4p/litre less than the milk price being paid when the plans were prepared.

During the current financial year (to 31 March 2017) the business expected to continue to expand the herd so that by the year end it would have grown to about 250 cows. This was planned to increase further to 300 head by March 2018.