1. o
standardSeptember2015
the
A CompanyPublished by: Promar International, Alpha Building, London Road, Stapeley, Nantwich, Cheshire, CW5 7JW.
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Benchmarking
can underpin
improvement
Promar UK Farm Business
Accounts Manager Carrie
Leech believes more
farmers should be getting
actively involved in
benchmarking.
All farmers will have been affected
by the recent price drop, the extent
of which depending on the
individual circumstances on farm.
As margins become tighter it is
vital to gain more control over
the technical and financial figures.
To gain this control, first we must
understand our figures. As a
method of achieving this,
benchmarking practices are
becoming more popular amongst
UK dairy farmers.
Areas for investigation
Benchmarking allows you to
compare the physical and financial
performance of your farm to the
performance of other similar farms
whether by farm type, farm system,
herd size, gross margins, profit,
yield or many other criteria. It will
allow you to determine how your
business compares and can be used
to identify areas for investigation
and improvement opportunities.
Equally importantly it will flag up
where performance is better than
being achieved elsewhere.
Benchmarking can provide the basis
for discussions with employees and
stakeholders and can be a great
motivator when things are
highlighted as going well.
Whether comparing to Mr Smith
down the road, Mr Jones 350
miles away, or the 30 others
operating similar systems to you
across the country, it is important
to benchmark realistically. You
need to compare to a realistic
sample of farms. Don’t benchmark
against average performance in
isolation. Always look at the top
20% or equivalent as this gives a
more challenging target. Ensure
your results have been calculated
in the same way as the sample
you are comparing against. It is
essential to compare like with like.
Benchmarking groups
While there are numerous data sets
that can be used for benchmarking
including dairy costings such as
Promar Milkminder, full farm
accounts like Promar Farm Business
Accounts and industry schemes such
as Interherd and AHDB Milkbench,
we are seeing an increased interest
in benchmarking groups.
Groups provide an opportunity
to meet and discuss issues and
concerns openly with others in
a similar situation to yourself in
an open but confidential
environment. Exchanging advice
or sharing procedures that have
been proven successful can help
identify where opportunities
might exist to change management
to increase efficiency or reduce
costs. The additional benefit of
groups which should not be
underestimated is the sincerity,
friendship and networks that are
so often created.
Develop a vision
Benchmarked results can help
develop a vision for a farm, to
challenge where a business should
be aiming. There are multiple
outputs of benchmarking
discussions but having the ability to
adapt and make changes will be the
thing that makes change happen.
Once change has been identified,
be solution focused, seek advice and
continue to stay connected with
your benchmarking counterparts.
Stay up to date with regulations
and when making decisions, be sure
to think long term.
Benchmarking using robust data
such as that produced by Promar
Farm Business Accounts is set to
play an increasing important role in
the development and maintenance
of durable dairy farm businesses.
Carrie Leech
UK Farm business Accounts Manager
Time to challenge our thinking
Living with volatility
What will define the next generation
of successful dairy farmers
Understanding of cost levels is
foundation of durability
Can dairy producer organisations
redefine the industry landscape?
Management data underpins
performance improvement
Benchmarking can underpin
improvement
WIN
£1200
of Promar
services

2. Many dairy farm businesses are
currently experiencing the most
volatility in prices than any
time over the last 21 years.
The chart below shows the average
annual price received. The annual
average smooths out the intra year
variation in price. However, the widening
and large divergence in milk price
currently being received by producers
highlights the limitations of referring
to average milk prices. It really can only
be used as an index to highlight the
general direction of price movement
and the rate at which this is changing.
Reforms of the CAP have left EU farmers
more exposed to the impact of global
prices which are driven by the
fundamentals of global supply and
demand. Currently we are in a perfect
storm. Demand has eased most
significantly from China which
accounts for a third of the global trade
in whole milk powder and a fifth of all
trade in dairy products. Yet at the same
time global milk production has increased
and production is forecast to increase
in most of the major milk producing
countries in the northern hemisphere
for this season.
The volatility being experienced is not
going to go away if anything the sector
is likely to experience more volatility
both in terms of the frequency of the
swings from high to low and the
amplitude between these highs and lows.
The whole of the milk supply chain
needs to get better at managing this
volatility to ensure the sector is resilient
and produces acceptable margins for all
efficient “partners“ in the supply chain.
Timing is crucial
Volatility is also not good for the sector
as it affects confidence and interferes
with longer-term strategic management
decisions e.g. when to make significant
capital investment in the business.
Making these decisions in volatile times
is challenging. Getting the timing
wrong might result in the business
experiencing financial stress, instead of
the positive impact the investment was
anticipated to deliver. To have a vibrant
and progressive sector it is important
that the business decision makers have
confidence in the future to enable
them to make these decisions.
This suggests to me the way in which
milk is procured and how the price is
set might need to change - possibly
using futures markets or other market
management tools. One other possible
way of producing a degree of price
certainty for all on the chain could be
for processors to put a percentage of
their annual requirement out to tender
with farmers or a Dairy Producer
Organisation bidding to supply that
milk at a price that leaves them an
acceptable margin. The processor
would then accept the lowest or
successively lowest bids until their
volume requirement was met.
The balance of milk required by the
processor would be acquired by a form
of “B“ pricing mechanism which might
be related to their market returns or
the spot market.
Well run, technically efficient
businesses with a good knowledge
of their costs of production are the
ones that a bank would wish to work
alongside. These farmers are also likely
to have longer term business and
personal objectives that all those
involved in running the business (and
often other family members) have
agreed and bought into. The objectives
will be reviewed periodically and the
plan adjusted as necessary. In other
words the business will be responsive
to changing circumstances. It might
even have a “plan B” in place in case
certain events happen.
The business will be able to
demonstrate ongoing ability to meet its
debt service requirements (interest and
capital repayment) not only at current
interest rates but for those requiring
longer term debt at what might be
more typical interest rates in the longer
term. Along with some sensitivity to
understand the impact of changes to
price of the major items affecting the
cash requirement of the business e.g.
milk price, feed and fertiliser costs.
A final thought – Farming
as a way of life is bad
business... but farming as
a business is a good way of
life and the wheel will turn
again for the dairy sector.
Roddy McLean
Director Agriculture - NatWest
2 3
Living with
volatility
Guest comment
Annual average ppl
Time to challenge
our thinking?
Promar International
Managing Director James
Dunn believes successful dairy
farmers must be prepared to
take a fundamental look at
their business and how best
to move it forward.
No-one should underestimate the
current milk price crisis. A price
cut of over 25% would have a
huge impact on any industry but
it is made worse in dairy farming
where the product is perishable,
produced from a biological system
that cannot be switched on and
off or scaled up and down within
a short time frame.
It is clear that the global market,
the primary driver of low prices
will not readjust quickly although
we may be seeing signs of early
recovery in the commodity
markets. We need to see a
significant increase in demand
such as China re-entering the
market or a reversal of the Russian
ban on EU products. Alternatively
a significant downshift in supply is
required and there are no signs of
this happening.
Supply and demand
Production in many dairying
countries is showing double digit
percentage increases, fuelled in
the EU by the removal of quotas.
In the UK we have increased
production by 1.6 billion litres in
the last twelve months, equivalent
to an additional 220 ex-farm
tankers a day, or 40 pints of extra
milk per head of UK capita.
As demand for dairy products is
static this extra milk will have to
eventually find its way onto the
global auctions, increasing supply
and further depressing prices.
Any extra production has to be
diverted to added value products
or to displacing imports if it is to
contribute to sustainably higher
milk prices.
The UK dairy farm model has been
based on producing more milk.
The trend line has been for more
cows producing higher yields even
if the number of farms has
declined. Currently we are seeing
a move to more herds adopting
3X milking to increase production,
presumably in an attempt to
spread costs over more output.
Reversing the trend?
One has to seriously question if it
is time to reverse this trend of just
producing more in the hope that a
market can be found willing to
pay an acceptable price. We
should be looking to more closely
align production to what the
processor requires and this means
having discussions with them.
This would have benefits for the
development of durable farm
businesses and for the overall
supply chain, allowing a managed
and sustained reduction in costs.
Thinking beyond the farm gate,
and increasingly this is where
successful businesses will focus
their time, a close relationship
with processors will be
paramount. The formation of
Producer Organisations offers a
chance to restructure the supply
chain and for farmers to have a
greater say in how their
production is used as we discuss
elsewhere in this issue.
Sometimes you need a catalyst to
change and the introduction of
quotas was a good example.
When told to produce 9% less,
dairy farmers looked to reduce
herd size but also cut back on
purchased feed inputs thinking
yield per cow would fall. The
actual outcome was that yields fell
by less than expected as forage
intakes increased leading to a
positive move in margins. Cows
can actually milk pretty well with
less reliance on the feed bag.
Increasing global volatility should
be an equivalent catalyst and I
think it might pay farmers to
fundamentally challenge their
current system. For a segment of
the industry would fewer cows
and a reduced reliance on
purchased feeds result in a more
durable system with reduced
costs? Milkminder data would
suggest that as yet few farmers
are thinking this way but possibly
more could? Whatever the system,
farmers must continue to breed the
best quality cows for the system.
Closer working with
customers
For others who see the current
environment as an opportunity,
they will need to consider how
they can align their business with
their processor and manage an
enlarged business to a very high
level to ensure efficient production
so they realise economies of scale.
Driving all of this will be a
willingness to think differently
and embrace change. Some new
research which is discussed later in
the Standard suggests successful
dairy farmers will increasingly
become less hands on, will
understand the importance of
teams and leadership and will
embrace technology and data
so their systems allow better
control of costs.
Before discarding this approach,
it is well worth pausing and
considering what has happened in
the arable and pig sectors. They
have been forced to reassess their
business model in the light of
industry changes and the outcome
has been more durable sectors.
There should be opportunities for
UK dairying to do the same.
Source AHDB Dairy
James Dunn
Managing Director
Roddy McLean
Director Agriculture - NatWest

3. The business of dairy farming is
evolving but what does this
mean for the people who will be
running those businesses?
Promar Senior Consultant
Andrew McLay reveals some new
research which suggests a change
in attitudes and skill sets will
help develop durable businesses.
As part of a recent study looking at the
future of European dairy farming after the
removal of milk quotas removal we spoke
with a wide range of farm consultants,
industry experts and academics in a range
of European markets.
One of the questions we asked was
‘which types of farmers exist today
and which types of farmers will exist
in the future?’ Interestingly, the
feedback we received rarely related to
a farm system, farm size or age of
farmer, but more towards certain
behaviours or skills exhibited by the
farmers themselves.
Wider skill base
Farmers in most countries have long
been recognised as being “jack of all
trades”. What became clear was that
successful farmers these days require
an even wider range of skills and
expertise - not just technical or
production skills, but also financial
management, people management
and leadership skills. This is especially
true as units get larger with a team of
staff being employed.
This feedback combined with some
existing views and ideas within Promar
enabled us to develop a four stage
model which suggests how farmers
will need to re-invent themselves as
the industry evolves.
The model categories farmer types
into four stages and is based on the
theory that as farmers become more
professional business managers and
leaders they move around the circle
from Stage 1 through to Stage 4.
This will require an investment in
training and other ways to acquire the
new skills required, an appreciation of
where help and support can be found
and an acceptance that successful
farming may involve less time
spent ‘getting hands dirty’.
The model is not based on ‘thousands
of interviews’ or ‘years of academic
research’, but we think it provides a
robust and practical framework for
looking at farmer types and development.
Our expectation is that Stage 4 farmers
are more profitable and are probably
more satisfied with their lifestyle then
many farmers in the earlier Stages.
Country variations
Our experience suggests these four
broad types of farmer exist in all
European countries, although the
actual proportions of each type vary
widely between different countries.
We would expect to see more Stage 1
and Stage 2 farmers in places like
Poland and probably more Stage 3
and Stage 4 farmers in countries like
the Netherlands.
With the removal of milk quotas, the
European dairy industry is likely to
become much more competitive.
We think one of the hallmarks of
successful dairy producing countries
in the future will be having a high
proportion of farmers in Stage 3,
if not Stage 4 of our model. The
challenge for almost all European
countries is to move more farmers, or
to help more farmers, move around
into the Stage 4 category.
To be a successful player in a
deregulated European dairy industry
the UK needs to continue to invest in
not only developing farms and
factories but also in developing our
human capital. The UK dairy industry
needs to make sure that we have the
best and brightest minds working on
and around UK dairy farms. This
includes attracting smart new people
to the industry, but also continuing to
develop those individuals already
working in the sector.
Longer term planning and a
detailed understanding of
costs will be foundations for
the development of durable
dairy businesses faced with
volatile milk prices, according
to Promar Principal Consultant
Peter Brown.
He argues that dairy businesses
need to review costs and technical
performance over at least a five year
time frame if they are to be best
placed to understand the impact of
market changes on their business.
“With volatile prices you have to
accept there will be good years and
bad years. This makes it vital that
you understand the ability of your
business to operate in both. This can
only be achieved by the development
of a long term plan focusing on the
requirements of the business.”
Peter says the starting point must
be to know your profit requirement,
saying businesses must generate
sufficient to cover private drawings,
capital repayment commitments
and tax. This is the benchmark
against which the whole business
should be assessed.
“The factors influencing the ability to
meet requirements are farm output,
milk price and production costs so
you need to understand how each of
these can affect the business over a
five year period. Of this list, total
output and production costs are
within a farmer’s control so this is
where their focus should be.”
Not always cost cutting
He says a review of costs may not
necessarily mean a drive to reduce
costs. Whatever is deemed to be the
average costs of production then by
definition, 50% of farmers will
already have costs lower than this.
“Some businesses will already have
lower costs while others are more able
to withstand a higher level of costs
and still meet profit requirements.
What is fundamentally important is
that you understand your cost base,
know why it is where it is and can
understand whether it is sustainable
for your business to work at this level.
Only then can you plan to strategically
reduce costs if necessary.”
Peter says looking at one year’s cost
of production in isolation will not
give a true picture or allow a
meaningful analysis. He comments
that a range of factors such as
weather and forage quality will
influence costs making a single year
unrepresentative. A good silage year,
for example, can increase yields and
allow savings on feed costs.
He advises looking at trends in costs
over at least three years as a base
for understanding business inputs.
Three years minimum
“Looking at three year’s costs will give
a more accurate picture by smoothing
out the fluctuations between years
and so provide a more reliable base
for decision making. A good starting
point is to compare cost per litre
against milk price received for each of
the last five years and working out
the profit per litre. How many year’s
did you make a profit in excess of
profit requirement. In the years when
profit requirement was not met, what
were the factors responsible?
“If cost base was the dominant issue
then look to reduce costs, but
remember that it may not need
drastic measures and it is important to
avoid short term cost cutting that
stores up problems for the future.”
He suggests many small, incremental
improvements can be achieved
quickly and with minimal investment.
Considering feed which is the
biggest single cost of dairy farming,
he says small changes such as
increasing available trough space,
keeping troughs clean to encourage
intakes and managing the silage
face better to reduce waste and
maintain quality can all have an
immediate effect on costs.
Include sensitivities
“Developing a five year plan for the
business will help assess the impact
of reducing costs or changing scale
of production on profit requirement.
In many cases cost per litre can be
reduced by planning and investing
wisely in farm infrastructure within
the five year plan to improve the
output potential from existing
livestock numbers or acres. It is also
important that the plan includes
price sensitivities so you can
understand how further volatility will
affect the business. What will be the
impact of a 1p increase in milk price
or a £10 fall in concentrate prices?
“A detailed plan including realistic
performance improvements and
price sensitivities will help develop
more durable dairy businesses,”
he predicts.
54
What will define the
next generation of
successful dairy farmers?
Understanding of cost
levels is foundation
of durability
“Successful dairy
producing countries
in the future will be
having a high
proportion of farmers
in Stage 3 and 4”
The four stages of farmer evolution
Andrew McLay
Promar Senior Consultant
Stage 1
Stage 2 Stage 3
Stage 4
Peter Brown
Promar Principal Consultant
Survivors
• Hands-on role, day to day focus
• Limited, often inherited knowledge
• Higher prices seen as way to
improve profit
• Limited engagement with supply
chain
Doers
• Hands-on role, day to day focus
• Rely on suppliers i.e. Feed Reps etc.
for advice
• ‘Working harder’ seen as solution
to improving profitability
• Some engagement with primary
buyer
Managers
•Evolving focus - skilled cow managers,
then finance managers, then people
managers
•Professional advice - vet, breeding, etc.
•Increasing scale and efficiency seen
as solution to improve profitability
•High engagement with primary buyer
Entrepreneur/Leaders
• Focus on leadership/team building/
innovation
• Innovation and value creation for
customer recognised as solutions to
improve profit
• Intense engagement with supply
chain and beyond

4. The specialist dairy business runs 205
Holsteins plus replacements. Over the
last few years they have made
considerable technical improvement
(see table), increasing turnover by over
20%, which has allowed them to
invest in the business to increase the
scale of operation.
“Like all dairy farms, they are being
impacted by lower milk prices but are
in a good position to really assess the
implications and plot ways to offset
as many of the consequences as
possible,” explains Promar Regional
Manager Emma Thompson who works
closely with the family.
“The aim has always been to drive
performance from the herd and we
have always used data to monitor what
is going on. Promar Farm Business
Accounts gives a really in-depth
breakdown of financial performance
while Milkminder lets us track physical
performance on a monthly basis.
“All cost areas are regularly evaluated
and compared to industry averages
to identify costs that are moving the
wrong way or are out of line with
the wider picture.”
Identifying opportunities
“Costs inevitably fluctuate year on year
but having a set way to analyses and
present information means we have a
clear picture on what is happening
and trends,” Emma comments. “This
means we can really probe costs and
find improvement opportunities.
“The process involves recording the
information and benchmarking with
whatever source is available. This
might be our own FBA averages,
Milkminder averages, Interherd or
RMS data for example.
“Once we have assessed current
performance we can identify areas
for improvement, develop a plan
with targets and closely monitor
what is happening.”
For example, in 2012 purchased
roughage costs were flagged as
being high at over £230 per cow.
“Despite the farm growing good
forages large quantities of additional
roughages were being fed. So we
challenged the practice.”
The all year round calving cows were
grouped as high and low yielders.
The high yielders went onto the best
grazing first, followed by low yielders.
Both groups buffer fed throughout the
summer. As a single TMR was produced,
it was providing more nutrients than
the low yielders required.
Big performance increase
It was agreed to change the system.
While low yielders are still turned out
in early April, high yielders are now
housed until the grazing wedge has
increased, usually a month later. While
high yielders are buffer fed when at
grass, the low yielders who now have
access to the better grazing are just
flat rate fed concentrates.
“Milk from forage has increased from
2157 litres to 3348 litres per cow.
Purchased feeds per cow have been
reduced to £40 and 25 more cows are
being carried on the same forage
platform. In addition to less purchased
feeds, other costs have been reduced
as less TMR is mixed each day, saving
labour and power costs.”
To achieve high levels of reproductive
performance the Hughes’ have been
using Genus ABS Reproductive
Management Systems since 2006.
“The combination of the technician,
the approach to serving cows and the
data to monitor performance means
we have been able to improve and
maintain a higher level of fertility,”
Andrew Hughes explains. “RMS data is
helping us improve further.
“Analysis of the data showed cows
were not transitioning as well as they
could,” he continues. “We were
moving fresh calvers direct from the
transition yard into the high yielders
and this was knocking them.
“We decided to erect a new building
with more transition group space and
room for fresh calved cows. Now fresh
calvers have a chance to settle before
joining the main herd and we are
seeing improved fertility as a result.”
Consistent high performance
In the last three years 21 day
pregnancy rate has averaged 25% with
64% heat detection rate. Currently
57% of the herd are in calf by 100
days in milk.
“The Hughes’ make use of a wide
range of data sources to manage the
business including FBA, Milkminder,
RMS, blood tests, monthly silage
analyses and a full 12 month budget
with price sensitivities included. They
know what is happening and can
assess progress against targets.
“If you want to improve you need
to understand performance and
there is no point collecting
information if you don’t use it.”
6 7
There is considerable talk about the
potential for Dairy Producer
Organisations (DPOs) to help restore a
balance in the supply chain between
producers and processors.
The industry has seen a concentration of
processors and retailers, leaving farmers
more exposed to global price forces.
For these reasons the EU has been
keen to encourage the establishment
of DPOs, seeing them as a way to
increase the bargaining power of
farmers within the supply chain.
What is a DPO?
A DPO will be a specific entity set up
principally to negotiate milk prices and
terms and condition of supply with
processors. The possible structure of
DPO falls broadly into two main types.
A ‘One to One’ DPO negotiates
exclusively on behalf its dedicated
member supply pool with one processor.
This is the model adopted by Dairy
Crest Direct. A ‘One to Many’ type of
DPO consolidates the supply of milk
from its members and then arranges
for it to be sold to different buyers.
By negotiating terms and conditions for
its members, a DPO has the potential to
increase returns as well as delivering a
more stable milk price allowing
members to run their businesses with
more confidence. It is likely a DPO
would negotiate on a wide range of
areas including constituent values and
hygiene quality, seasonality and
profile, volume bonuses, two tier
pricing, transport, indexation of prices
and production system. There is also
the possibility of selling all or part of
milk supply on forward contracts
underwritten through futures
contracts or with end user contracts.
A DPO will usually have at least 10
members but clearly there would be
benefits from having a larger group
negotiating for more farmers with a
larger total milk pool. Ideally 100% of
a processors supply base could be
represented through a DPO.
Challenges
While a DPO would seem to offer
some significant benefits and help
rebalance the supply chain, establishing
one is not straight forward. Perhaps
the biggest single challenge is that
they are not mandatory and there is
no obligation for a processor to
recognise any that are formed. In all
likelihood DPOs will be set up based
on partnering between existing groups
of supplying farmers and processors
rather than farmers setting one up
and then expecting processors to be
queuing up to trade with them.
Several processors and farmer groups
are already working successfully.
The key is that processors need a milk
supply that meets their product and
customer profile and this means they
will have to work with farmers.
Farmers need a milk processor that
offers security and is prepared to work
collaboratively so that they can fine
tune their systems to meet market need.
The actual process of forming a DPO
relies on considerable co-operation
which may not come easily to an
industry not used to the concept. Not
all producers will want to work with a
DPO and successful groups will require
outstanding leadership. The most
effective groups will really understand
the dynamics of the marketplace and
be skilled negotiators.
Confidence is key
Possibly the biggest barrier to a
successful DPO will be a general lack of
confidence in their ability to actually
achieve anything tangible and
sustainable. There is as yet little
compelling evidence from elsewhere
in the world that DPOs are being
effective or ineffective as it is still early
days. This will only be overcome by
the first groups getting off the ground
and demonstrating their effectiveness.
Do DPOs have a role to play? Almost
certainly yes as they give farmers the
voice they need, but currently lack, to
negotiate terms and conditions that
deliver better returns at the farmgate.
But they aren’t for everyone, won’t
appear overnight and require
considerable leadership and planning
with a commitment from farmers to
work together and with processors.
Producer organisations have proven success in other countries
and also in some sectors of UK agriculture, such as in horticulture.
Promar Principal Consultant Neil Adams considers the positive
part they could play in rejuvinating the UK dairy industry.
David Hughes who farms partnership with his sons Martin and
Andrew at Westwood Farm, Neston has made full use of regular
physical and financial benchmarking to achieved a sustained
increase in technical improvement which has underpinned
business expansion and helped generate funds for investment.
Aug 2013 Aug 2014 June 2015
Cows in herd 190 205 203
Yield per cow (L) 7843 8065 8037
Milk from forage (L) 2735 3221 3348
Concentrates fed (kg) 2346 2917 2239
Feed rate (kg/l) 0.30 0.30 0.28
Can Dairy Producer
Organisations redefine
the industry landscape?
Management data
delivers performance
improvement
Neil Adams
Promar Principal Consultant Andrew Hughes and
Emma Thompson