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Know Your Costs

At a recent presentation to the NZIPIM at the McMekin centre I was impressed by the thinking that is being done at Lincoln College based on both the university and industry. The logic was excellent and was well worth thinking about on any sized dairy farm.

The question that was asked by the speaker at the presentation was – "Do many dairy farmers really make money?"

They did a study over a number of farms in the South Island which of course can also be applied to the North Island. It was interesting there were still a large number of farmers running a low input basis and still making very good bottom lines.

There was a large range of profitability, extending from losses right through to substantial profits. They looked at EFS and they varied greatly. One of the key things they found was the more pasture that was consumed the better the profit. They found that people feeding a lot of supplements can still lose money. A key point from this finding was that utilization of the pasture and brought in feed was the key to profitability. One slide had the caption. "Grow more grass and fully feed the cows"

In their budgeting model they now include depreciation, as that reflects the amount of plant required to run the business. A good example of that is say $250,000 worth of irrigation, it is a cost to the business and therefore depreciation should be included.

They looked at the following costs as percentages of gross income and what they could cut back on:
Feed costs 30%
Staff 20%
Depreciation 15%
Fertilizer 8%
Irrigation 5%
Animal health 4%
Overheads 4%
R and M 3%


What they identified was that it is hard to reduce costs substantially by cutting back on animal health for example, but rather it is probably easier to look at feed costs, staffing issues and depreciation. Start at the big costs and see if you can reduce those down first.

They looked at the ability to grow more grass and graze it more effectively. And that includes a close look at pasture management. "The cow is our client" You need to increase the cow energy intake from pastures. Also, you need to keep the whole farm in an active growing state. They aim to graze down to 1500 cover all the time.

You need to use silage making to maintain pasture quality. Their saying was "If its green in the bottom then cut", and they are making silage before everybody else therefore contractors are readily available and keen to do the work. Another important driver for profitability was re-grassing the pastures and getting them producing better.

Empties – they found the empty rate is a big cost. Their empty rate can be up to 36% and this can be a substantial cost to the business.

Some of the key drivers they use:
    Use all feed efficiently
    Grow more grass and forage
    Aim to have fewer replacements
    Select the more efficient cows that consistently produce and multiply them up
    More efficient use of fertilizer and reduce energy losses
It is interesting they talked about the soils at Lincoln, and you need to be aware of compaction of soils. This is something not given much consideration in the North Island.

Looking at one of the other big costs which is employment, they thought if they could simplify the farming system with automation, then they could reduce labour inputs. This has included time and motion studies in the cow shed and in calf rearing as well as looking at more effective pasture management. If they can reduce the number of staff they can reduce the number of houses that are necessary.

So in summary, some of the key drivers on the Lincoln college dairy farm can be applied to all dairy farming in NZ. The key points are:
    Know your costs
    If you are going to cut costs, go for the big items rather than the small ones
    Improve financial performance by reducing costs and increasing production
    Convert pasture into kilograms before purchasing outside feed.


 

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