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September2015

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A CompanyPublished by: Promar International, Alpha Building, London Road, Stapeley, Nantwich, Cheshire, CW5 7JW. Tel 01270 616800 • Fax 01270 616704 • www.promar-international.com • www.promardairydirect.com

Benchmarkingcan underpinimprovementPromar UK Farm BusinessAccounts Manager CarrieLeech believes morefarmers should be gettingactively involved inbenchmarking.All farmers will have been affectedby the recent price drop, the extentof which depending on theindividual circumstances on farm.As margins become tighter it is vital to gain more control over the technical and financial figures.To gain this control, first we mustunderstand our figures. As amethod of achieving this,benchmarking practices arebecoming more popular amongstUK dairy farmers.

Areas for investigationBenchmarking allows you tocompare the physical and financialperformance of your farm to theperformance of other similar farmswhether by farm type, farm system,herd size, gross margins, profit,yield or many other criteria. It willallow you to determine how yourbusiness compares and can be usedto identify areas for investigationand improvement opportunities. Equally importantly it will flag upwhere performance is better thanbeing achieved elsewhere.

Benchmarking can provide the basisfor discussions with employees andstakeholders and can be a greatmotivator when things arehighlighted as going well.

Whether comparing to Mr Smithdown the road, Mr Jones 350miles away, or the 30 othersoperating similar systems to youacross the country, it is importantto benchmark realistically. Youneed to compare to a realisticsample of farms. Don’t benchmarkagainst average performance inisolation. Always look at the top20% or equivalent as this gives amore challenging target. Ensureyour results have been calculatedin the same way as the sampleyou are comparing against. It isessential to compare like with like.

Benchmarking groupsWhile there are numerous data setsthat can be used for benchmarkingincluding dairy costings such asPromar Milkminder, full farmaccounts like Promar Farm BusinessAccounts and industry schemes suchas Interherd and AHDB Milkbench,we are seeing an increased interestin benchmarking groups.

Groups provide an opportunity to meet and discuss issues andconcerns openly with others in a similar situation to yourself in an open but confidentialenvironment. Exchanging advice or sharing procedures that havebeen proven successful can help

identify where opportunities might exist to change managementto increase efficiency or reducecosts. The additional benefit ofgroups which should not beunderestimated is the sincerity,friendship and networks that are so often created.

Develop a visionBenchmarked results can helpdevelop a vision for a farm, tochallenge where a business shouldbe aiming. There are multipleoutputs of benchmarkingdiscussions but having the ability toadapt and make changes will be thething that makes change happen.Once change has been identified, be solution focused, seek advice andcontinue to stay connected withyour benchmarking counterparts.Stay up to date with regulationsand when making decisions, be sureto think long term.

Benchmarking using robust datasuch as that produced by PromarFarm Business Accounts is set toplay an increasing important role inthe development and maintenanceof durable dairy farm businesses.

Carrie LeechUK Farm business Accounts Manager

Time to challenge our thinking

Living with volatility

What will define the next generation of successful dairy farmers

Understanding of cost levels isfoundation of durability

Can dairy producer organisationsredefine the industry landscape?

Management data underpinsperformance improvement

Benchmarking can underpinimprovement

WIN £1200

of Promarservices

Many dairy farm businesses arecurrently experiencing the mostvolatility in prices than anytime over the last 21 years. The chart below shows the averageannual price received. The annualaverage smooths out the intra yearvariation in price. However, the wideningand large divergence in milk pricecurrently being received by producershighlights the limitations of referringto average milk prices. It really can onlybe used as an index to highlight thegeneral direction of price movementand the rate at which this is changing.

Reforms of the CAP have left EU farmersmore exposed to the impact of globalprices which are driven by thefundamentals of global supply anddemand. Currently we are in a perfectstorm. Demand has eased mostsignificantly from China whichaccounts for a third of the global tradein whole milk powder and a fifth of alltrade in dairy products. Yet at the sametime global milk production has increasedand production is forecast to increasein most of the major milk producingcountries in the northern hemispherefor this season.

The volatility being experienced is notgoing to go away if anything the sectoris likely to experience more volatility

both in terms of the frequency of theswings from high to low and theamplitude between these highs and lows.The whole of the milk supply chainneeds to get better at managing thisvolatility to ensure the sector is resilientand produces acceptable margins for allefficient “partners“ in the supply chain.

Timing is crucialVolatility is also not good for the sectoras it affects confidence and interfereswith longer-term strategic managementdecisions e.g. when to make significantcapital investment in the business.Making these decisions in volatile timesis challenging. Getting the timingwrong might result in the businessexperiencing financial stress, instead ofthe positive impact the investment wasanticipated to deliver. To have a vibrantand progressive sector it is importantthat the business decision makers haveconfidence in the future to enablethem to make these decisions.

This suggests to me the way in whichmilk is procured and how the price isset might need to change - possiblyusing futures markets or other marketmanagement tools. One other possibleway of producing a degree of pricecertainty for all on the chain could befor processors to put a percentage oftheir annual requirement out to tenderwith farmers or a Dairy ProducerOrganisation bidding to supply thatmilk at a price that leaves them anacceptable margin. The processorwould then accept the lowest orsuccessively lowest bids until theirvolume requirement was met. The balance of milk required by theprocessor would be acquired by a formof “B“ pricing mechanism which mightbe related to their market returns orthe spot market.

Well run, technically efficientbusinesses with a good knowledge of their costs of production are theones that a bank would wish to workalongside. These farmers are also likelyto have longer term business andpersonal objectives that all thoseinvolved in running the business (andoften other family members) haveagreed and bought into. The objectiveswill be reviewed periodically and theplan adjusted as necessary. In otherwords the business will be responsiveto changing circumstances. It mighteven have a “plan B” in place in casecertain events happen.

The business will be able todemonstrate ongoing ability to meet itsdebt service requirements (interest andcapital repayment) not only at currentinterest rates but for those requiringlonger term debt at what might bemore typical interest rates in the longerterm. Along with some sensitivity tounderstand the impact of changes toprice of the major items affecting thecash requirement of the business e.g.milk price, feed and fertiliser costs.

A final thought – Farming as a way of life is badbusiness... but farming as a business is a good way oflife and the wheel will turnagain for the dairy sector.Roddy McLeanDirector Agriculture - NatWest

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Living withvolatility

Guest comment

Annual average ppl

Time to challengeour thinking?Promar InternationalManaging Director JamesDunn believes successful dairyfarmers must be prepared totake a fundamental look attheir business and how bestto move it forward. No-one should underestimate thecurrent milk price crisis. A pricecut of over 25% would have ahuge impact on any industry but it is made worse in dairy farmingwhere the product is perishable,produced from a biological systemthat cannot be switched on andoff or scaled up and down withina short time frame.

It is clear that the global market,the primary driver of low priceswill not readjust quickly althoughwe may be seeing signs of earlyrecovery in the commoditymarkets. We need to see asignificant increase in demandsuch as China re-entering themarket or a reversal of the Russianban on EU products. Alternativelya significant downshift in supply isrequired and there are no signs ofthis happening.

Supply and demandProduction in many dairyingcountries is showing double digitpercentage increases, fuelled inthe EU by the removal of quotas.In the UK we have increasedproduction by 1.6 billion litres inthe last twelve months, equivalentto an additional 220 ex-farmtankers a day, or 40 pints of extramilk per head of UK capita.

As demand for dairy products isstatic this extra milk will have toeventually find its way onto theglobal auctions, increasing supplyand further depressing prices.Any extra production has to bediverted to added value productsor to displacing imports if it is tocontribute to sustainably highermilk prices.

The UK dairy farm model has beenbased on producing more milk.The trend line has been for morecows producing higher yields evenif the number of farms hasdeclined. Currently we are seeinga move to more herds adopting3X milking to increase production,presumably in an attempt tospread costs over more output.

Reversing the trend?One has to seriously question if itis time to reverse this trend of justproducing more in the hope that amarket can be found willing topay an acceptable price. Weshould be looking to more closelyalign production to what theprocessor requires and this meanshaving discussions with them. This would have benefits for thedevelopment of durable farmbusinesses and for the overallsupply chain, allowing a managedand sustained reduction in costs.

Thinking beyond the farm gate,and increasingly this is wheresuccessful businesses will focustheir time, a close relationshipwith processors will beparamount. The formation ofProducer Organisations offers achance to restructure the supplychain and for farmers to have agreater say in how theirproduction is used as we discusselsewhere in this issue.

Sometimes you need a catalyst tochange and the introduction ofquotas was a good example.When told to produce 9% less,dairy farmers looked to reduceherd size but also cut back onpurchased feed inputs thinkingyield per cow would fall. Theactual outcome was that yields fellby less than expected as forageintakes increased leading to apositive move in margins. Cowscan actually milk pretty well withless reliance on the feed bag.

Increasing global volatility shouldbe an equivalent catalyst and Ithink it might pay farmers tofundamentally challenge theircurrent system. For a segment ofthe industry would fewer cowsand a reduced reliance onpurchased feeds result in a moredurable system with reducedcosts? Milkminder data wouldsuggest that as yet few farmersare thinking this way but possiblymore could? Whatever the system,farmers must continue to breed thebest quality cows for the system.

Closer working withcustomersFor others who see the currentenvironment as an opportunity,they will need to consider howthey can align their business withtheir processor and manage anenlarged business to a very highlevel to ensure efficient productionso they realise economies of scale.

Driving all of this will be awillingness to think differently and embrace change. Some newresearch which is discussed later inthe Standard suggests successfuldairy farmers will increasinglybecome less hands on, willunderstand the importance ofteams and leadership and willembrace technology and data so their systems allow bettercontrol of costs.

Before discarding this approach, it is well worth pausing andconsidering what has happened inthe arable and pig sectors. Theyhave been forced to reassess theirbusiness model in the light ofindustry changes and the outcomehas been more durable sectors.There should be opportunities forUK dairying to do the same.

Source AHDB Dairy

James DunnManaging Director

Roddy McLeanDirector Agriculture - NatWest

The business of dairy farming isevolving but what does thismean for the people who will berunning those businesses?Promar Senior ConsultantAndrew McLay reveals some newresearch which suggests a changein attitudes and skill sets willhelp develop durable businesses.As part of a recent study looking at thefuture of European dairy farming after theremoval of milk quotas removal we spokewith a wide range of farm consultants,industry experts and academics in a rangeof European markets.

One of the questions we asked was‘which types of farmers exist todayand which types of farmers will existin the future?’ Interestingly, thefeedback we received rarely related toa farm system, farm size or age offarmer, but more towards certainbehaviours or skills exhibited by thefarmers themselves.

Wider skill baseFarmers in most countries have longbeen recognised as being “jack of alltrades”. What became clear was thatsuccessful farmers these days requirean even wider range of skills andexpertise - not just technical orproduction skills, but also financialmanagement, people managementand leadership skills. This is especiallytrue as units get larger with a team ofstaff being employed.

This feedback combined with someexisting views and ideas within Promarenabled us to develop a four stagemodel which suggests how farmerswill need to re-invent themselves asthe industry evolves.

The model categories farmer typesinto four stages and is based on thetheory that as farmers become moreprofessional business managers andleaders they move around the circlefrom Stage 1 through to Stage 4. This will require an investment intraining and other ways to acquire thenew skills required, an appreciation ofwhere help and support can be found

and an acceptance that successfulfarming may involve less timespent ‘getting hands dirty’.

The model is not based on ‘thousandsof interviews’ or ‘years of academicresearch’, but we think it provides arobust and practical framework forlooking at farmer types and development.

Our expectation is that Stage 4 farmersare more profitable and are probablymore satisfied with their lifestyle thenmany farmers in the earlier Stages.

Country variationsOur experience suggests these fourbroad types of farmer exist in allEuropean countries, although theactual proportions of each type varywidely between different countries. We would expect to see more Stage 1

and Stage 2 farmers in places likePoland and probably more Stage 3and Stage 4 farmers in countries likethe Netherlands.

With the removal of milk quotas, theEuropean dairy industry is likely tobecome much more competitive. We think one of the hallmarks ofsuccessful dairy producing countries in the future will be having a highproportion of farmers in Stage 3,if not Stage 4 of our model. The

challenge for almost all Europeancountries is to move more farmers, orto help more farmers, move aroundinto the Stage 4 category.

To be a successful player in aderegulated European dairy industrythe UK needs to continue to invest innot only developing farms andfactories but also in developing ourhuman capital. The UK dairy industryneeds to make sure that we have thebest and brightest minds working onand around UK dairy farms. Thisincludes attracting smart new peopleto the industry, but also continuing todevelop those individuals alreadyworking in the sector.

Longer term planning and adetailed understanding ofcosts will be foundations forthe development of durabledairy businesses faced withvolatile milk prices, accordingto Promar Principal ConsultantPeter Brown. He argues that dairy businessesneed to review costs and technicalperformance over at least a five yeartime frame if they are to be bestplaced to understand the impact ofmarket changes on their business.

“With volatile prices you have toaccept there will be good years andbad years. This makes it vital thatyou understand the ability of yourbusiness to operate in both. This canonly be achieved by the developmentof a long term plan focusing on therequirements of the business.”Peter says the starting point mustbe to know your profit requirement,saying businesses must generatesufficient to cover private drawings,capital repayment commitmentsand tax. This is the benchmarkagainst which the whole businessshould be assessed.

“The factors influencing the ability tomeet requirements are farm output,milk price and production costs soyou need to understand how each ofthese can affect the business over afive year period. Of this list, totaloutput and production costs arewithin a farmer’s control so this iswhere their focus should be.”

Not always cost cuttingHe says a review of costs may notnecessarily mean a drive to reducecosts. Whatever is deemed to be theaverage costs of production then bydefinition, 50% of farmers willalready have costs lower than this.

“Some businesses will already havelower costs while others are more ableto withstand a higher level of costsand still meet profit requirements.What is fundamentally important isthat you understand your cost base,know why it is where it is and can

understand whether it is sustainablefor your business to work at this level.Only then can you plan to strategicallyreduce costs if necessary.”Peter says looking at one year’s costof production in isolation will notgive a true picture or allow ameaningful analysis. He commentsthat a range of factors such asweather and forage quality willinfluence costs making a single yearunrepresentative. A good silage year,for example, can increase yields andallow savings on feed costs. He advises looking at trends in costsover at least three years as a basefor understanding business inputs.

Three years minimum“Looking at three year’s costs will givea more accurate picture by smoothingout the fluctuations between yearsand so provide a more reliable basefor decision making. A good startingpoint is to compare cost per litreagainst milk price received for each ofthe last five years and working outthe profit per litre. How many year’sdid you make a profit in excess ofprofit requirement. In the years whenprofit requirement was not met, whatwere the factors responsible? “If cost base was the dominant issuethen look to reduce costs, butremember that it may not needdrastic measures and it is important toavoid short term cost cutting thatstores up problems for the future.”

He suggests many small, incrementalimprovements can be achievedquickly and with minimal investment.Considering feed which is thebiggest single cost of dairy farming,he says small changes such asincreasing available trough space,keeping troughs clean to encourageintakes and managing the silageface better to reduce waste andmaintain quality can all have animmediate effect on costs.

Include sensitivities“Developing a five year plan for thebusiness will help assess the impactof reducing costs or changing scaleof production on profit requirement. In many cases cost per litre can bereduced by planning and investingwisely in farm infrastructure withinthe five year plan to improve theoutput potential from existinglivestock numbers or acres. It is alsoimportant that the plan includesprice sensitivities so you canunderstand how further volatility willaffect the business. What will be theimpact of a 1p increase in milk priceor a £10 fall in concentrate prices? “A detailed plan including realisticperformance improvements andprice sensitivities will help developmore durable dairy businesses,”he predicts.

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What will define thenext generation ofsuccessful dairy farmers?

Understanding of costlevels is foundation of durability

“Successful dairyproducing countriesin the future will behaving a highproportion of farmersin Stage 3 and 4”

The four stages of farmer evolution

Andrew McLayPromar Senior Consultant

Stage 1

Stage 2 Stage 3

Stage 4

Peter BrownPromar Principal Consultant

Survivors• Hands-on role, day to day focus• Limited, often inherited knowledge• Higher prices seen as way to

improve profit• Limited engagement with supply

chain

Doers• Hands-on role, day to day focus• Rely on suppliers i.e. Feed Reps etc.

for advice• ‘Working harder’ seen as solution

to improving profitability• Some engagement with primary

buyer

Managers•Evolving focus - skilled cow managers,

then finance managers, then peoplemanagers

•Professional advice - vet, breeding, etc.•Increasing scale and efficiency seen

as solution to improve profitability•High engagement with primary buyer

Entrepreneur/Leaders• Focus on leadership/team building/

innovation• Innovation and value creation for

customer recognised as solutions toimprove profit

• Intense engagement with supplychain and beyond

The specialist dairy business runs 205Holsteins plus replacements. Over thelast few years they have madeconsiderable technical improvement(see table), increasing turnover by over20%, which has allowed them toinvest in the business to increase thescale of operation.

“Like all dairy farms, they are beingimpacted by lower milk prices but arein a good position to really assess theimplications and plot ways to offsetas many of the consequences aspossible,” explains Promar RegionalManager Emma Thompson who worksclosely with the family.

“The aim has always been to driveperformance from the herd and wehave always used data to monitor whatis going on. Promar Farm BusinessAccounts gives a really in-depthbreakdown of financial performancewhile Milkminder lets us track physicalperformance on a monthly basis. “All cost areas are regularly evaluatedand compared to industry averagesto identify costs that are moving thewrong way or are out of line withthe wider picture.”

Identifying opportunities“Costs inevitably fluctuate year on yearbut having a set way to analyses and

present information means we have aclear picture on what is happeningand trends,” Emma comments. “Thismeans we can really probe costs andfind improvement opportunities.“The process involves recording theinformation and benchmarking withwhatever source is available. Thismight be our own FBA averages,Milkminder averages, Interherd orRMS data for example.“Once we have assessed currentperformance we can identify areas for improvement, develop a plan with targets and closely monitor what is happening.”For example, in 2012 purchasedroughage costs were flagged as being high at over £230 per cow.

“Despite the farm growing goodforages large quantities of additionalroughages were being fed. So wechallenged the practice.”The all year round calving cows weregrouped as high and low yielders. The high yielders went onto the bestgrazing first, followed by low yielders.Both groups buffer fed throughout thesummer. As a single TMR was produced,it was providing more nutrients thanthe low yielders required.

Big performance increaseIt was agreed to change the system.While low yielders are still turned outin early April, high yielders are nowhoused until the grazing wedge hasincreased, usually a month later. Whilehigh yielders are buffer fed when atgrass, the low yielders who now haveaccess to the better grazing are justflat rate fed concentrates.

“Milk from forage has increased from2157 litres to 3348 litres per cow.Purchased feeds per cow have beenreduced to £40 and 25 more cows arebeing carried on the same forageplatform. In addition to less purchasedfeeds, other costs have been reducedas less TMR is mixed each day, savinglabour and power costs.”To achieve high levels of reproductiveperformance the Hughes’ have beenusing Genus ABS ReproductiveManagement Systems since 2006.

“The combination of the technician,the approach to serving cows and thedata to monitor performance meanswe have been able to improve andmaintain a higher level of fertility,”Andrew Hughes explains. “RMS data ishelping us improve further.“Analysis of the data showed cowswere not transitioning as well as theycould,” he continues. “We weremoving fresh calvers direct from thetransition yard into the high yieldersand this was knocking them.“We decided to erect a new buildingwith more transition group space androom for fresh calved cows. Now freshcalvers have a chance to settle beforejoining the main herd and we areseeing improved fertility as a result.”

Consistent high performanceIn the last three years 21 daypregnancy rate has averaged 25% with64% heat detection rate. Currently57% of the herd are in calf by 100days in milk.

“The Hughes’ make use of a widerange of data sources to manage thebusiness including FBA, Milkminder,RMS, blood tests, monthly silageanalyses and a full 12 month budgetwith price sensitivities included. Theyknow what is happening and canassess progress against targets.“If you want to improve you need to understand performance andthere is no point collectinginformation if you don’t use it.”

6 7

There is considerable talk about thepotential for Dairy ProducerOrganisations (DPOs) to help restore abalance in the supply chain betweenproducers and processors. The industry has seen a concentration ofprocessors and retailers, leaving farmersmore exposed to global price forces.For these reasons the EU has beenkeen to encourage the establishmentof DPOs, seeing them as a way toincrease the bargaining power offarmers within the supply chain.

What is a DPO?A DPO will be a specific entity set upprincipally to negotiate milk prices andterms and condition of supply withprocessors. The possible structure ofDPO falls broadly into two main types.A ‘One to One’ DPO negotiatesexclusively on behalf its dedicatedmember supply pool with one processor.This is the model adopted by DairyCrest Direct. A ‘One to Many’ type ofDPO consolidates the supply of milkfrom its members and then arrangesfor it to be sold to different buyers.By negotiating terms and conditions forits members, a DPO has the potential toincrease returns as well as delivering amore stable milk price allowingmembers to run their businesses withmore confidence. It is likely a DPOwould negotiate on a wide range ofareas including constituent values andhygiene quality, seasonality andprofile, volume bonuses, two tierpricing, transport, indexation of pricesand production system. There is alsothe possibility of selling all or part ofmilk supply on forward contractsunderwritten through futurescontracts or with end user contracts. A DPO will usually have at least 10members but clearly there would bebenefits from having a larger groupnegotiating for more farmers with alarger total milk pool. Ideally 100% ofa processors supply base could berepresented through a DPO.

ChallengesWhile a DPO would seem to offersome significant benefits and helprebalance the supply chain, establishingone is not straight forward. Perhapsthe biggest single challenge is thatthey are not mandatory and there isno obligation for a processor torecognise any that are formed. In alllikelihood DPOs will be set up basedon partnering between existing groupsof supplying farmers and processorsrather than farmers setting one upand then expecting processors to bequeuing up to trade with them.Several processors and farmer groupsare already working successfully. The key is that processors need a milksupply that meets their product andcustomer profile and this means theywill have to work with farmers.Farmers need a milk processor thatoffers security and is prepared to workcollaboratively so that they can finetune their systems to meet market need.

The actual process of forming a DPOrelies on considerable co-operationwhich may not come easily to anindustry not used to the concept. Notall producers will want to work with aDPO and successful groups will requireoutstanding leadership. The mosteffective groups will really understandthe dynamics of the marketplace andbe skilled negotiators.

Confidence is keyPossibly the biggest barrier to asuccessful DPO will be a general lack ofconfidence in their ability to actuallyachieve anything tangible andsustainable. There is as yet littlecompelling evidence from elsewherein the world that DPOs are beingeffective or ineffective as it is still earlydays. This will only be overcome bythe first groups getting off the groundand demonstrating their effectiveness.Do DPOs have a role to play? Almostcertainly yes as they give farmers thevoice they need, but currently lack, tonegotiate terms and conditions thatdeliver better returns at the farmgate.But they aren’t for everyone, won’tappear overnight and requireconsiderable leadership and planningwith a commitment from farmers towork together and with processors.

Producer organisations have proven success in other countriesand also in some sectors of UK agriculture, such as in horticulture.Promar Principal Consultant Neil Adams considers the positivepart they could play in rejuvinating the UK dairy industry.

David Hughes who farms partnership with his sons Martin andAndrew at Westwood Farm, Neston has made full use of regularphysical and financial benchmarking to achieved a sustainedincrease in technical improvement which has underpinnedbusiness expansion and helped generate funds for investment.

Aug 2013 Aug 2014 June 2015Cows in herd 190 205 203Yield per cow (L) 7843 8065 8037Milk from forage (L) 2735 3221 3348Concentrates fed (kg) 2346 2917 2239Feed rate (kg/l) 0.30 0.30 0.28

Can Dairy ProducerOrganisations redefinethe industry landscape?

Management datadelivers performanceimprovement

Neil AdamsPromar Principal Consultant Andrew Hughes and

Emma Thompson