Evidence Report GB dairy herd performance 2014 /15 December 2015

Transcription

1 Evidence Report GB dairy herd performance 2014 /15 December 2015

2 Contents Executive summary Key findings stemming from year end 2014/15 data 3 Introduction Background 4 The aim of the report 4 The data 5 The basis of the financial review 5 International comparison The global picture in Longer term sustainability 8 Results for account year ending December 2014 to June 2015 Dairy herd enterprise pence per litre 10 Dairy herd enterprise per hectare 13 Dairy herd enterprise categorised by cow milk yield 15 Dairy herd enterprise categorised by housing period 17 Findings and Conclusions Appendix Glossary 20 2

3 Executive summary In addition to the presentation of the latest set of physical and financial performance data for dairy herds in Great Britain, this report aims to examine long-term viability and sustainability through: Showing UK costs of milk production in context of other countries around the world Investigate selected European typical farm net margins over the last five years Presenting 2014/15 figures in a longer-term context Examining the sustainability of top performing herds against the background of milk price changes. The report does not address questions relating to different types of farming systems, nor does it champion or compare any aspect of technical excellence. The data is focused on providing a foundation level of industry costs and margin potential to guide or support business decisions. Farmers who wish to benchmark their businesses or review system-specific group comparisons can access benchmarking groups through their AHDB Dairy Extension Officer. Key findings stemming from year end 2014/15 data The UK has reasonably low total costs of milk production compared with western Europe, although, not as favourably in global terms as it was in 2012 In the group of EU countries represented in the data, the typical farms achieved a positive cash net margin in each of the last five years. However, full economic costs net margins were often negative in the same group, for the same period The UK typical farm fared better and was positive in three out of the five years The top quartile of GB producers achieved a positive net margin of 6 pence per litre (ppl) in 2014/15 In contrast, the bottom quartile made a loss of 5ppl, a range of 11ppl, when full economic costs are considered Since 2014, prices collapsed for many farmers, with more facing negative returns at the present time Total cost of production was 26% lower between the top and bottom quartiles of GB farms. This was in part due to the top quartile producing a milk yield 11% higher than the bottom quartile On a per hectare basis, the net margin was over 1,400 per ha more for the better performing herds despite costs being 232 per ha higher than the bottom quartile They also earned over 1.20 for every 1 of cost, on average, during the last eight years The top quartile herds in GB have better resilience, which allows those businesses to invest and develop. This is important in the context of long-term sustainability of these businesses. 3

4 Introduction Background The data in this survey is from farm accounts all with year-ends falling between December 2014 and June The data reflects a period of relatively higher margins as milk prices since this period have in many cases fallen significantly. With the lower prices many are receiving, few will be thinking about herd expansion; for many it is simply a struggle to survive. However, in the longer term, it is expected that prices will recover. It is against this background that this report aims to provide financial evidence to inform these decisions. This report aims to provide the evidence to demonstrate that technically excellent producers are able to make sufficient return to consider investment. The aim of the report In addition to the presentation of the latest set of physical and financial performance data for dairy herds in Great Britain, this report aims to examine long-term viability and sustainability through: Showing UK costs of milk production in context of other countries around the world Investigate selected European typical farm net margins over the last five years Presenting 2014/15 figures in a longer-term context Examining the sustainability of top performing herds against the background of milk price changes. The report does not address questions relating to different types of farming systems, nor does it champion or compare any aspect of technical excellence. The data is focused on providing a foundation level of industry costs and margin potential to guide or support business decisions. Farmers who wish to benchmark their businesses or review system-specific group comparisons can access benchmarking groups through their AHDB Dairy Extension Officer. 4

5 The data The data is sourced from 325 sets of farm accounts, all with year-ends falling between December 2014 and June 2015 collected by Promar International and its contributing partners. The data sample used here is stratified to reflect the range of producers in the dairy sector. Farm stratification was based on the following criteria: Geographical location Level of milk production Calving pattern Housing period Type of contract Financial and physical performance. The basis of the financial review In this report, the financial data is considered as both cash only cost of production and also as the full economic cost of production. Each dairy business will have its own management accounting conventions for evaluating its financial performance. By presenting both cash costs and full economic cost, this report provides the range of costs that most businesses will fall within. Cash costs of production: This includes costs that would be actual cash costs associated with the milk production. It excludes: depreciation, unpaid labour and imputed costs of land tenure. However, it does include any actual rent where it is paid and actual costs of any finance, eg overdraft charges. These are recognisable as the day-to-day costs of running a milking operation. Full economic costs of production: This includes all cash costs paid, imputed rent and finance cost, where farmers are not paying rent or able to fund their own working capital. Similarly, unpaid labour is ascribed an imputed cost and also included. These costs would be important in consideration of an investment appraisal and return on capital employed. The report considers the performance of the upper and lower quartiles, as well as the inclusion of the top and bottom 5%, which provides a further insight into the performance range of dairy herds in GB. The top 5% figures provide an indication of what the very best producers are achieving. To accommodate different scenarios that farmers and dairy managers are considering, the data has been reviewed on a ppl, per hectare basis, as well as categorised by cow yield and housing period. These additional tables might help in understanding enterprise performance compared with other farming enterprises. 5

6 International comparison How do UK dairy farms compare to the rest of the world? What are the best dairy farmers from around the world doing to be competitive? Understanding costs of milk production from all over the world allows us to know how competitive UK dairy farms are in Europe and globally. Comparison with farms from around the world can also highlight areas which UK producers can learn from. As a member of the International Farm Comparison Network (IFCN), AHDB Dairy has access to data from 55 major milk-producing countries around the world, compared using a typical farm model approach and updated annually. The data is based on a selection of typical farms that represent the most common types producing the highest share of milk within a region or country. It looks at milk production only all cash and non-cash costs of the dairy enterprise and returns from milk and other income but excludes youngstock and calves, and costs associated with other dairy income than milk. The global picture in 2014 In 2014, the average cost of milk production in the network was 27ppl of Energy Corrected Milk (ECM) 1. This was similar to 2013, as major changes in feed costs were not experienced in most countries. The world milk price experienced sharp decline in 2014, which continued in 2015, as shown in Figure 1. Figure 1: World milk and feed price trends January 2007 to September 2015 Source: IFCN However, on average for the whole of 2014, the farmgate milk price reached the same level as in the year before or even experienced an increase, eg in the USA. Therefore, farm profitability proved to be better in 2014 than in Energy corrected milk (ECM) (kg) = (milk production (l/year) x x (0.383 x butterfat (%) x protein (%) )/3.1138): allows comparison between milk types with different solid contents 6

7 Figure 2: 2014 cost of milk production on average sized farms Source: IFCN Closer to home, western European average costs of production were 37ppl, with the UK at a typical 32ppl ECM in 2014, it still remains reasonably competitive within the community. However, as Figure 3 demonstrates, outside of the EU, American and Oceania costs of milk production are still much lower. Figure 3: 2014 average cost of milk production by global region ppl ECM Western Europe North America Asia Middle East Central Eastern Europe Oceania South America Africa Source: IFCN 7

8 Longer term sustainability How does the UK position in 2014 compare with previous years and also some selected European competitors? Figures 4 and 5 show net margin performance of milk production in typical herds that represent the statistical average herd size in each of those countries. Figure 4 looks at net margins after cash costs are considered, which provides an indication of short-term viability. Figure 5 shows net margins after the full economic costs of milk production and can hint at the long-term sustainability, ie being able to cover investment in buildings and machinery, as well as an income for own labour. Figure 4: Net margins after cash costs for milk production in selected EU countries ppl ECM 14 France Ireland Germany Poland UK Netherlands Denmark Year Note: Country name indicates the typical farm herd size Source: IFCN Although the UK hasn t experienced the highest margins after cash costs compared to some of the other EU countries, it does appear to have had a steadier margin. Only the Danish typical farm in this comparison had negative net margins, after cash costs, at any point. A different picture is seen when net margins are calculated after non-cash fixed costs are included. 8

9 Figure 5: Net margins after full economic costs for milk production in selected EU countries ppl ECM 4 2 France UK Ireland Denmark Germany Netherlands Poland - 16 Year Note: Country name indicates the typical farm herd size Source: IFCN The obvious trend seen in Figure 5 is that during most of the last five years, net margins were negative after all costs were considered. In comparison to the other countries, the UK typical farm has fared best with three out of the five years returning a positive margin, albeit small. Some of the reasons explaining the differences in cash net margin results and full economic net margins include: Amount of paid versus own labour Owner occupation levels Levels of depreciation. Covering full economic costs of production ensures longer-term sustainability, as returns should be providing a return to family labour but also business investments. The UK tends to have lower depreciation costs on a ppl basis due to lower investment levels, compared to its European counterparts. This can mean lower costs in the short-term but is this sustainable in the longer term? Further separate analysis will be carried out to investigate this issue. 9

10 Results for account year ending December 2014 to June 2015 Dairy Herd enterprise ppl The comparison between the top performers of GB dairy herd enterprises and bottom performers ranked on net margin in ppl shows a large variation in both physical and financial performance as presented in Tables 1 and 2. Table 1: Range in physical performance of GB dairy herds 2014/15 Top 5% Top 5% Number of farms Herd size Dairy stocking rate (LU) Herd replacement rate (%) Cows calved (%) Milk yield (l/cow/year) 7,640 7,881 7,121 6,044 Butterfat (%) Protein (%) Labour (hours/cow/year) Note: Ranked by net margin ppl 1: The % of cows in a herd calved in a 365-day period. Table 2: Range in financial performance of GB dairy herds 2014/15 (ppl) Top 5% Top 5% Milk sales Revenue Herd replacement cost Feed and forage cost Livestock costs Total variable costs Labour costs (paid) Power and machinery cost Property repairs, Rent and Finance Other operational costs Cash fixed costs Cash costs of production Cash net margin Labour costs (unpaid) Total depreciation Rental value of owned land Non-cash fixed costs Full economic fixed costs (cash and non-cash) Full economic costs of production Full economic net margin Notes: Ranked by net margin ppl Cash costs exclude unpaid family labour and depreciation and include actual rent and finance costs

11 The financial results shown in Table 2 cover a 12-month period, during which, a wide range of milk prices were received with higher prices experienced in the first half of the period and then started declining in the latter half. Figure 6 shows the distribution of prices received across the whole sample. It also demonstrates that there are some producers in the top that received prices as low as those in the bottom quartile, and similarly some in the bottom received prices as high as in the top quartile. Figure 6: Full economic net margin received versus milk prices for accounting year-ends between December 2014 to June 2015 (ppl) 50 herds Middle 50% herds Top herds 45 Milk price received (ppl) Full economic net margin (ppl) Source: AHDB Dairy/Promar International and partners Input prices also fell during the period which helped off-set some of the revenue drop. This meant that net margins fell by around 1-2ppl on average in compared with the previous year. A similar picture was seen with the change in Farm Business Income for dairy farms in Defra s Farm Business Survey for , which reported a 5% decrease. The full economic costs of production had decreased year-on-year by 0.3 and 0.9ppl for top and bottom respectfully. However, it is worth putting this into context of recent years. Figure 7 shows the trend in total costs of production from 2007/08 to 2014/15 for the average and top and bottom ranked herds. Over the eight years to 2014/15, full costs of production, on a ppl basis, are now estimated to be around 20% higher than in 2007/08. 11

12 Figure 7: Full economic costs for dairy herds versus average milk price from 2007/8 to 2014/15 Pence per litre Average Average Milk price (Defra) Top / / / / / / / /15 Source: AHDB Dairy Data: 2007/ /2013 DairyCo Milkbench+; 2013/ /15 Promar International and partners and top ranked on full economic net margin ppl When these costs of production trends are seen against the change in the average milk price in each year, it shows that only the top quartile consistently kept costs lower than the average milk price. This is important in the context of long-term sustainability of a business. If the performance of a business is able to consistently operate with costs below prices received, it will have a greater resilience should market conditions significantly worsen for a time. In addition, it allows the business better scope to invest and develop during better times. 12

13 Dairy herd enterprise per hectare A significant range in performance also extended to the top and bottom quartiles based on a per forage hectare basis. Table 3: Range in physical performance of GB dairy herds 2014/15 Top 5% Top 5% Number of farms Herd size Dairy stocking rate (LU) Herd replacement rate (%) Cows calved (%) Milk yield (l/cow/year) 8,033 8,258 7,421 7,165 Butterfat (%) Protein (%) Labour (hours/cow/year) Table 4: Range in financial performance of GB dairy herds 2014/15 ( /hectare) Note: Ranked by net margin per hectare 1: The % of cows in a herd calved in a 365-day period Top 5% Top 5% Milk sales 6,308 5,478 3,884 3,731 Revenue 6,616 5,722 4,087 3,928 Herd replacement cost Feed and forage cost 1,862 1,788 1,503 1,518 Livestock costs Total variable costs 2,463 2,289 1,967 2,038 Labour costs (paid) Power and machinery cost Property repairs, Rent and Finance Other operational costs Cash fixed costs 1,392 1,289 1,317 1,344 Cash costs of production 4,200 3,932 3,781 3,767 Cash net margin 2,417 1, Labour costs (unpaid) Total depreciation Rental value of owned land Non-cash fixed costs ,031 Full economic fixed costs (cash and non-cash) 1,972 1,906 1,852 1,892 Full economic costs of production 4,779 4,549 4,317 4,315 Full economic net margin 1,837 1, Notes: Ranked by net margin per hectare Cash costs exclude unpaid family labour and depreciation and include actual rent and finance costs 13

14 Table 4 shows that the top quartile, on a per hectare basis, incurs higher costs, over 5% more than the bottom quartile, with the main area of difference being feed and forage costs. However, the revenue earned by the top quartile is 40% more than with the bottom performers. Another way to look at this relationship between revenue and costs is the ratio between them, which can be viewed as a measure of productivity, that is, how much output can be produced per unit of input. Figure 8 shows not just the revenue:cost ratio for the latest year, but also trending back to 2007/08 for the top, bottom quartiles and the average per hectare. The overall average revenue to cost ratio for the last eight years is 1.03, meaning that for every 1 of costs, these dairy farm businesses generated 1.03 worth of revenue. Figure 8: Ratio of dairy herd revenue to full economic costs of milk production from 2007/8 to 2014/15 Revenue:Cost ratio / / / / / / / /15 Top Average Source: AHDB Dairy Data: 2007/ /2013 DairyCo Milkbench+; 2013/ /15 Promar International and partners and top ranked on full economic net margin per hectare The top, on average, earned at least 1.20 for every 1 of cost. In contrast, the bottom lost 0.20 for every 1 of cost. Interestingly, despite experiencing significant changes in milk and input prices during the last eight years, the gap between the top and bottom has remained at a reasonably steady ratio of So is this difference in ratio a reflection of higher milk prices received by the top? Not necessarily. For example, in 2014/15, in the bottom quartile, three quarters of farms were on non-aligned contracts, as were nearly two thirds of the top quartile. In addition, the top performing herds had higher stocking rates, achieved a better performance per litre and may have maximised their contract value. So it is not necessarily a product of being on higher earning contracts. Overall, despite incurring higher cost per hectare, the top quartile herds are generating more revenue from those inputs and so achieve better net margins, which goes a long way to ensuring business viability. 14

15 Dairy herd enterprise categorised by cow milk yield The whole 2014/15 sample has been split according to the level of milk yield achieved per cow on average in the herds. The top and bottom quartile range is given for each milk yield category except for the highest and lowest bands where just an average is given due to smaller sample sizes Table 5: Range in physical performance of GB dairy herds 2014/15 by cow yield (litres) Over 9,500 8,000-9,499 6,500-7,999 5,000-6,499 under 5,000 Average Top Number of farms Herd size Dairy stocking rate (LU) Herd replacement rate (%) Cows calved (%) Milk yield (l/cow/year) 10,306 8,631 8,768 7,359 7,222 5,859 5,687 4,286 Butterfat (%) Protein (%) Labour (hours/cow/year) Note: Ranked by net margin ppl 1: The % of cows in a herd calved in a 365-day period Top Top Average 15

16 Table 6: Range in financial performance of GB dairy herds in 2014/15 by cow yield and ppl Over 9,500 8,000-9,499 6,500-7,999 5,000-6,499 under 5,000 Average Top Top Top Average Milk sales Revenue Herd replacement cost Feed and forage cost Livestock costs Total variable costs Labour cost (paid) Power and machinery cost Property repairs, rent and finance Other operational costs Cash fixed costs Cash costs of production Cash net margin Labour cost (unpaid) Total depreciation Rental value of owned land Non-cash fixed costs Full economic fixed costs (cash and non-cash) Full economic costs of production Fell economic net margin Notes: Ranked by net margin ppl Cash costs exclude unpaid family labour and depreciation and include actual rent and finance costs 16

17 Dairy herd enterprise categorised by housing period The 2014/15 sample has been split according to the time that the herd is housed during the year. This can provide a proxy for different systems. Table 7: Range in physical performance of GB dairy herds in 2014/15 by housing period More than 10 months 7-10 months 5-7 months Less than 5 months Top Top Top Top Number of farms Herd size Dairy stocking rate (LU) Herd replacement rate (%) Cows calved (%) Milk yield (l/ cow/year) 9,202 8,686 8,816 6,865 7,892 7,274 6,257 5,769 Butterfat (%) Protein (%) Labour (hours/ cow/year) Note: Ranked by net margin per hectare 1: The % of cows in a herd calved in a 365-day period 17

18 Table 8: Range in financial performance of GB dairy herds in 2014/15 by housing period and ppl More than 10 months 7-10 months 5-7 months Less than 5 months Top Top Top pence per litre Top Milk sales Revenue Herd replacement cost Feed and forage cost Livestock costs Total variable costs Labour cost (paid) Power and machinery cost Property repairs, rent and finance Other operational costs Cash fixed costs Cash costs of production Cash net margin Labour cost (unpaid) Total depreciation Rental value of owned land Non-cash fixed costs Full economic fixed costs (cash and non-cash) Full economic costs of production Full economic net margin Notes: Ranked by net margin ppl Cash costs exclude unpaid family labour and depreciation and include actual rent and finance costs 18

19 Findings and conclusions The UK retains a competitiveness with its closest neighbours within western Europe, despite not necessarily having the lowest average cost of production. However, this will only remain if it keeps its costs competitive. Reasons for the competitiveness include, good labour productivity, modest labour costs and economies of scale. Another key difference in the UK costs of production versus others in Europe is lower depreciation, indicating lower levels of investment by UK producers. The 2015 Oxford Farming Conference Report The Best British Farmers What gives them the edge mentions that The lack of investment in the dairy sector is often quoted as a key threat to the industry. However, while investment is necessary to ensure long-term production capacity, countries that do exhibit high levels of capital investment, including the Netherlands, also tend to have high costs of production. Investment in increased efficiency and decreased costs of production is key. The ability to reinvest and have long-term sustainability is possible if dairy herd performance is in the realm of the top of herds. In the last eight years, regardless of market volatility and changes in input prices, the top quartile can perform at a level that provides resilience. A resilient farm level can also provide confidence further down the supply chain in terms of investment at the processing level and even beyond. In addition, what is shown by the best producers, is that the UK does have the capability to move the sector to a better long-term sustainable position for all involved. For up to date estimated typical milk production costs for Great Britain go to dairy.ahdb.org.uk/marketinformation/farming-data/estimated-gb-milk-production-costs 19

20 Appendix Glossary Cash cost of production consists of all variable, cash fixed costs and herd replacement cost. Excludes depreciation, imputed cost of family labour and includes actual rent and finance. Cash fixed costs cash only fixed costs, which include power and machinery, property repairs and actual labour, rent and finance plus other operational costs. Cash net margin equals revenue minus herd replacement, variable and cash fixed costs. Cows calved % percentage of cows calved in the year, calculated as the number of cows calved divided by the average herd size. ECM Energy Corrected Milk. A method for comparing dairy financial performance across countries. Feed and forage cost equates to actual cost of all purchased feed and forage, plus market value of all home-grown non-forage feed and variable cost of home-grown forage. Forage grass silage, hay, non-grass forage and straw (both purchased and home-grown). Full economic cost of production consists of all variable, fixed costs and herd replacement cost including depreciation, an imputed cost of owned land, unpaid family labour and finance. Full economic net margin equals revenue minus herd replacement, variable and fixed costs (including depreciation, imputed family labour, rent and finance). Herd replacement cost equates to the number of cows that have left the herd throughout the year, multiplied by the average value of incoming cows and heifers, plus value of dairy bull purchases, minus the total value of all outgoing cows, heifers and dairy bulls. Herd replacement rate is based on the number of cows that have left the herd throughout the year, presented as a percentage share of the herd size. Herd size this is the average number of dairy cows in the milking herd during the year. IFCN International Farm Comparison Network, based in Germany. Imputed rent imputed (notional) rent on the hectares of owned land used for the dairy herd (grassland and forage areas). Labour cost actual cost of paid labour plus imputed cost for unpaid family labour. Milk yield calculated from the total amount of milk produced in the year, divided by either the herd size to obtain the average yield per cow per year or by total area allocated to the dairy herd to obtain the average yield per hectare per year. Non-cash fixed costs include unpaid family labour, depreciation and value of land owned. Non-forage feeds consist of purchased compound feed, cereals, protein feeds and by-products, plus home-grown cereals, protein feeds and by-products. 20

21 Other operational costs consists of water and telephone charges, general insurances, professional fees and other office-related costs. Power and machinery cost consists of repairs and spares, machinery hire, contracting, fuel, electricity. Revenue consists of the value of milk produced, value of calves at 20 days, net value of quota leases (in or out) and other dairy income (slurry to arable land, etc.). Total depreciation imputed depreciation on dairy-specific and forage machinery, equipment and buildings. Agriculture and Horticulture Development Board No part of this publication may be reproduced in any material form (including by photocopy or storage in any medium by electronic means) or any copy or adaptation stored, published or distributed (by physical, electronic or other means) without the prior permission in writing of the Agriculture and Horticulture Development Board, other than by reproduction in an unmodified form for the sole purpose of use as an information resource when the Agriculture and Horticulture Development Board is clearly acknowledged as the source, or in accordance with the provisions of the Copyright, Designs and Patents Act All rights reserved. While the Agriculture and Horticulture Development Board seeks to ensure that the information contained within this document is accurate at the time of printing, no warranty is given in respect thereof and, to the maximum extent permitted by law the Agriculture and Horticulture Development Board accepts no liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered directly or indirectly in relation to information and opinions contained in or omitted from this document. AHDB Dairy Agriculture and Horticulture Development Board Stoneleigh Park Kenilworth Warwickshire CV8 2TL T: E: W: dairy.ahdb.org.uk Sign up to receive regular dairy market updates by at dairy.ahdb.org.uk/sign-up