KIDWORTH DAIRY FARM

CASE STUDY

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KIDWORTH DAIRY FARM Kidworth Dairy Farm is at a crossroads. Long term survival is in doubt. This family farming business has been ticking away for generations but the increasing trading volatility and uncertainty are rapidly putting the Kidworths farm viability in doubt. If we cannot help them create a new beginning, what does their long term future look like? On top of the extremely tough trading environment there has been a recent change in the family dynamic with the next generation knocking on the door and now the family business needs to begin the process of overcoming the challenges of being a price taker in a global commodity market place. As an owner occupier, this business, like many, has actually seen its equity grow in recent years, but this has all been down to land price inflation rather than positive cash flow. Robert and Heather Kidworth’s year ahead and beyond will be an extreme challenge which will need some external thinking to navigate the way ahead. They will need new opportunities and thoughts put in front of them immediately as they attempt to navigate their family through the current crisis as well as setting the business on a stronger course to deal with the globalisation of their industry. They need help to identify what their current business is capable of and how they can ‘future proof’ their cashflows and balance sheet.

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THE FARM   

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220 acre ring fenced block of land. Ploughable pasture land predominantly grade 3. Excellent grass growing area of the country. Equipped with a range of buildings including parlour, cubicle sheds and loose housing. Limited slurry storage and adequate silage storage. The business has invested in modernising buildings over the years, so they are usable, however the layout is not ideal for the current setup and makes further expansion on site difficult (see plan). Farmhouse is within the farm steading. Habitable but in need of modernisation. The farm is well fenced, drained and maintained. The farm has recently been valued at £2.2m as a whole. Further 150 acres of similar land rented from neighbouring unit. Land lies into the home farm. This was a 5 year tenancy with 3 years remaining. Rent is £190/acre. No buildings but includes a small cottage. Land class similar to the owned unit.

THE SYSTEM  

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180 dairy cows in the herd. This has grown from 150 in the last 24 months and has grown from 130 over the last 5/6 years. Steady growth from retained heifers, and with a bigger increase in cow numbers in 2013/14 when eldest son returned home. Forecast 12 months milk production for the 2015/16 financial year is 1.314m litres with traditional Holstein Friesian cows averaging 7,300 litres of milk sold from an all year round calving composite system. Cows tend to be out at grass from late March for as long as possible. There is no 'system' around the pasture management. Breeding policy is top 50% of cows served by Holstein Friesian bull with bottom 50% to beef bull. Heifer calves retained for own replacements. All other calves retained and reared to heavy stores and sold at around 18 months of age. Stocking density is relatively low. The business can conserve plenty of forage and indeed may sell some at times. Historically milk was sold to Dairy Farmers of Britain and the business lost money on the demise of their milk buyer. They now sell to a regional buyer on a commodity type contract which has recently had A/B pricing introduced. There are no aligned contracts available in their area.

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THE FAMILY   

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Robert (60) and Heather Kidworth (59) inherited the farm from Robert's family. They own all of the land, buildings and farmhouse. They have 3 children, John (28), Tom (25) and Alison (24). John is very well educated with a degree in Mathematics. Following graduation he worked his way to a senior position in the insurance industry. Despite being successful, John disliked his chosen career and returned home to farm with his family 2 years ago. Prior to this John took a passing interest in the farm but was not actively involved. It is clear that he thinks about money and farming differently to his mother and father. John is highly literate in financial affairs and is very focussed on targets and outcomes. John has around £100,000 of cash in the bank from the sale of his house. Tom left school at 16 to come home and milk cows. He is very keen on livestock. He still lives with mother and father, however he no longer works at home, instead he works at a dairy farm nearby to earn more money. This was also driven by John returning home. Robert and Heather also have concerns that Tom just isn't up to the job of running a farm business. Alison works in nursing in Manchester and is recently married. She is not interested in the farm but wants a family and home ownership in the near future. Parents would like to help with a house purchase in future. Robert and Heather have no formal succession plan in place with the family. Whilst they have tried to keep the unit relatively modern, Robert and Heather also have very traditional views on dairy farming. There is some conflict with John over the future direction of the business.

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FAMILY AND FARMING FINANCES 

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The last 6 years annual accounts demonstrate that the business has stagnated during the period. The increase in net worth is noted at £79,061 over the actual 6 year period - an average of £13,176 per annum. The projections for the accounting year 2015/16 suggests a decrease in Net Worth of £65,186. This wipes out 82.5% of the previous 6 years gains in one financial period. In reality equity will have increased significantly, but only due to land value inflation. Net worth according to the projected 2016 annual accounts is £854,364. A Farmers Statement of Affairs notes that this figure is much closer to £2.2m due to undervaluation of land in the balance sheet. The business has net negative cashflow of £149,399 over the past 7 years. With £93,758 of that expected to be realised in 2015/16 alone. The business has a £188,961 bank loan with c.12 years remaining. It also operates a £100,000 overdraft facility with a balance very close to the limit – this will need to be extended to £150,000 to accommodate current losses projected by the financial year end. The bank holds security over the farm for the borrowings. Whilst the loan has been reducing, the overdraft has been rising at a faster rate to accommodate the ongoing cash losses. In terms of assets the business is not heavily geared, however with a record of cash shortfalls the ability to repay long term debt is in the balance. Trading conditions have been relatively benign up until recently. The business was most profitable in a topsy-turvy year of 2013/14 which started with a shortage of forage and high feed prices and progressed to a high milk price giving a respectable year-end profit. 2014/15 outturn was also very good with another profitable year noted. Milk income held up despite a drop in price as extra litres came through and significant price drops were towards the end of the financial year. Increased store cattle sales also increased output during the year. Projections for 2015/16 are looking very concerning at the moment as milk price continues to slide. Although this may be the low point of the current trading cycle, there is clearly a long run reduction in those terms of trade. With this in mind we have to ask ourselves, is this business in terminal decline without some action being taken?

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CHALLENGES

 What should this business look like to be competitive in a volatile global market?

 How does this business pass over from one generation to the next, is the burden of succession and land ownership holding British dairy farming businesses back and why is that the case?

 How can this business get through to the next upturn in prices and then how can it reorganise to have long term sustainability?

 If this is representative of a typical UK family dairy farm, then what is fundamentally flawed with the structure of the British dairy industry and how can that be improved?

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FARM FINANCIAL DATA CASHFLOW STATEMENT Funds Flow

Mar-16

Mar-15

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

- 22,822 13,443

81,818 15,992

81,829 12,990

35,280 14,489

40,743 14,928

31,974 14,032

4,583 16,509

- 9,379

97,810

94,819

49,769

55,671

46,006

21,092

(Increase) / decrease in stock (Increase) / decrease in debtors Increase / (decrease) in creditors (Increase) / decrease in investments

- 29,050 6,705 882 -

- 33,800 274 2,731 -

- 12,000 - 4,552 1,142 -

- 14,750 - 2,554 2,792 -

- 2,400 - 4,363 4,381 -

- 7,800 - 1,107 305 -

- 3,856 325 -

Cash generated from trading

- 30,843

67,015

79,409

35,257

53,289

37,404

17,561

Fixed assets purchased Receipts from sale of fixed assets Net inflow/(outflow) from bank loans Net inflow/(outflow) from other loans Net inflow/(outflow) from HP

- 13,952 - 6,600

- 58,000 25,000 - 13,207 17,400

- 5,000 1,500 - 12,501 - 9,000

- 18,000 6,000 - 11,835 3,000

- 35,000 15,000 - 11,202 15,000

- 10,604 - 4,500

- 10,038 - 4,500

- 20,552

- 28,807

- 25,001

- 20,835

- 16,202

- 15,104

- 14,538

Net drawings and tax

- 42,363

- 55,311

- 37,342

- 35,054

- 38,377

- 26,500

- 32,506

Net moment in funds

- 93,758

- 17,102

17,066

- 20,632

- 1,290

- 4,200

- 29,483

Net profit for the year Depreciation

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Accounting Year Ends Average Cow Numbers Production per cow Total litres sold

Mar-16 180 cows 7300l/cow 1,314,000

Mar-15 180 cows 7200l/cow 1,224,000

Mar-14 170 cows 7100l/cow 1,156,000

Mar-13 150 cows 7000/cow 1,020,000

Mar-12 140 Cows 6900l / cow 910,000

Mar-11 130 cows 6800l/cow 845,000

Mar-10 130 cows 6700l/cow 845,000

275,940 28,600 2,400 71,700 7,000 5,500

356,400 28,600 2,400 65,850 29,050 5,500

359,686 30,800 2,400 19,000 33,800 5,500

305,059 18,325 2,400 18,500 12,000 3,500

274,412 19,000 2,400 17,500 14,750 3,500

222,061 21,000 2,400 16,500 2,400 3,500

208,772 23,000 2,400 16,000 7,800 3,500

Sales Milk SFP Other subsidies Cattle sales Cattle purchases Valuation change Other income Gross output

391,140

487,800

451,186

359,784

331,562

267,861

261,472

Variable costs Haulage Fertiliser, seed & sprays Feedstuffs Veterinary & AI Auction mart commision Dairy Total variable costs

1,325 30,000 170,820 21,961 1,452 13,304

PROFIT AND LOSS ACCOUNT

Gross margin

1,403 29,808 155,520 23,252 1,538 14,087

1,307 27,761 132,770 21,656 1,432 13,120

1,349 21,000 140,450 17,814 1,672 10,731

1,510 19,320 114,550 16,923 1,484 9,949

2,022 15,770 86,398 14,489 1,283 7,871

1,188 14,575 85,792 15,610 1,306 7,225

238,862

225,608

198,045

193,016

163,738

127,834

125,697

152,278

262,192

253,141

166,768

167,825

140,026

135,775

Power & labour costs Wages Contracting & casual Machinery fuel & oil Motor expenses Machinery repairs Licences & insurance Hire of equipment Heat & Light Depreciation Total power & labour costs

32,500 29,388 11,636 3,400 8,340 390 875 7,500 13,443

32,500 31,116 12,320 3,352 8,830 413 927 7,245 15,992 107,472

31,700 28,980 11,474 3,122 8,224 385 863 6,747 12,990 112,696

31,100 23,316 10,220 3,102 7,820 451 1,007 5,801 14,489 104,485

28,600 21,879 9,545 4,938 6,681 486 322 6,140 14,928 97,307

20,000 18,829 6,633 3,507 6,417 561 706 5,272 14,032 93,520

19,700 18,556 5,748 3,691 6,610 493 506 5,098 16,509 75,957

76,910

Premises costs Repairs & renewals Rates & water Insurance Total premises costs

13,902 1,954 3,000

14,720 2,069 2,912 18,856

13,709 1,927 2,712 19,701

9,694 2,014 2,485 18,348

9,030 2,642 2,540 14,193

8,634 2,364 2,076 14,212

9,428 2,480 2,029 13,075

13,937

Sundry Telephone Office expenses / PPS Sundry Bad Debts Accountancy & Professional Total sundry

800 187 1,881 2,400

Total fixed costs Profit pre rent & finance

778 198 1,992 2,400

724 185 1,855 2,400

735 120 1,452 2,250

725 142 1,229 2,100

707 156 1,117 1,900

697 121 1,070 20,884 1,800

5,268

5,367

5,164

4,557

4,196

3,881

24,572

131,596

137,765

127,997

116,057

111,928

92,913

115,419

20,682

124,427

125,144

50,711

55,897

47,113

20,356

Rent & finance costs Rent Bank interest Loan interest Hire purchase interest Bank charges Total rent & finance Profit

28,500 2,700 10,804 1,500

28,500 1,000 11,549 960 600

28,500 1,000 12,255 960 600

950 12,921 960 600

600 13,554 600 400

587 14,152 400

250 14,718 405 400

43,504

42,609

43,315

15,431

15,154

15,139

15,773

- 22,822

81,818

81,829

35,280

40,743

31,974

4,583

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BALANCE SHEET Balance sheet

Mar-16

Tangible fixed assets Land & buildings Plant & Machinery

850,000 76,177

Current assets Stocks Trade debtors Bank current account Current liabilities Trade creditors Hire purchase Bank current account Bank loan

Mar-15

926,177

280,750 22,995

850,000 89,620

939,620

251,700 29,700 303,745

27,741 19,800 139,056 188,961

Mar-14

375,558

850,000 72,612

922,612

217,900 29,974 281,400

26,859 26,400 45,298 202,913

Mar-13

301,470

850,000 82,102

932,102

205,900 25,422 247,874

24,128 9,000 28,196 216,120

Mar-12

277,444

850,000 84,591

934,591

850,000 79,520

214,018

188,750 18,505 -

300,280

15,813 23,340 251,658

191,150 22,868 231,322

22,986 18,000 45,261 228,621

Mar-11

314,868

20,194 15,000 24,630 240,456

Mar-10

929,520

850,000 93,552

943,552

180,950 17,398 207,255

290,811

198,348

15,508 4,500 19,140 262,262

301,410

854,364

919,550

893,042

848,555

848,329

845,964

840,489

919,550 - 22,822 - 29,000 - 13,363 854,364

893,042 81,818 - 34,000 - 21,311 919,550

848,555 81,829 - 31,000 - 6,342 893,042

848,329 35,280 - 29,000 - 6,054 848,555

845,964 40,743 - 29,000 - 9,377 848,329

840,489 31,974 - 26,500 0 845,964

868,412 4,583 - 26,500 - 6,006 840,489

Financed by: Capital account b/f Profit / loss Drawings Tax & NI Capital account c/f

FINANCIAL SUMMARY NOTES 2009/10

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Moved milk buyer as Dairy Farmers of Britain went out of business, causing significant business interruption and loss. Low labour costs as only one employee plus family including one son. Milking 130 cows with 6700 litres per head sold.

2010/11  

Static year with little to talk about. Cow numbers static at 130, but genetic improvements giving 100 litres sold per cow increase in yield to 6,800 litres per cow.

2011/12   

Milk price improvement to 28ppl. Genetic gains and feed improvements again made, with yields up a further 100 litres per cow to 6,900 litres. Cow numbers up by 10 in response to better milk price. Extra cash being generated so a telehandler was changed for £35,000 with a £15,000 trade in with balance financed over 3 years via HP.

2012/13  

Further increase in cow numbers to 150 (+10) with yields now up to 7,000 litres per cow. Difficult climatic year so a poor grazing season ensued with higher relative feed costs incurred to compensate.

2013/14     

Opportunity to rent 150 acres of neighbouring land taken. Cow numbers increased to 170 (+20) with yields at 7,100 litres per cow. Beef X calves retained to make us of extra land. John returns home to work. Tom leaves farm to work for neighbour for more money.

2014/15

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Cow numbers now up to 180 (+10) with yields at 7,200 litres per cow. Store cattle sales are significantly higher (+£45k). Milk price at 30ppl so generating significant cash. Tractor changed at £58,000 less £25,000 trade in and financed over 5 years. Helped to keep tax down.

2015/16 (Projected)    

Numbers static but yields up to 7,300 litres per cow. Milk price down 30% to 21 ppl. Profits down by £100,000 in the year resulting in cash shortfall of £93k. Erosion of equity to live and keep business operating.

THE PROBLEM

SIX YEARS OF STEADY PROFITABILITY SEEN, ALTHOUGH ONLY CASH POSITIVE IN ONE OF THOSE YEARS. 2015/16 WILL WIPE OUT 82% OF THE GAINS MADE IN PREVIOUS 6 YEARS. PLEASE SEND YOUR COMPLETED COMMENTS BY EITHER EMAIL TO [email protected] OR BY POST TO ROBERT CRAIG, CAIRNHEAD FARM, AINSTABLE, CARLISLE, CA4 9RP

CAPTURE YOUR THOUGHTS ON THE CHALLENGES HERE

Thank you for helping generate new ideas, We hope you enjoy the problem solving …….…

Please feel free to expand your answers beyond the boxes in this study What should this business look like to be competitive in a volatile global market?

How does this business pass over from one generation to the next, is the burden of succession and land ownership holding British dairy farming businesses back and why is that the case?

How can this business get through to the next upturn in prices and then how can it reorganise to have long term sustainability?

Thank you for helping generate new ideas, We hope you enjoy the problem solving …….…

If this is representative of a typical UK family dairy farm, then what is fundamentally flawed with the structure of the British dairy industry and how can that be improved?

KIDWORTH DAIRY FARM MAPS Thank you for helping generate new ideas, We hope you enjoy the problem solving …….…

Thank you for helping generate new ideas, We hope you enjoy the problem solving …….…

Thank you for helping generate new ideas, We hope you enjoy the problem solving …….…