COGWD - Cost of getting work done!

This time last year dairy farmers were worried about rising input costs and how this may impact the bottom line of their March 2023 accounts. We at Albert Goodman are currently very busy with these year ends and therefore have the ability to review the financial performance of many different farming businesses.

As a result, I thought this would be a good opportunity to consider how input costs have changed over the last few years using the actual results we have seen so far.

One of the measures that we use when reviewing the efficiency of a dairy farm is the cost of getting the milk out of the cows. We call this COGWD – the cost of getting the work done. We measure this as the labour, plus power and machinery costs (including contracting), divided by the number of litres produced. After feed, it is the largest cost on most dairy farms and for the purpose of this article, it is the measure that I have chosen to analyse.

COGWD varies hugely depending on the system that the farm operates. For example, a block calving dairy herd which grazes cows as much as possible would have a much lower COGWD than average. A high input, high output, housed dairy farming system would have a much higher COGWD in comparison.

When doing the research for this article I selected a range of different dairy farming systems and compared their COGWD for the financial year 2021 to their COGWD for the financial year 2023.

The results were largely as I had expected, if not marginally better. The average increase in COGWD was 17%, however during this time there was also an average increase in milk output of 4%. Therefore, the COGWD increase of 17% was reduced to 12% by spreading the increased input costs over a greater supply of milk.

If you compare this to the AgInflation Index, which showed a jump in input costs of 34% in the 12-month period to September 2022, then this is quite positive. You could argue that feed and fertiliser took the biggest hit in terms of rising input costs for dairy farmers, however fuel and labour costs also saw considerable increases, both of which are considered within the COGWD measure.

The average milk price increase for the same period was around 38%, which leaves a considerable margin for other increasing input costs such as feed and fertiliser.

This research shows that farmers have fared well to mitigate against rising input costs by controlling their costs and increasing their supply of milk. This increase in gross margin is often accompanied by an improved net profit margin which in turn, has resulted in higher tax bills to be paid in January.

The tide, however, has turned since the spring, with farmers now seeing a large reduction in milk price. This will cause a huge squeeze on cash flow and with the January self-assessment deadline looming, increased tax payments should be taken into consideration when budgeting for the next 12 months.