Positive Farmers delve deep into controlling costs

Last week’s Positive Farmers Conference in Cork heard from New Zealand-based adviser Paul Bird. Paul is heading up farm business advisory with Dairy NZ, the Teagasc equivalent. Based on DairyBase (profit monitor) data from New Zealand farms, he said that most farms don’t make any more money from feeding supplement, regardless of farm location and milk price.

Paul used one farm that has been recording costs in DairyBase for 10 years as an example. Compared to the region, the farm was making almost identical to average profit for the years 2013 to 2016, but then started making much more profit than the average from 2016 onwards.

“The key message is that benchmarking is a complete waste of time unless you are going to act on it. One of the key conclusions as to how this farm suddenly improved in profit is around complexity and focus on pasture management. Through those early years, the farm was spot-on average in terms of profit. It was very complicated in terms of its reseeding and cropping regime, different feeds coming in and the farm manager had lots of decisions to make every day.

“The number of decisions to be made was too high and the quality of the decisions being made was just average, as the decisions were too complex. Then in 2016 and 2017 they decided to just simplify the entire system and focus on grazed grass. They did bring in some amount of concentrate feed in the milking parlour, but that was it. So the main decisions the farm manager had to make was what paddocks the cows are going into, pregrazing covers, post-grazing residuals and rotation length.

“Their brains just freed up, they could make high-quality decisions and, as a result, made a dramatic change in profit. If we could compound up that change in profit, it’s actually worth millions of euro to that farm over 10, 20 or 30 years, all because the mind was freed up to make fewer but better decisions,” he says.

He says that farmers who have a natural instinct to focus on cows and grass and less of a focus on machinery or driving performance through milk production at the expense of managing costs, will have a competitive advantage.

Relationship to profit

Over 15 years of DairyBase data from 2008 to 2022 shows an additional $350 (€200) of operating profit per hectare generated for each extra tonne of pasture eaten per hectare.

Paul says that this result increased to $500 (€280) of operating profit per tonne of pasture eaten in the top five high milk price years and reduces to $230 (€130) per tonne in the bottom five milk price years.

Further analysis shows that for every $1 spent on supplement, total costs increase by $1.85 and this was common across all farm types and all levels of profitability;

“You don’t see that in any one year, but that’s the accumulation of probably more machinery, infrastructure, labour, more depreciation, all of those extra costs over and above supplement is what leads to the extra 85c and that’s why its so easy to break even on incremental supplements coming in.”

He said farmers need to fully understand this relationship before embarking on expansion, or taking on extra land for silage or growing feed.

On costs, Paul said that farmers need to be highly discerning about what is bought for the farm and what you can get a return from, as most salespeople are trained negotiators. He said that monitoring costs alone won’t achieve results.

“Do a budget and do a cashflow and then when you see the actual results each month, you need to sit down and go into detail on whether you’re ahead or behind, and how we’re going to react to that.

“The farmers that I see getting ahead the quickest and doing the best spend a lot of time looking at financial management and ways of cutting costs and what they are going to do about it.”

He recommends that farmers do a zero sum budget every couple of years. This involves building the budget from scratch, rather than just using last year’s costs.

“Generally, people who do zero sum budgeting will pull out 10% to 15% of costs that have somehow crept in over the last three or four years. Just by doing that exercise, you can almost guarantee to save money,” he said.

On budgeting, Paul said he regularly gets feedback from farmers to say why bother budgeting when there is so much variability with weather, milk price and costs changing.

“It’s completely the opposite. The more variation that you have, the more fluctuations in revenue and expenses, the more vital it is to do budgeting. Monitor it and discuss where you’re at each month and how you get back on track.”

It was stressed at the conference by both Paul and fellow speakers about the importance of managing the budget and making alterations during the year to get the profit to come in on target.

He said some of the things being cut may not be sustainable, such as reducing P and K fertiliser where soil fertility is good. He described these actions as being sometimes necessary to avoid making a loss in the face of a disaster budget scenario.

UK dairy farmer Ed Dale said that the capital budget is often the first to be cut on his farm in order to get back on track if the budget goes off target. He also said that rather than focusing on making huge savings in one area, that it is easier to target a 10% saving in all areas, which amounts to a greater overall saving in costs.

On risk, Paul Bird said that farmers need to be aware that if there is a high risk or probability of something happening that will have a significant impact on the farm business, then they have to be cautious about that. Regarding nitrates, he said he would be looking at the percentage probability of further changes to the derogation and then running scenarios based on the different potential outcomes.

Farmer health

Dr Paula Carroll from South East Technology University said that farmers and agricultural workers are five to seven times more likely to die of all causes of death than a salaried worker in Ireland.

She said the majority of these deaths are due to heart disease or cancer and that the trends are getting worse, not getting better.

“There is definitely something we can do to prevent these conditions, but it does ask us to examine what is it about the culture, environment and behaviour on Irish farms that predisposes farmers to premature mortality at much higher rates than other citizens?”

She said that in the last six years there has been a higher rate of mortality on Irish farms from suicide than from farming. She said stress is highly prevalent in the farming community, with 75% of dairy farmers in a recent survey saying they have been highly stressed in the last month.

These statistics, she said, need to be discussed more openly and with greater awareness.