The Cost of Milk Production. Do you know your cost of getting work done?
Two types of dairy farm are relatively insulated from the milk price crash – those on a retailer aligned contract and those that have very low costs of production (very few if any do both). Both groups use costs of milk production – one for calculating milk price and the other for managing the business. Cost of milk production statistics are a fantastic business management tool and a very defensive way of setting prices – but of course, a defensive approach by UK dairy farmers given current market conditions and the prior investments they have committed to is perfectly understandable.
Much is written and spoken about costs of milk production – ranging from very informative to dangerously fanciful. The accountant is in the lucky position of being able to understand and interpret the only costs of production that really matter to any individual dairy farm – its own, total costs with nothing left out or artificially put in. Having spent the money on the accounts, this is a great use of your accountant’s fee, especially given tax on profits is unlikely to be top of the agenda for now.
I have taken back accounts this year which describe how a business has only spent 23p to produce a litre of milk and in the same week how it has cost a different business 37p to produce a similar litre of milk. Neither are representative of a reliable average – the 23p farm produces a relatively small amount of milk with extreme seasonal peak volumes and the 37p farm simply spends too much and/or produces too little milk. The bulk of farms are somewhere in the middle and a well invested, technically good dairy farm with good cost control, a production profile that suits market demands and some economies of scale can now produce milk for about 27p/litre (before any return on capital).
The vast majority of difference between the costs on two dairy farms is usually explained in two areas – technical performance (old fashioned margin over purchased feed per litre) and in the “costs of getting the work done”. The latter is not a very snappy title so I shorten it to COGWD – it combines all the labour and machinery costs irrespective of what system is used (own staff and machinery, family labour, contractors, robots etc.); it is the costs of undertaking all the physical operations on the farm expressed “per litre”. The best are doing it for 7p/litre with the worst spending 15p/litre and it is usually more variable between farms than the margin over feed per litre.
So much attention continues to be paid to technical performance on dairy farms and some old fashioned costs like rent and finance are frequently blamed for high costs of production – now it is time to promote the concept of COGWD and the first steps to reducing those costs is to know your own and then find out how those that are doing it for less are doing it. One tip, COGWD is not closely correlated to whether the system is intensive or extensive.
Of course at present good cost control on the average dairy farm will only deliver less loss as opposed to more profit – but trying to be constructive in these difficult times, it is something that is genuinely in the control of most milk producers, unlike milk price.
If you’d like to know more about the cost of milk production and cost control please do not hesitate to contact our specialist agricultural team