The title given to me for my presentation was “Expansion in Dairy Farming in Northern Ireland”. In this paper I will try to identify the key drivers behind the significant changes, which have occurred within Northern Ireland dairy farming, since milk quotas were introduced. I will use this information to see if there are lessons to be learnt, which may be applicable to the dairy sector in Republic of Ireland and help you approach the new era in farming post MTR with confidence.
As I mention MTR I will provide some background as to its implementation in Northern Ireland as there are differences with the approach taken compared to other United Kingdom regions. This will undoubtedly bring change but change is nothing new nor is it to be feared. Agriculture and particularly dairy farming is a dynamic and changing industry it has been and will continue to be so. Structural change is not a new phenomenon. Review the statistical data for any farming industry in Western Europe and this is clearly evident.
However, what is worth noting is the pace of change. In business it is not possible to stand still. If you do so, one of two things will happen. Either the business will be overtaken by the competition, become non-viable and cease production. Or if sufficient financial reserves have been built up and the owner enjoys being part of the business world, it will remain as a hobby but unlikely to be passed on as a profitable and sustainable business to the next generation.
Change is part of everyone’s life, it is a challenge and how you approach and deal with the challenge will dictate the level of success achieved.
Agriculture in Northern Ireland and indeed throughout Europe is about to face significant change as a result of the Mid Term Review of the Common Agricultural Policy. In Northern Ireland from 1st January 2005 support to farming will be decoupled, breaking the link between production and the financial payments received in the form of livestock or arable subsidies. The new era means that future farm profitability will be dictated by the returns from the market place. Farmers must make decisions on the scale and system of milk production based on market demand.
The Single Farm Payment on dairy farms is potentially made up of three elements. Firstly the historic reference amount based on the livestock subsidies and arable aid payments received in the years 2000–2002. Secondly, the flat-rate element calculated on the area on which entitlements are to be established on the 2005 IACS. The third part of the SFP is the payment, which will be made against milk quota held at 31st March 2005. These three elements will be amalgamated into the Single Farm Payment and allocated to an area of land thus creating entitlements. The SFP which dairy farmers will receive is intended to partly compensate for an anticipated fall in milk price arising from cuts in intention support price for milk products. As the dairy industry in the Island of Ireland has been heavily dependent upon butter and skim milk powder the cuts in intervention support are likely to be felt more acutely than other EU countries where there is less reliance on commodity world markets.
Background to Northern Ireland Agriculture
Agriculture in Northern Ireland is three times more important to the economy, accounting for 2.5% in 2003 of Gross Value Added (GVA) as compared to the United Kingdom as a whole. In Republic of Ireland the equivalent figure for agriculture as a percentage of GVA is 3% highlighting the importance of agriculture both the North and South of the Ireland.
In Northern Ireland the total agricultural area is just over 1 million hectares equating to 80% of told land area, with 70% of the 1 million hectares classified as LFA. The total number of farm businesses is just over 28,000 and is 6% less than in 2000. Average farm size is currently 38 hectares slightly larger than Republic of Ireland at 32 hectares, but significantly smaller than the United Kingdom where average farm size is 56.5 ha, Conacre land attributes for a third of the land farmed annually in Northern Ireland and has enable some farms to expand without the capital investment in land purchase. It is anticipated conacre values will fall post MTR allowing those who wish to expand to do so at more competitive land prices.
Of the 28,000 farms in Northern Ireland only 3,710 or 13% are classified as medium or large businesses with 2,633 of these dairy farms. Dairy farming provides on-farm employment for approximately 10,000 people including dairy farmers, other family members and employees. It produces added value of over £170 million annually. In addition the dairy herd produces 80% of the milk used by the Northern Ireland milk-processing sector, which employs over 2,300 people and contributes added value of £70 million annually to the Northern Ireland economy. When the supply of inputs e.g. feed, fertilizer, machinery, equipment etc is also taken into account it is evident that the dairy sector contributes to more than the £240 million added value each year. Therefore the ability of Northern Ireland dairy farmers to compete successfully has a significant impact beyond the farm gate in terms of employment and added value to the economy.
The Structure of Dairy Farming in Northern Ireland
In 1984 when milk quotas were introduced there were 8,083 dairy farms with an average herd size of 37 cows, producing on average 4,630 litres per cow. Over the next 10-year period, the total number of dairy cows reduced by 25,000 to stand at just over 270,000. There were almost 2,000 less dairy farms equating to on average 200 dairy farms leaving the industry each year. Average herd size and milk yield per cow only increased marginally to 44 cows and 4,930 litres respectively.
Northern Ireland had an initial milk quota allocation of 1,322m litres. However due to EU imposed cuts by 1993/94 the regional quota had fallen to 1,283m litres. Farmers had opted for a grass based production system seeking to maximise margin per litre. However with pending deregulation of milk marketing and the strengthening of milk price dairy farmers sought to increase output from the dairy herd. The availability of milk quota particularly from England coupled with positive encouragement from milk processors significant quantities of milk quota were purchased. Specific loans from either the banks or milk processors were set up with repayments periods over 5 years at 1% over bank lending rate readily offered to dairy farmers wishing to expand. For the 2003/04 milk quota year the volume held by Northern Ireland dairy farmers is just over 1,760m litres reflecting a 37% increase since the 1993/94 milk quota year. Whereas in the previous 10-year period only small increases had been recorded in herd size and milk yield the period 1994–2003 significant changes at farm level have occurred. Herd size increased year on year by on average of 1.5 cows with herd size now standing at 61 cows while milk yield per cows average 6,290 litres across all herds and this data is summarized in Table 1.
Table 1. Number and size of dairy farms in Northern Ireland 1984–2003
|
1984 |
1993 |
2003 |
| Total Number of Dairy Farms |
8,083 |
6,179 |
4,742 |
| Total Number of Dairy Cows ’000 |
298 |
273 |
291 |
| Average Herd Size |
37 |
44 |
61 |
| Average Milk Yield Per Cow (1) |
4,630 |
4,930 |
6,290 |
There is a wide range in herd size in the Province with 186 farms milking 9 cows or less but 80 farms now milking 200 cows or more. The definite trend is towards fewer farms with larger herds and is highlighted in Table 2. For the last full year of data the 773 largest dairy farms produced more milk than the 3,194 “smallest”. Some time should be taken to reflect on this as the implications for future development within dairy farming are socially and economically far reaching.
Table 2. Distribution of Farms and Dairy Cows in Northern Ireland 2003
| Herd Size |
Number of Farms |
Number of Cows
|
% Change in number of farms 1993–2003 |
| 1-19 |
622 |
7,448 |
-53 |
| 20-49 |
1,729 |
59,349 |
-42 |
| 50-69 |
843 |
48,921 |
-3 |
| 70-99 |
775 |
63,273 |
+22 |
| 100+ |
773 |
111,154 |
+110 |
As dairy farms specialize and get larger it puts into perspective the challenges, which must be addressed in developing social and economic policies in line with EU initiatives even within a small EU region like Northern Ireland. While average herd size has increased by 1.5 cows in Northern Ireland over the last 10 years the rate of increase has varied across countries. Just over 12% of dairy farms in Co Fermanagh milk 70 cows or more and the County has an average herd size of 39 cows. While in Co Down average herd size is almost 80 cows and 48% of the herds in the County milk 70 cows or more.
Why has Northern Ireland dairy farming recorded such expansion?
Some of the main factors, which have contributed to the increase in output at farm level are given below. These may provide an explanation as to how expansion has taken place and pointers for those considering expansion in future years.
- A milk quota regime in the United Kingdom allowing quota trading.
- The availability of milk quota from mainland UK with farmers ceasing production.
- Positive encouragement from milk processors to increase output.
- Expansion funded out of farm profits.
- Favourable borrowing terms from several sources of finance.
- Economics of scale for the best use of on-farm resources.
- Land prices limiting increase in farm size, dictating increased output per cow.
- Availability of “grazeable acres” within easy access of the milking parlour.
- Milk Price / Meal Price Ratio improving the economics of meal feeding.
- Competitive costs of alternative compared to grazed grass.
- Dairy cows genetics.
- The cost of marginal litres of production.
- Flexible and adaptable management systems.
Benchmarking
At the request of key opinion leaders within the industry, Northern Ireland dairy farmers themselves and the Ulster Farmers Union, Greenmount developed a dairy benchmarking program for use by all dairy farmers in the Province. The program is simple and straight-forward to use. It allows farmers to quickly and easily identify the strengths and weaknesses of their own farm business when compared to farms of similar scale and production system as well as “best-in-class” industry standards.
The information presented at the Conference will use data from these benchmarked farms to demonstrate the level of expansion and development, which is possible. Therefore it needs to be noted these farms are not representatives of the whole Northern Ireland dairy farming sector as Greenmount predominately works with the farmers who wish to develop and go forward. Benchmarking has been available since 1999 and a considerable number of farms have used the system each year. These form a valuable resource as “core” farms, where trends can be quickly noted regarding development at farm level year on year.
Over the last six years these common or “core” farms have increased herd output by almost 35% through a combination of more cows and higher milk yield per cow. This is despite a collapse in spring milk price and the difficulties presented by atrocious weather conditions during the summer and autumn of 2002. Remember also as dairy farming is a cycle there was a carry over of the effects of the very poor weather into 2003 as evidenced by both grazing and silage sward damage and poor cow condition.
What if these farms had not expanded? If the herds had maintained output at 1999/00 levels compared to 2003/04, herd profitability would be almost £14,000 less at £39,450 compared to £53,400. Even assuming costs of production could be reduced by 1ppl on these already efficient farms herd profitability would still be £8,700 less.
As is clearly evident the availability of milk quota has allowed the on–farm expansion of milk production in Northern Ireland. But what is the impact on profitability depending on different limiting resources. To answer this question I have considered the results from benchmarked farms who are in the top 10% of their chosen system of milk production i.e. a spring calving grass based system or a high input high output autumn calving system. The efficiency targets set for each system are listed below.
|
Spring Calving Grass Based |
High Input / High Output |
| Milk Yield (1) |
6,000 |
12,000 |
| Concentrate Feeding (kg) |
250 |
3,000 |
| Stocking Rate CE/Ha |
2.5 |
2.8 |
| Total Costs of Production ppl |
8 |
11 |
However to date these challenging targets have not been achieved. The results from the top 10% of dairy farms on benchmarking are 5,600 litres from 600 kilos and 9,800 litres from 2,800 kilos of concentrate feeding for the two systems. Table 3 summarizes the financial performance of these systems at a milk price of 17ppl (25c / 1at current exchange rate).Table 3. The Financial Performance of Dairy Systems
|
5,600 l
Milk Price 17ppl |
9,800 l |
| Output |
890 |
1,565 |
| Variable Costs / Cow |
275 |
663 |
| Variable Costs / Litre |
4.9 |
6.8 |
| * Overhead Costs / Litre |
4.0 |
4.5 |
| Profit / Litre |
8.1 |
5.7 |
| To generate £25,000 require |
|
|
| Milk Quota (litres) |
309,000 |
439,000 |
| Herd Size (cows) |
55 |
44 |
* excluding own and family labour
The results in Table 3 shows that grass based systems maximize margin per litre. But I pose the question do grass based systems maximize farm profit and allow expansion of the farm business? The answer I feel depends on what is the farm’s most limiting resource.
What is limiting expansion in milk production?
If this question had been asked several years ago many farmers would have replied milk quota. However this would no longer be applicable and it is more likely the answer in Northern Ireland is the availability of grazeable acres easily accessible to the dairy unit. Increasingly two other factors are limiting expansion and must not be ignored. Firstly the lack of quality labour for dairy herd management.
Secondly and presently occupying the thoughts of many dairy farmers is current and pending environmental legislation linked to the Nitrates Directive, which may put a stocking rate limitation as a result of N output per dairy cow. It is not possible to provide any further analysis on this topic as the Nitrates Action Plan is not published in Northern Ireland.
Using the data from the top 10% of farms in each system and the economic principle of maximize output to the most limiting resource the following conclusions can be made.
- Only where milk quota is the most limiting resource is herd profitability increased under the grass based system.
- Where land is limiting, profitability can be increased by over 20% by opting for more milk output per cow.
- At 170 kg of N per hectare, where cow numbers will be limited then the high output system produces the most profit per herd.
Know your costs of milk production
The results from benchmarking show a wide variation in performance and emphasize the importance of knowing the costs of production at individual farm level. Industry averages are useful as trend indicators but no farm business planning for a secure, profitable and sustainable future should use anything less than their own herd and farm performance results. Do not sail out to far from the safety of the shoreline on the bank’s boat based on industry averages—you do so at your own peril!
A survey conducted by the RABDF at this year’s Dairy Event in September 2004 indicated that two-thirds of milk producers in England and Wales do not know the costs of production. This is no way to plan ahead particularly when key decisions need to be taken on for example the use of the Single Farm Payment within the farm business or whether it is worth investing to comply with environmental legislation standards. This is why in conjunction with dairy farmers who had completed benchmarking and were wanting to develop the farm further, Greenmount developed the Business Challenge for Dairy Farmers. The “Challenge” deals with such issues as the differences between cash and profit, planning for profit and growth of the farm and financing development and expansion.
The results from Greenmount Benchmarking show a wide range in both physical and financial performance as highlighted by these few figures listed and emphasise the importance of understanding business management. Milk sales per cow per year varies from 3,810—10,150 litres, concentrate feeding 175—4,100 kilos and profit per litre ranging from–2 to 10ppl demonstrating the need for farmers to know their own farm business situation. When the results are studied in detail the following points can be made regarding successful development of the dairy business.
- A focus for year on year growth of the farm business.
- Increased specialisation recognising the need to develop the necessary business skills to manage such farms.
- Greater use of contractors for all farm activities including, slurry spreading, silage making, fertilizer application, calf / heifer rearing and contract growing of alternative forages.
- Benchmarking highlights a 4ppl differential in the value of milk sold so increased focus on breeding, feeding and herd management to improve components.
- The relative value of feed inputs particularly in light of the quantity and quality obtained from alternative forage production.
- Farmers must target top 25% performance—there is no future in below industry average performance.
- If your farm cannot achieve better than average performance or you view “the glass as half empty” seek another career over the next 2—3 years.
- When growing the business focus on investments giving the best return on time and money.
- No business can stand still, the business will either be left behind or die.
- Encourage “new thinking” onto your farm with “new blood” with drive, determination, initiative and innovation to tackle the issues of product quality, labour efficiency, environmental legislation and lifestyle.
- If you are managing a profitable but mature business invest off-farm to improve business wealth creation for the future, but enjoy and be interested in this off-farm investment.
- Adopt a positive realistic approach to your dairy farm business enjoying what you do.
- Farming will face new challenges but develop your farm business with confidence.
- Invest time and money in your family and yourself.
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