Efficiency not output the key to improving dairy profits

Driving milk output is not the magic bullet for improved dairy profits according to consultants Promar International who advise a closer focus on production efficiency than solely yield.

Announcing the latest results from their Farm Business Accounts (FBA) service, the most comprehensive analysis of actual dairy farm financial performance available in the UK, Neil Adams, managing director of Promar International confirms that the year to 31st March 2019 was a challenging one for the dairy sector.

“While milk prices rose 3%, most other price movements worked against dairy profits with energy up 14-20% and feed prices up 9% coupled with increased usage due to the poor forage season,” he comments.  “Barren cow prices fell while calf prices were broadly unchanged.

“In the year yield per cow rose by 2.4% on average while herd size increased 1.2%.  Compared to the year to March 2018, income per cow was 5% higher but total feed costs increased by 11.9%, variable costs rose 8% overall which combined with a 2.8% increase in overheads resulted in profit per cow falling by 13.2%.

“Combining these factors, the average profit for the 500 matched farms in our sample fell from £103,000 in 2018 to £73,000 in the year oy March 2019.

“Net worth, which is the true measure of farm sustainability fell for 45% of the farms in the sample.”

Mr Adams emphasised that there was a vast range in performance with a 240% difference in profit per cow between the top and bottom farms, principally due to superior cost control in all areas of the business.  The top farms ranked on operating profit had 13% higher output per cow, an 8% lower feed rate, 17% lower variable costs and 28% lower overheads,

To remain competitive and sustainable, generating sufficient profit to increase net worth, he says farmers must focus on efficiency of production, not just scale of operations.

“For many years there has been a trend and ambition to produce more – more cows, more milk per cow with an increased reliance on purchased feeds, but our analysis starkly shows that this is not necessarily correlating with improved profitability.  While some businesses have done very well by increasing scale and output, success is not guaranteed.

“When we compared the top 25% of farms ranked on milk yield with the top 25% ranked on total variable costs, we found that the profit per cow on the highest yield farms were lagging significant behind the high cost efficiency farms.

“While the high output herds had 30% higher output per cow, their feed rate was 24% higher, they had 21% higher variable costs and 13% higher overheads.  Across the board the higher yield farms were carrying on average, higher costs resulting in a 62% lower profit per cow.

“The vital message is that it is not what you produce, but how you produce it.  On average, higher efficiency will be more important for sustainable businesses that high output.

“However, it is insufficient to just focus on feed efficiency, although it is a key area all costs need to be reviewed and understood.  For example, you should pay as much attention to labour and power and machinery costs.  On a per litre basis both labour and feed costs account for a quarter of the difference in operating profit between the top and bottom farms, so there are efficiencies to be realised in both areas.

“Businesses need to challenge the status quo, identify a clear strategy and focus on doing everything well, leaving no stone unturned in the quest for greater efficiency”

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About The Author

John Swire - Deputy editor of Agronomist and Arable Farmer as well as responsibility for the Agronomist and Arable Farmer and Farm Business websites. After 17 years milking cows on the family farm John started writing about agriculture in 1998 and has since written for a variety of publications and has developed a wide circle of contacts within the industry. When not working John is a season ticket holder at Stoke City and also of late has become a fitness freak, listing cycling, swimming and walking as his exercises of choice.