This post first appeared online at http://www.thatsfarming.com on the 27th November 2017
Reading the press, one notices that we are again being regaled with more about dairy expansion.
Now I have no objections to expansion per se, if it is done in the right way, for the right reasons and fully considers all the factors that will impinge on such an investment decision going forwards.
I do not, however, agree with expansion when expansion is undertaken primarily to compensate for low farm-gate prices. Of course, in certain locations, scale can provide the solution, but Ireland is not one of them. It is a small country with a difficult climate and has major constraints in terms of land accessibility. I am greatly concerned that the upward trend in milk production is not because of the inherent profitability of the sector but due to farmers trying to compensate for poor milk prices by expanding. And since April 2015, there have not been very many months where the milk price has covered the full costs of milk production. In such a farm-gate-price environment, expanding to mitigate market price shortfalls can only go so far before the wheels fall off the cart.
Following a similar line of thinking, switching to dairy from beef or tillage because the latter are unprofitable is not a reason to move into dairying. As with dairy farming itself, a part of these sector’s problem stem from an inherent lack of production scale. Elsewhere, this small scale is compensated for by focusing on high-value markets whereas in Ireland a lack of suitable routes to markets to the right consumers inhibits the implementation of such a compensatory strategy.
Hence with my over 30 years of experience of farm business planning and investment analysis, rather than write a lengthy discourse about the pros and cons of expansion, I thought I would just list a few of the many questions I would ask someone who was considering investing in dairying.
The available route to market options
- What is the market focus and product mix of the processors who can purchase your milk?
- Will the processors be able to add value and, if so, are they structured to pass on the benefit?
- Are the processors able to pay their suppliers an attractive milk price from sales revenues alone?
- Can you establish a past track record of the milk price, the seasonality and stability that your route to market options have delivered? Can this be predicted for the next few years?
- Have you established downside price scenarios and evaluated their cashflow implications?
- Is the structure of the processor and its milk suppliers competitive within the markets it supplies?
- Will the processor have to change its product mix to meet market changes in the medium-term?
- Are you willing to accept the rigours of year-around-milking if that becomes necessary to supply milk into a higher-value, more rewarding, consumer-products-focused supply chain?
- Can you relatively easily change milk processor if it fails to deliver the milk price that you need?
- If the routes to market available to you fail to deliver for your business, do you have a Plan B?
The constraints on the farming business
- Within the context of the land and farming resources available, are you able to create a business of sufficient scale to be competitive within the overall market chosen by your milk processor?
- Farm land is usually a major constraint. Can it be accessed at realistic and competitive prices?
- Are you able to operate with a common-sense buffer for grazing and forage and slurry storage?
- Will labour availability impact upon your chosen business model? Will the business be able to sustain the employment of third parties to enable you to manage your work/lifestyle balance?
- What is the possibility that constraints will be placed on the business by legislation relating to GHG emissions, nitrate seepage and animal welfare within the next decade?
- Will you be able to invest to mitigate the consequences of such constraints? If not, will the farm business remain viable in an imposed-change operating format?
- Have you been able to obtain totally independent, experience and qualified investment advice?
- Is your family willing to provide the finance to maintain the farm through any bad times ahead?
- If loan finance is required to fund the investment and the farm, land and, possibly, the house has to be offered as collateral, do you fully appreciate that these will be imperiled by loan default?
- And the toughest question of all; are you considering dairying because you do not know how else to utilize your land? Should you be considering leaving farming altogether?