Resilience in Dairy Businesses

VOLATILITY in the dairy sector has had a significant effect on businesses in the last few years and looks set to continue as global market forces influence the UK market. In order to safeguard your business against volatility it is important to plan ahead, work to a budget and save money at key times.

Setting a budget for the year ahead offers a level of security and clear vision of where the business is heading. Setting a budget using the previous five year average milk price is a good starting point to help cover any dips in price volatility.

“Always build a business based on a long-term outlook of the previous five year average, which is 25.5p/litre. Running the business at the five year average means it is able to handle the highs and lows of volatility,” Tony Evans, of Andersons Consulting told farmers at a meeting hosted by AHDB Dairy and Farming Connect in Usk.

“I want to have a resilient business and the resilience of that business has got to be able to handle the highs and lows. Too many people are going through the lows waiting for the next high, but to deal with volatility it’s important to bank the cash in the good times to carry you through the tougher times. Investment should be in order to make your business more efficient, not necessarily to expand.”

When budgeting, Mr Evans started with the five year average milk price of 25.5p plus 2.5p stock value, giving a total of 27.5p/litre. He advocated saving 12p/litre, leaving 15.5p available for production costs and other expenses. In the UK the three main production systems are all-year-round calving, autumn calving and spring calving which all have varying costs of production:

“The biggest single factor that influences the swing of 8p between the top and bottom performance is the farmer,” added Mr Evans.

Staff retention and stability in the business also helps boost resilience, while looking at where efficiencies can be made, such as litres sold per labour unit and machinery capital per litre sold will also help lower costs.

“Finally, in order to hold on to that money, do something profitable with it when you’ve got it. If you’ve got a profitable business and it’s making a good rate of return leave it alone and take money from it. It’s not turnover that counts, it’s left over,” Mr Evans concluded.

Subsidised business planning advice is available through the Farming Connect Advisory Service. To find out more go to www.businesswales.gov.wales/farmingconnect or contact your local development officer, whose details are available on the website.