Where dairy farm cash flows

Where Dairy Farm Cash Flows
 
Introduction

5 July 2017, by Ian Bailey

A new piece of joint research from Savills and the Duchy and Bicton College's Rural Business School

 

Our research shows from the sample of dairy farms in the South West of England that there has been a considerable fluctuation in Farm Business Income (FBI) over the six years 2010/11 to 2015/16. This is largely due to the volatility of the milk price. The results suggest that new technology and a general increase in herd size has driven investment in land, buildings and machinery.

Farm Business Income, for sole traders and partnerships, represents the financial return to all unpaid labour (farmers and spouses, non-principal partners and directors and their spouses and family workers) and on the capital invested in the farm business, including land and buildings.

Dairy FBI in this sample performed at a higher level (including milk price) than the average across England, but followed the same pattern of income changes. Herd and farm size for the South West farms gradually increased over the six years. There was a dip in production in 2012/13 as a result of a poor grass growing season, and the milk price rose to a peak in 2014/15, before a sharp decline in 2015/16 (see Fig 1).

 
Milk price rose to a peak in 2014/15, before a sharp decline in 2015/16

FIGURE 1

South West dairy farm characteristics (sample average)

 
Figure 1

Source: Farm Business Survey – Duchy and Bicton College's Rural Business School

 
The key numbers

A wide range of profitability

The distribution of average FBI per cow and by herd size (see Fig 2) over the period shows the wide range of results. Some of this variation will be due to FBI being calculated before unpaid labour and notional rent. This will have a reduced effect on the larger herds where family labour cost is likely to be diluted by increased paid labour.

FIGURE 2

Average annual Farm Business Income by size of herd (2010/11 to 2015/16)

 
Figure 2

Source: Farm Business Survey - Duchy and Bicton College's Rural Business School

However, the vast range of performance either side of the trend line cannot all be put down to FBI accounting – for example, 100 cow herds vary between a negative FBI to an average FBI of £100,000 pa. Similarly, in a 100 cow herd the FBI per cow ranges from below £0 per cow to over £800 per cow. As would be expected increasing herd size does show a trend of increasing FBI.

Clearly these results show that there are opportunities to improve performance through best practice on a significant proportion of farms.

In addition, our analysis shows that the total private drawing over the six years was greater than the cumulative FBI on a third of farms and as noted in 'Key Numbers' (above) any deficit is generally funded with increased loans. Net drawings were much higher on farms with younger working partners suggesting that the business is supporting a ‘larger’ farming family.

There are often good reasons, including annual variations in Income and Corporation tax, for the results of our analysis. However, farm businesses should have a quantified grip on all areas of cost with clear understanding of the impact of current cash flows on the long term sustainability of the business.

The AHDB’s Vulnerability Index (see Fig 3) emphasises these findings showing a stark reduction over the past three years in the proportion of dairy farm businesses which are deemed to have a sustainable long term future.

FIGURE 3

The AHDB's Vulnerability Index

 
Figure 3

Source: AHDB

Are investment decisions sustainable?

Our research showed that around 16% of farms bought land in any particular year (although over the six years the owned area increased by only five hectares, and rented area by just two hectares); about two thirds invested in buildings and most bought some machinery, with around 60% having made re-investments greater than depreciation.

This means around 40% of the sample are investing less than the calculated machinery depreciation charge over the same period, and their equipment asset value will have declined.

There may be several reasons for this, including:

■ inability to afford reinvestment in the business for the future; this may seriously impact on the long term viability of the business and suggests a thorough appraisal/budget of the business is required to determine the best way forward – this might involve a radical restructuring, including ceasing milk production.

■ they are generating a reserve of funds to make a large investment later

■ a strategic disinvestment with the view to ceasing dairy farming

Tenure

Our research looked at performance by farm tenure and it is interesting to note that ‘mainly tenanted’ farms are, on average, larger with more cows which have higher yields resulting in higher FBIs and more cash. Net investment in machinery/equipment was similar to the ‘mixed tenure’ farms and as would be expected, ‘mainly tenanted’ farms saw very little land and woodland investment or capital appreciation. The generally higher performance of ‘mainly tenanted’ farms suggest a greater focus on how capital in the business is used.

It is also worth noting there are likely to be less opportunities for diversification within the tenanted sector suggesting a complete management and investment focus on the core dairy business has improved the long term sustainability of the business.

Alternatively, the ‘mainly owner occupied businesses have tended to concentrate on building the capital base but care should be taken to ensure that servicing this additional debt does not undermine the core business.

FIGURE 4

Dairy farming is of significant importance in some regions, for example the South West

 
Figure 4

Source: Produced by Duchy and Bicton College's Rural Business School on behalf of the NFU

Consider collaboration

Some farms may have resource constraints which limit or prevent expansion to achieve the factors listed to the right. Alternative forms of tenure and collaboration should not be discounted and, for example, the amalgamation of smaller herds in a locality might offer the opportunity to concentrate a larger milking herd in one place.

This could enable more effective investment in buildings, equipment, new technology and innovations, and an increase in economies of scale, as well as presenting the opportunity to locate and manage herd replacements and forage production away from the milking cows.

The right agreements and an enthusiastic resolution to find an innovative solution to current issues might create a long term sustainable business which efficiently uses the resources of labour, land, capital and skills.

Additional opportunities to reuse and convert ‘now’ redundant buildings may generate new income streams to further boost the new ‘collaborated/shared’ farm business. However, any new venture should be thoroughly researched and costed, otherwise it could have a serious negative effect on the core dairy business.

 

 
Is there a Blueprint?
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Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

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