There are a number of income redefining issues in play at the moment that every dairy farmer North and South of the border needs to assess for themselves and their family.

Issues that are common to all farmers are falling milk price, rising costs, redefinition of an active farmer, land leasing concerns, and capital expenditure. Don’t forget existing loan repayments, rising drawings or some other family event might also have to be paid for.

One could get very depressed if all of the above had to be addressed on any particular farm. If they do, then you are better off facing up to the challenge and try to address the problems one by one – at least all those that can be addressed by the farmer.

We can’t do that much about milk price, but we can restructure loans, we can question costs and we can stress test the farm’s business plan to try to get through a potentially very rough period in output.

The first step in completing a business review is to make up your mind that you actually want to look at your cost and output structure. Take that first step this week and start gathering the relevant information.

If you need help, there are people out there – advisers and consultants willing to help. Yes, they need to be paid, but the return you get on that can, at the very least, keep your business alive or in the good output years, return high profits by reducing costs and improving output long term.

Both CAFRE in the North and Teagasc in the South have software packages where you can input various assumptions and the resulting information on cashflow and balance sheet can be developed. However, the line “rubbish in, rubbish out” holds true so make the assumptions as real as possible.

A plan is all about what assumptions you put in at the start. If one of the assumptions you put in suggests you will grow 15t of grass and you haven’t exceeded 10t per hectare in the last three years, then the outcomes of that plan are useless, as it is completely make-believe.

The plan

There are some issues that are specific to farms, such as labour concerns, poor fertility, low tonnes of grass grown, poor soil fertility, etc. A farm physical and business plan should highlight for you the key areas that the business needs to improve on.

It doesn’t have to look 10 years into the future, but it should attempt to look three to five years down the line.

In order to do this, it may be necessary to look three years back and see what physical performance has been achieved to date, given a range of weather and milk price.

Once you have the bones of a plan, then it is possible to stress test that plan at various milk prices. We have seen over the last five years milk prices vary by almost 50% North and South, so a poor milk price year can have disastrous effects on cashflow, but if the business model is strong enough, then the average to good milk price years should pull the business through.

The business plan should allow you to see what issues need to be controlled or looked at again. Having £40,000 or €40,000 on a constant overdraft is very expensive money and can get even more expensive if it gets bigger.

Do you need to talk to the bank now in anticipation of low output prices? Restructuring now could take a lot of pressure off the system, especially for growing businesses that are asset rich (all money tied up in animals), but cash poor.

A plan should be a work in progress all the time. It should never go up on the shelf and be left to collect dust. It needs to be revisited and tweaked, so that your business objective and mission is clear to all concerned and, if nothing else, you remind yourself what is important to your business.

With the global decline in milk product prices, the effects on your business could be significant. Can your business ride out the decline in farm output?

Milk prices

We don’t know where milk prices are going to go next year or the year after and nobody is willing to say definitively what they expect, but the objective of business planning is to stress test the business at different milk prices and see what happens.

This means you need to test a range of prices. Some farmers will improve milk output prices for their business over time by improving milk solids and milk quality. Breeding for milk solids is a long-term breeding decision, while milk quality can be managed from day-to-day.

You can see in Figure 1 and 2 where Northern and Southern milk prices have averaged over the last 10 years.

You could make the assumption that milk prices are on a new level (if you take the last five years), but given where markets are now, maybe stress-testing your plan at lower prices is worthwhile.

The reality is that input prices have risen significantly over the last few years also, so you need to take that into account when factoring what margin your business will have.

Some farmers with higher milk solids and higher milk quality can factor and depend on a 4c to 5c/litre premium over the base price shown in this article, but that takes years of planning and breeding.

You can’t just turn that tap on – unless of course you decide to sell and replace your existing herd.