COVID-19 has brought with it a huge amount of uncertainty to the dairy industry, and while it may seem that the factors impacting on dairy businesses are out with your control, there are several things you can do to look after the financial health of your business.
In the short term, work out how much cash you actually need. This should include drawings, loan and HP repayments and any tax burden. Be sure to include pensions and investments in your drawings. Speak to your accountant to get an idea of any likely tax bill. If you don’t already, get to know your cost of production.
While milk price is a main determinant of profit, there is huge variation in the cost of production (see table below) and herd health is one of the biggest influencing factors, along with replacement costs. You can get a rough indication of your cost of production by adding up the total costs associated with the dairy in your yearend accounts and divide that by the number of litres produced. This can be broken down further into separate components such as labour, vet/med, feed costs etc and benchmarked against herds of similar production to see where efficiencies can be made.
Estimated GB Cost of Production for AYR Calving Herds for the 12 Months Ending January 2020 (includes replacement heifer rearing)
|Pence per litre||Pence Per litre|
|Top 25%||Middle 50%|
|Feed and forage costs||11.4||12.4|
|Other variable costs||3.6||3.9|
|Cash cost of production*||25.4||28.5|
|Total economic cost of production||28.2||33.0|
*excludes unpaid labour, machinery and buildings depreciation and inputed rental value of owned land
Source: AHDB Dairy, Promar Internation and Partners
If your likely future profit is not high enough to cover your cash need the options are:
- Reduce cash need
- Reduce costs
- Introduce funds
Reducing cash need
Look at all non-essential capital expenditure, on and off-farm. Discuss capital repayment holidays with HP companies. Make sure you are getting the best rates on any borrowings.
This is what farmers are constantly told to do. However, after a few years of relative stability, it is worth looking again. The sale of unprofitable animals will reduce costs and production. Start asking the hard questions. Is she a good cow if she has recurring mastitis and took 5 straws to get in calf? Remember, no shows this summer.
It should be noted that some units culling or selling off extra animals have not seen a reduction in milk output. Is your unit as efficient as it can be? It is worth looking at reducing milking cow numbers especially if stocking rates are high. Chances are that milk output will be unaffected but your variable costs will be less.
Look at all the options. If more family labour or relief help is available due to lockdown, would you be able to reduce costs by furloughing staff? Cut costs, not corners. Factor in long term effects of any changes you make. Reducing vaccinations, routine vet visits, concentrates to high yielders or minerals may lead to higher costs in the future.
Do you have any equipment that is not used on a regular basis and a contractor could do the job instead? This could be sold to raise funds. If you are lucky enough to have funds outside the business, consider if this is the time to introduce them. If you have exhausted all of these options you may need to increase you borrowings.
If you need to approach the bank to increase your borrowing capacity, consider the following:
- Calculate how much you are likely to need using a forward budget. This will demonstrate to the bank that you have thought about what you are doing. In general, creating a forward budget will give you an idea of any potential need to increase borrowing before money runs out. This should be a dynamic document that can be changed as costs and prices change and should be reviewed on a month basis or at least quarterly as a minimum.
- Include a future plan of where you are taking the business and show what you are doing to cut costs or make changes. Asking for money to keep things ticking over might not lead to a positive response from your bank.
- Include industry benchmarks to show your technical ability. Use the Farm Advisory Service or AHDB website to find these:
- Consider a Carbon Audit. These are increasingly being used by banks as a measure of efficiency and are funded by the Scottish Government.
- Act early! Banks are running at full capacity at the moment so keep an eye on the long-term view so that there is time to arrange any extra borrowing.
Alasdair Scott, SAC Consulting, for the Farm Advisory Service
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