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Volatility and consequences for your farm budget in 2016

Bram Prins Published on 31 December 2015

Editor’s note: The following column is a quarterly update from Global Dairy Farmers, a network of farmers, companies and universities. Contributors from this global network of experts will begin with this issue to provide Progressive Dairyman readers with a quarterly update about events affecting dairymen around the world.

In countries such as New Zealand, Australia and the U.S., farmers are used to volatility in milk prices. Nowadays, we face the same situation in the European Union (EU). We, as dairy farmers, are not used to this. A consequence of this volatility is that we have to change our management decisions and management skills.

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As a start, it is important to be working from a farm budget. On our 300-cow farm in the Netherlands, we are used to it, but more than 70 percent of our dairy farmer colleagues around the world don’t use a budget. Besides this, our farm tries to create a cash buffer of at least two months’ savings.

This is not easy, especially recently, as we have all experienced unexpected low milk prices this past year. In our situation, we had to invest in a new milking parlor because of an increasing herd size and high maintenance costs of the former milking system.

Today, we are faced with the consequence that no space is left in our budget for new investments. Even more, we have to continue working with machines which normally would be replaced.

We recently completed our 2016 budget. We are working from a monthly baseline, and we compare realized results with the budget and the forecast. Within one month after the last day of the previous month, we make the financial results available to our management team. These, we feel, are best practices.

Another uncertain factor is manure policy. After the EU quota system was abolished, we are confronted with a new phenomenon – nutrient management restrictions. Or, as we know them, “phosphate rights.” These rights allow you to produce manure (containing phosphate) based on the number of cows and acres of land you own.

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For these rights, a historic production reference of manure produced in the year 2013 will be used. When you grow your dairy operation in the EU, this means you have to buy new “phosphate rights,” coordinate the sale of manure off-farm or have the needed amount of land to apply the manure in compliance with regulations.

At this moment, EU dairy farmers do not know the price and conditions for these rights because legislation governing them is not finished yet. For sure, it is a new way of restricting milk production in the Netherlands and an increase in the cost to produce milk.

The banks are very keen on farmers’ reactions to these conditions. This influences the line of credit banks will issue, given recent low prices. If you don’t have a good cash budget, a clear vision of how you will implement the new manure policy and a strategy to handle price volatility, you presently don’t receive extra cash money in the form of a loan in the EU.

More than 30 percent of Dutch farms presently have liquidity problems. The same situation can be found in other EU nations, such as Denmark and Germany.

Milk prices and manure policy are external factors to deal with. These are difficult to influence. The only way to try to change these will be by common negotiations together with our farmers’ unions.

How to deal with these factors yourself? It is easy to blame others, but we have our own responsibilities too. As I wrote, we are working on our 2016 budget now. For this we have to make estimations about milk prices, feed prices and other costs.

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We are calculating the budget with a projection for slightly increased milk prices for 2016. In the second quarter of this year, we especially expect to see an increase in milk prices. We anticipate that China will return to the international market then.

This will be because of their recent change from a one-child policy to a two-child policy and the use of the tremendous stores they bought in 2013 and have been drawing down since then. In our opinion, the increase in global milk production will slow down due to lower margins.

In some countries, meat prices are high enough that it is attractive to slaughter milk cows. Also, due to liquidity problems, some farmers are selling milk cows for cash.

Feed prices are difficult to predict. We are making calculations on the same level as we did in 2015. On a global level, there maybe will be a small shortage in feed.

But, on the other hand, in the Netherlands farmers cannot pay for feed in advance. At this moment, suppliers have problems finding buyers for corn silage, due to dairy producers’ lack of money. All of this means that making good predictions for a dairy budget is not easy.

Another issue in the EU is the relation between milk prices and feed prices, especially regarding feed efficiency. With the low milk prices, placing a focus on feed efficiency is important. With efficient feeding, milk production might increase in the EU by 1 to 3 kg per cow per day (about 2 to 6 pounds).

In our situation, every kilogram of milk produced per cow per day extra is worth €30.000 (about $32,970) more to our milk check’s annual base. Feed efficiency can be increased with improved feed components. What we are doing is calculating the cost of each feed component in the ration in relation to the milk price.

Another thing to watch for is the efficient use of a feed mixer. This is relevant to our farm’s situation. Feed companies suggest you start improving efficiency with the feed mixer. They expect an increase in milk production of at least 2 kg milk per cow per day (about 4 pounds) with the same amount of feed, if you’re not using your mixing as efficiently as you can.

In conclusion, focus your mind on the future of your dairy farm, not stories from others. Make a good financial budget for 2016. As I wrote earlier, there a lot of uncertainties for all of us, but at least you can work on the figures you can influence.

Stop blaming external facts and take the lead yourself by creating an adequate strategy for those things on your dairy farm that you can manage.  PD

Bram Prins and his family run a 300-cow dairy farm in the Netherlands. He takes care of the dairy’s management and strategic decision-making. He is one of four principal operators of Global Dairy Farmers. Visit the website to learn more about this organization.

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