07 July 2015 | Online since 2003

Cost plus contracts won t ensure dairy future accountants warn



10 July 2012 16:06:19|Cattle,Dairy,Finance,News

Cost-plus contracts won't ensure dairy future, accountants warn


The latest round of milk price cuts angered farmers and the associations, particularly at a time when the costs of production are rising. Agricultural accountants are warning farmers that before they queue up for retailers' cost-plus style contractors, they must ensure the sums add up.

“The gap between cost-of-production contracts and mainstream suppliers has never been greater – indeed, cost-plus prices have increased while non-aligned prices have dropped by 4p/litre. It would therefore be easy to assume that cost-based contracts are the future for the dairy industry. But that can only be the case if all of a farm’s true costs are included in the calculation.”

And so far, every model that Old Mill has seen falls far short of those true costs. Some include a notional salary for the producer, but it is usually only pegged at about £15,000 a year.

“Considering the high level of skill and dedication dairy farmers put into their business, they should command a salary of at least £35,000, and potentially up to £50,000,” says Mr Butler. “A good herdsman will cost £40,000 when you take into account accommodation and taxes – so the person actually running the business is surely worth more than that?”

But the biggest shortfall is the lack of proper costing for capital involved in the business. “If you were to go and buy or rent a farm with cattle and milking facilities, it would cost an enormous amount,” says Mr Butler. “Even families who have invested over a number of generations to build up equity without debt should include the opportunity cost of that capital, as it could be invested elsewhere to give a far greater return than dairying.

“No supermarket or processor would invest in facilities and ignore the cost of that capital when drawing up budgets,” he adds. “And farmers should not be any different.” Say a new entrant borrowed at 5% interest to set up a dairy enterprise at £7500/acre. Assuming they take a modest wage of £30,000 a year, they would need more than 40p/litre to just break even.

“Some might say that is unrealistic, and yet we wonder why there are no new entrants in the industry,” says Mr Butler. “Clearly, the low milk price makes it completely unviable for all except those who are prepared to accept a pittance wage with no return on the thousands of pounds of capital invested in their business. That surely is not a model for the future.”

Of course, milk prices do have to take some reference from global dairy commodity markets, he adds. “But there are issues beyond pure financial gain to be considered. Liquid milk is a staple food requirement, and if retailers do not pay enough to ensure a sustainable future for the industry, it will be to the detriment of the entire nation.

“It is essential that consultants who work with the supermarkets producing these cost-plus contracts ensure that their model is both complete and accurate, and reflects the true cost of production. To do anything other than this will be a disservice to the industry they claim to support.”

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