Managing milk price volatility

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To help manage milk price volatility in a low milk-price year, agri consultant Matt Ryan has some cost-saving tips.

Managing milk price volatility in a low milk-price year is a major challenge, if only because every decision radiates from the risk management strategy adopted by each individual farmer. Figure 1, modified from Tadhg Buckley’s Nuffield Scholar Report, allows us to examine, in principle, the possible solutions to milk price volatility.

The blue line depicts milk price as being up and down, volatile, over the coming years: a fact! Of course, all input costs will go through similar volatility. How can we deal with that certainty? We can take the ‘Joe Duffy programme’ approach (apart from some of the good it does): moan, complain, feel sorry for ourselves, blame the Government, the absence of quotas, etc. But self-employment means that you adapt or fail. There are high, average and low-cost dairy farmers out there: where are you on that chart? You can see that when the milk price is below the cost line the farmer is losing money. The high-cost operator is in very serious trouble during the period, and it may be a continuous two to four years when milk price is low. For that person to become an ‘average cost’ producer, let alone a ‘low-cost’ one, will require a St Paul-like conversion when he fell off his horse on the way to Damascus. I am very unsure, given Irish attitudes, that such is possible, but the consequences are very, very stark. The New Zealanders tell us that it takes one year to recover from a ‘good year’ and four years to recover from a ‘bad year’.

The right attitude

Low to lowish-cost farming is an ‘attitude’ and doesn’t come easy to the Irish psyche. For 2015, a predicted low milk price will result in significant loss of income. For instance, a 10c/litre drop in price will reduce the value of milk sales by Ä500 per cow. There are few solutions, but plan to reduce costs. Profit is a decision – don’t ever lose sight of that. The black line shows that, if a farmer increases his milk price by improving the percentage fat and percentage protein, he will improve his ‘financial chance in life’ discussed below under ‘Averages’.

On the Dairy Profit Monitor there are 28 individual costs listed; if farmers were to take 0.1 cent off each then savings of 2.8c/l would be made – less than a quarter of the milk price decrease. This puts the scale of the task in perspective. Therefore, the savings in each must be 0.2 to 0.4c/l on all. Please don’t say that is not possible. Ask yourself how it can be achieved.

A cost control plan, done in January at the projected milk price, will indicate from the very beginning of the year what amount of cost cutting is required. Do this plan taking 0.2 to 0.3c/l off all costs, at least. As a result, farmers will then know what they can spend every month. Generally, the better the dairy farmer the more of the profit is put in place at the beginning of the year. The poorer farm manager will wait to see what is left at the end of the year. Losses manage themselves but profit only comes from a number of key decisions made early in the year.

Fundamentally, it is vital to match stocking rate (SR) per hectare to the amount of grass being grown on the farm. If you go for a very high SR on the milking platform, then more meal will have to be fed; more silage drawn or bought from outside or grass zero grazed. I know, from my groups, that for every 10 per cent of home-grown grass utilised on the farm, costs in 2013 were reduced by over 3c/l. Therefore, based on Moorepark research, farmers should operate on a stocking rate of 2.5 to 3.2 cows/ha on the milking platform for optimum profit opportunity.

The target meal feeding level for an SR of 2.5 cows/ha is 0.07kg/l. The year 2014, because it was a good grass year, proved that this level of meal feeding will deliver satisfactory profits. Just because we have no quotas now, is no reason to produce extra milk from meal because the economic response is between 0.5 and 1.1kg milk per kg of meal. Forage purchase must not have to occur on your farm. No savings can be made on fertiliser and lime, unless they are high Index 3.

Cutting costs

Breeding costs can be reduced by being ‘on your game’ before and during the season so as to minimise the number of straws per pregnancy. Match artificial insemination (AI) straw requirement to the number of replacements required (five per replacement but efficient guys doing it on four), then use lower-cost beef AI or rent in stock bulls at Ä300-400 for the six-to-eight-week ‘clean-up’ season.

By using contractors judiciously, some labour, machinery repairs and running costs can be saved. I have recently come across a farmer whose contractor charged less than Ä40/ha for eight blanket fertiliser spreadings in 2014. This option might be considered if the fertiliser spreader or tractor needs a serious overhaul or replacement in 2015.

Milk recording is an essential tool for monitoring somatic cell counts (SCCs) and individual cow performances; but, if these two factors, for this year, are not an issue (individual cow performance may not be important where cows are not culled on performance, particularly when expanding and if SCC is OK) then it could be foregone in 2015 – a saving of Ä7-9 per cow.

Reseeding, no matter how beneficial, will have to be postponed on most farms. Some will say it needs to be done, but why wasn’t it done in 2013-14 to save on tax?

Hired labour must be minimised without affecting the hours the main man has to work. There are many families where the woman makes a massive contribution on this front.

Be very, very careful of spend on repairs, be they machinery or general.

Improving output

Capital investment spending should not happen, unless absolutely required. The Department of Agriculture, Food and the Marine should take cognisance of this in cases where the single farm payment (SFP) is being reduced because of some compliance issue.

Land rental costs vary up to 6c/l for some farmers. This is huge! Can you do without; can you reduce but be aware of it and discuss with someone? A low milk and cattle price year may dampen down land-owner expectations on this front – some people are earning easy money because they own property!

Producing more volume will reduce fixed costs somewhat because of the dilution effect. For the same reason, co-ops should not have to charge farmers for producing ‘over-quota’ milk post-April 2015 as they will be diluting their overheads. For that matter, all of the suggestions made here for individual farmers should apply to farmers’
co-ops also. On the output side we can improve the kg MS/cow sold by increasing the peak yield in April/May by 1-2l/cow/day, and this will increase overall yield by 220 to 440l/cow/year. Managing body condition score (BCS) and the period from calving to April is the key to achieving this improved peak. Culling rate and cow deaths must be minimised, particularly in cross-bred herds where the difference between cull cow prices and replacement costs are great (see Table 1), so as to limit replacement rate costs. It costs nearly Ä1,600 to rear/buy a replacement heifer and if the sale price of the cull cow is Ä700 then the difference is Ä900; if the replacement rate is 25 per cent compared with 10 per cent the cost for every cow in the herd is Ä135 (a very common cost difference).

 

Replacement rates (%)

Difference between cull price – rearing cost

30%

25%

20%

15%

10%

Ä1,000

300

250

200

150

100

Ä900

270

225

180

135

90

Ä800

240

200

160

120

80

Ä700

210

175

140

105

70 

Ä600

180

150

120

90

60 

Table 1: The replacement cost per cow (Ä) in herd with different replacement rates and varying differences between cull cow price and the cost of replacement.

Averages

Do you understand the meaning of the word, average? Well, if your herd average was 4.0 per cent and 3.6 per cent for fat and protein, respectively, in 2014, then half the cows are producing below these levels. Therefore, if you are not expanding and you can or intend to sell off the lowest 10-20 per cent of cows with low percentage fat and protein then you will increase both by nearly 0.05 per cent each. This will be worth an extra 0.34 c/litre profit (research figure) in 2015 to you, approximately Ä17/cow/year for every cow in the herd! 

Summary

The future, while meeting all environmental requirements in a milk price volatile business, will require that ‘low-cost’ milk is produced by high Economic Breeding Index (EBI), fertile cows from 90 per cent home-grown grass where the driver is tonnes of grass utilised per hectare. 

Thanks to the Moorepark research staff: Laurence Shalloo, Emer Kennedy, Eva Lewis, Michael O’Donovan and Brendan Horan whose research papers and verbal communications have been essential for this document. I am indebted to my Discussion Group farmers from whom I have borrowed many ideas and with whose help I have legitimised my own. Figure 1, a great communication graph, would not have been possible without Tadhg Buckley, Nuffield Scholar and AIB agricultural adviser.