Profit drivers for successful
grazing dairy businesses
No of cows

Herd size to earn the average
national wage
200
180
160
140
120
100
80
60
40
20
0

Average

1980

1985

1990

...
No of cows

Herd size to earn the average
national wage
200
180
160
140
120
100
80
60
40
20
0

Average
Top third
Possible
...
“If you don’t like
change, you’ll like
irrelevance even
less!”
Gen. Eric Shinseki
Get the priorities right
Fine tuning

System
80% of potential gain made by
getting the system right
Too many people get it
wrong

Fine
tuning

System
No increase in
productivity with a
100% increase in
inputs
Operating surplus
has not increased
in line with
revenue
What drives profit?
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
Greater milk price increases
profit
Net margin, £/ha

1500

1000
500
0
-500
-1000
-1500

y = 48.35x - 1337
R² = 0.04
P = 0...
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
No relationship between milk
yield/cow and profit
Net margin, £/ha

1500
1000
500

Milk yield/cow is an output of a
system...
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
Increased profit with milk
yield/ha (?)
Net margin, £/ha

1500
1000
500
0
-500
-1000
-1500
y = 0.04x - 400
R² = 0.05
P < 0...
Profit increases with stocking
rate
Net margin, £/ha

1500
1000
500
0
-500
-1000

y = 278x - 387
R² = 0.08
P < 0.01

-1500...
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
Feed price not related to profit
Net margin, £/ha

1500
1000

500
0
-500
-1000
-1500

y = -0.78x + 295
R² = 0.006
P = 0.13...
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
As Milk-feed price ratio
increases, profit increases
Net margin, £/ha

1500
1000
500
0
-500
y = 886x - 792
R² = 0.09
P < 0...
What drives profit?
•
•
•
•
•
•

Milk price
Milk yield/cow
Milk yield/ha
Feed price
Milk to feed price ratio
Cost of produ...
Production cost/L strongly
related to profit/ha
Net margin, £/ha

1500
1000

y = -99x + 3172
R² = 0.79
P < 0.001

500
0
-5...
Both variable and fixed costs
tied to profit
Net margin, £/ha

1000

Net margin, £/ha

y = -140x + 1763
R² = 0.43
P < 0.00...
Production costs drive profit/ha
2008-09

2010-11

$5.21/kg

$7.36/kg

2009-10

$6.16/kg

2011-12

$6.69/kg
Financial performance
Where does the money go?
Overheads
Property

Feed

4%
14%

24%

Forage
machinery 6%
5%
Machinery &
power

Forage

10%
4% V...
The more pasture in the diet, the lower the cost
of milk production
0.35
Production cost, £/L

0.30
0.25

US traditional

...
The more pasture in the diet, the lower the cost
of milk production
For every 10%
increase in the
percent of grazed
grass ...
Total production cost, p/L

Production costs decline with
increased milk from forage in
UK
50.0
y = -0.0028x + 37.8
R² = 0...
Net margin increases with milk
from forage in the UK
1500

Net margin, £/ha

1000
500
Every 1000 L milk from forage is
0
w...
Same in Ireland
4000

Net profit (€/ha)

3500

R2 = 0.42

3000

Every additional t DM/ha is worth
2500
€161/ha
2000
1500
1...
Profit drivers in successful dairy
businesses
–
–
–
–
–

Milk yield/cow is not a driver of profit
Focus on cost/kg milk or...
Profit drivers for successful grazing dairy businesses
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Profit drivers for successful grazing dairy businesses

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Profit drivers for successful grazing dairy businesses

  1. 1. Profit drivers for successful grazing dairy businesses
  2. 2. No of cows Herd size to earn the average national wage 200 180 160 140 120 100 80 60 40 20 0 Average 1980 1985 1990 1995 2000 Year 2005 2010 2015 2020
  3. 3. No of cows Herd size to earn the average national wage 200 180 160 140 120 100 80 60 40 20 0 Average Top third Possible Skill before scale! It is important to know the drivers of profit of your business 1980 1985 1990 1995 2000 Year 2005 2010 2015 2020
  4. 4. “If you don’t like change, you’ll like irrelevance even less!” Gen. Eric Shinseki
  5. 5. Get the priorities right Fine tuning System 80% of potential gain made by getting the system right
  6. 6. Too many people get it wrong Fine tuning System
  7. 7. No increase in productivity with a 100% increase in inputs
  8. 8. Operating surplus has not increased in line with revenue
  9. 9. What drives profit?
  10. 10. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  11. 11. Greater milk price increases profit Net margin, £/ha 1500 1000 500 0 -500 -1000 -1500 y = 48.35x - 1337 R² = 0.04 P = 0.07 -2000 -2500 25.0 30.0 Milk price, p/L 35.0
  12. 12. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  13. 13. No relationship between milk yield/cow and profit Net margin, £/ha 1500 1000 500 Milk yield/cow is an output of a system, not a driver of a successful dairy system! 0 -500 -1000 -1500 -2000 -2500 3000 P = 0.92 4000 5000 6000 7000 Milk yield, L/cow 8000 9000
  14. 14. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  15. 15. Increased profit with milk yield/ha (?) Net margin, £/ha 1500 1000 500 0 -500 -1000 -1500 y = 0.04x - 400 R² = 0.05 P < 0.05 -2000 -2500 5000 10000 15000 Milk yield, L/ha 20000
  16. 16. Profit increases with stocking rate Net margin, £/ha 1500 1000 500 0 -500 -1000 y = 278x - 387 R² = 0.08 P < 0.01 -1500 -2000 0.0 0.5 1.0 1.5 2.0 2.5 Stocking rate, cows/ha 3.0 3.5 4.0
  17. 17. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  18. 18. Feed price not related to profit Net margin, £/ha 1500 1000 500 0 -500 -1000 -1500 y = -0.78x + 295 R² = 0.006 P = 0.13 -2000 -2500 0 100 200 300 Feed price, £/t 400 500
  19. 19. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  20. 20. As Milk-feed price ratio increases, profit increases Net margin, £/ha 1500 1000 500 0 -500 y = 886x - 792 R² = 0.09 P < 0.01 -1000 -1500 -2000 0.0 0.5 1.0 Milk-feed price ratio 1.5 2.0
  21. 21. What drives profit? • • • • • • Milk price Milk yield/cow Milk yield/ha Feed price Milk to feed price ratio Cost of production – Variable cost – Fixed cost
  22. 22. Production cost/L strongly related to profit/ha Net margin, £/ha 1500 1000 y = -99x + 3172 R² = 0.79 P < 0.001 500 0 -500 -1000 -1500 -2000 -2500 20 25 30 35 40 Total production cost, p/L 45 50
  23. 23. Both variable and fixed costs tied to profit Net margin, £/ha 1000 Net margin, £/ha y = -140x + 1763 R² = 0.43 P < 0.001 1500 y = -93x + 1533 R² = 0.40 P < 0.001 1500 500 0 -500 -1000 -1500 -2000 -2500 1000 500 0 -500 -1000 -1500 -2000 -2500 0 10 20 30 Variable production cost, p/L 0 10 20 30 Fixed cost, p/L 40
  24. 24. Production costs drive profit/ha 2008-09 2010-11 $5.21/kg $7.36/kg 2009-10 $6.16/kg 2011-12 $6.69/kg
  25. 25. Financial performance
  26. 26. Where does the money go? Overheads Property Feed 4% 14% 24% Forage machinery 6% 5% Machinery & power Forage 10% 4% Vet, med, & AI 5% 17% Labour 11% Livestock sundries Herd Replacement
  27. 27. The more pasture in the diet, the lower the cost of milk production 0.35 Production cost, £/L 0.30 0.25 US traditional Dk UK Ger NL Fr 0.20 0.15 Ire 0.10 NZ Aus 0.05 0.00 0 20 40 60 Percentage of grazed grass in diet, % 80 100
  28. 28. The more pasture in the diet, the lower the cost of milk production For every 10% increase in the percent of grazed grass in the diet, Production costs decrease 4p/L Production cost, £/L 0.35 y = -0.0006x + 0.28 0.30 R² = 0.98 0.25 US traditional Dk UK Ger For every 10% increase in the percent of grazed grass in the diet, Production costs decrease 0.6p/L 0.20 0.15 0.10 0.05 NL Fr Ire NZ Aus y = -0.0041x + 0.45 R² = 0.97 0.00 0 20 40 60 Percentage of grazed grass in diet, % 80 100
  29. 29. Total production cost, p/L Production costs decline with increased milk from forage in UK 50.0 y = -0.0028x + 37.8 R² = 0.19 P < 0.001 45.0 40.0 For every 1,000 L milk produced from forage, production costs drop 2.8p 35.0 30.0 25.0 20.0 15.0 0 1000 2000 3000 4000 Milk from forage, L/cow per yr 5000
  30. 30. Net margin increases with milk from forage in the UK 1500 Net margin, £/ha 1000 500 Every 1000 L milk from forage is 0 worth £340/ha -500 y = 0.34x - 726 R² = 0.27 P < 0.001 -1000 -1500 -2000 0 1000 2000 3000 4000 Milk from forage, L/cow per yr 5000 6000
  31. 31. Same in Ireland 4000 Net profit (€/ha) 3500 R2 = 0.42 3000 Every additional t DM/ha is worth 2500 €161/ha 2000 1500 1000 500 0 0 2 4 6 8 10 12 Estimated Grass utilisation t DM/ha 14 16
  32. 32. Profit drivers in successful dairy businesses – – – – – Milk yield/cow is not a driver of profit Focus on cost/kg milk or cost/kg MS Costs decline with increased pasture in diet Profit increases as milk from pasture increases Grow and utilise as much pasture as possible

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