Scottish Government

4.3 FACTORS AFFECTING THE GROSS MARGIN

4.3.1 HERD SIZE

The table below shows the variation in herd size across the farms that participated in the study.

Table 4.2 - Variation of Dairy Herd Size

The above figures show a substantial variation in the size of the herds which took part in the study. Herd size ranged from 95 to 517 cows. There did not appear to be any correlation between herd size and gross margin.

4.3.2 MILK PRODUCTION

Table 4.3 - Litres of Milk Produced per Cow, Milk Price Received per Cow and per Litre Produced

There is a substantial difference in the quantity of milk produced by each cow on the different dairy units in the study varying between just under 4,000 litres per cow to almost 12,000. This large difference can be attributed to the following: -

• High and low input systems being represented
• The inclusion of organic farms in the study
• Different genetic potential of the cows being milked

Average milk yield in 2006/07 was 6,969 l/cow according to the MDC, some 780 l per cow below the weighted average yield found in the study.

Price paid for milk varied between 14.56ppl and 26.61ppl. However, the highest price was due to an organic premium being received on the milk. The highest non-organic milk price received was 21.98ppl giving a 7.46ppl range for non-organic milk.

This range in milk price together with differing yields meant that the participant generating most income from milk sales generated 3.75 times the income the participant with the lowest milk sales on a per cow basis.

4.3.3 CALF INCOME

Table 4.4 below shows the details of the income derived from the sale and transfers out of calves on a per cow and ppl basis.

Table 4.4 - Calf Income

The income received from calf sales and calf transfers, varies more than any other income stream. The smallest income comes from DS54 which had a fertility problem during the year. Other herds with low outputs shot unwanted bull dairy type bull calves. The largest income came from DS2 which mates all of the cows to a beef type bull and sells all of the calves born as the herd is run as a flying herd.

Local marketing factors have a large impact on calf price and where farmers have had agreements in place to sell calves at a higher value this has pushed up their income substantially.

4.3.4 REPLACEMENT COST

Table 4.5 shows the weighted average and variation associated with replacement costs for the dairy herds participating in the study.

Table 4.5 - Calf and Income

The range in replacement costs is extremely wide. This is due to two factors: -

• In cases where the herd is increasing in size, the formula specified in the SSMM calculates the replacement cost by multiplying the number cows leaving the herd by the cost of cows entering the herd. In a case where the herd size is increasing, this results in an artificially low replacement cost.
• In herds that were decreasing in size the opposite is true. In addition, some of the herds had an extremely high replacement rate. DS54 is an example of this. The average herd size was 95 cows but 33 cows were introduced into the herd and 37 left, giving a replacement rate of 35%. This was due to a disease problem within the herd.

The weighted average replacement cost per litre of milk produced is 2.00ppl. This is the second largest cost to the enterprise after concentrate costs on a per litre basis.

4.3.5 NET OUTPUT

Table 4.6 shows the weighted average net output and variation in net output across the participants in the study

Table 4.6 - Net Output

The net output figures follow the same trend as the income received from milk sales as this is where the majority of the income is generated. As with milk sales, the range in performance is massive with the net output per cow of the best performer being 3.71 times that of the poorest performer in £/cow. However, this reduces to 2.46 times on a ppl basis. This suggests that the better performance is only partly driven by better yield. The variation seen in milk price lends weight to this conclusion.

4.3.6 FEED BEDDING AND FORAGE

Tables 4.7 and 4.8 show the analysis of feed, bedding and forage costs across the study. Table 4.7 expresses the results in ppl of milk produced whilst table 4.8 shows the results expressed as costs per cow.

Table 4.7 - Feed, Bedding and Forage Costs Expressed in ppl of Milk Produced

Table 4.8 - Feed, Bedding and Forage Costs Expressed as £ Per Cow

Total feed, bedding and forage costs account for 78% of the total variable costs with feed costs being 82% of total feed, bedding and forage costs.

The variation in feed costs is mainly due to the different systems that the various participants follow. Units with high feed costs tended to be the more intensive units with high yields. For example the herd with the highest feed costs, DS66, had a yield of 8,660 l/cow whilst DS46, the herd with the lowest feed costs, had a much lower yield of 5,604 l/cow. It should be noted that these were not the highest and lowest yields achieved in the sample. One factor at work is that those participants who utilised bulk fodders or forage replacer tended to have lower feed costs. Also, some units were more effective at achieving higher yield with lower feed costs. This would be affected by the genetic potential of the herd in question and the effectiveness with which forage is utilised on the unit. Particularly important is the quality of the silage made. Finally those units that fed a proportion of home grown feed tended to have lower feed costs.

Straw and bedding costs varied between units depending upon the housing system in place with cows housed on cubicles requiring almost zero bedding. Indeed some of the units had no recorded expenditure for bedding.

Forage costs varied significantly across the sample. There were several reasons for this: -

• Some of the units were more extensive than others, allowing a reduced cost structure with regard to forage variable costs.
• There was a large difference in the reseeding policy in place on the units in the study. Whilst some units reseeded large hectarages in proportion to their forage area, some reseeded nothing at all. This accounts for most of the variation.
• Some of the participants also grew whole crop cereals, resulting in the costs being higher than would otherwise be the case.
• The cost of forage produced also varied depending upon the level with which silage additives were used.

4.3.7 OTHER VARIABLE COSTS

Tables 4.9 and 4.10 show the importance of the remaining variable costs and how much contribution they make to the enterprise gross margin. Table 4.9 shows the variable costs expressed in ppl of milk produced whilst table 4.10 expresses the costs on a per cow basis. Contract work and casual labour have not been included as the amounts are not material.

Table 4.9 - Table Showing the Remaining Variable Costs Expressed in ppl of Milk Produced

Table 4.10 - Table Showing the Remaining Variable Costs expressed as £ per Cow

The remaining variable costs have a much lesser impact on gross margin than the feed and forage costs. The weighted average of the remaining variable costs totals just 1.80ppl or £146 per cow. Of these, four are material: vet & med, livestock sundries, AI costs and commissions and deductions.

The weighted average vet and med costs are 0.75ppl or £58 per cow.

There appears little correlation between high and low input units and vet fees. Apart from that units with the very lowest output tend to have lower than average vet costs. Also, somewhat surprisingly all 3 organic units had above average vet fees demonstrating that organic units do not necessarily use less medicine or veterinary support. Further commentary is made in section 4.4.2.

There was a high degree of variation across the all of the remaining variable costs with some of the units having zero expenditure in at least one of either the livestock sundries, AI costs or commissions and deductions categories. This appeared to be because in a minority of cases the farmer participants' recording systems did not differentiate between the cost centres nor was it possible to analyse the costs further.

However, it is not entirely unexpected for there to be a high degree of variation across these cost centres. For example with AI costs some of the participants used bulls rather than AI to serve the cows.

4.3.8 TOTAL VARIABLE COSTS

Table 4.11 analyses the total variable costs incurred by the study participants

Table 4.11 - Total Variable Costs

Total variable costs also show high levels of variation across the sample with the most efficient producer being able to produce milk at a cost of just 30% that of the highest cost producer on a ppl basis. On a per cow basis this ratio drops to just 19%. This demonstrates that whatever the system of production in place, there is a wide range in efficiency between producers. The range is wider on a per cow basis because the higher yielding cows produce many more litres of milk with each litre produced at a higher cost.

4.3.9 GROSS MARGIN

Table 4.12 analyses the gross margins of the participants in the study.

Table 4.12 - Gross Margin

The range in performance between top and bottom is greater than the range seen in any of the other variable examined. This suggests that the poorer performers are operating under a high cost regime but are not getting the returns for their efforts. In some cases this will be because of lower milk prices. The poorest performer will almost certainly be making a loss at net margin level.

The reasons for the variation in performance are discussed in more detail in section 4.4.