LFA Hill Cattle Study Extension 2005

4. STUDY RESULTS

The following study results are the actual costs of suckler cow production on the farms surveyed in Scotland for the 2005 year, compared with those analysed in the 2004 study year. The results section contains a weighted average gross margin comparing 2005 results against 2004 results followed by performance league tables showing the relative physical and financial performance for each participant. Average performance was calculated for the top third, bottom third and whole sample to illustrate the range of performance between the participants.

4.1 HILL CATTLE PRODUCTION

This section analyses the physical and financial performance of the 19 suckler cow enterprises in the 2005 study compared with the 32 suckler cow enterprises in 2004.

The herds were mainly spring calving although some also had cows calving in the summer and autumn.

The herd size in 2005 varied from 14 cows to 409 cows, with an average size of 84 cows. In 2004, the average size was 71 cows, with 12 cows in the smallest herd and 369 cows in the largest.

One participant was organic - HCS 27.

In accordance with the SSSM, the main factor in calculating the output from these herds was the transfers of weaned calves out of the herd. As most herds kept their calves until a much older age, the sale values were unavailable; transfer values were used to estimate output were appropriate.

These transfer values relate to calves that were transferred out of the breeding herd to store or finisher enterprises. It was assumed that all calves were transferred at weaning and that the value of the calf at transfer was £250 for a heifer calf and £300 for a steer calf. None of the participants kept male calves entire. This practice was maintained from the 2004 study.

In addition to calves being transferred out of the suckler cow enterprise some herds also transferred home bred in-calf heifers into the enterprise as replacements. These were valued at £650/in-calf heifer.

These transfer values are based on market values for stock of the appropriate class at the time period the study period was in operation.

They are meant to represent reasonable estimates of the livestock values for each class of animal in the absence of actual prices received.

4.1.1 Weighted Average Gross Margin

The table overleaf shows the weighted average gross margin achieved by the 19 herds included in the study in the 2005 calendar year alongside those analysed in 2004.

The table shows that the weighted average gross output across all the herds was £367/cow in 2005, dropping to a net output of £293/cow when adjusted for replacement charges and weaned calf valuations.

Variable costs were £120/cow in 2005 compared with £127/cow in 2004.

Giving a Weighted Average Gross Margin of £172/cow.

The variances seen in each of the major revenue and cost centres that combine to produce the gross margins are discussed in detail in the next section.

Table 5: - Hill Cattle Production - Weighted Average Gross Margin

1) Sales are negative due to purchases of calves.
2) The female calf transfer value was £250.
3) The male calf transfer value was £300.
4) The transfer value for heifers, which had calved, was £650.
5) LFASS has been adjusted to account for the amounts due to each enterprise.
6) Headage payments include SCPS, Extensification and SPS in 2004 and SBCS only in 2005.
7) A calf valuation change has been introduced to account for changes in trading stock valuation.

The weighted averages shown do not compare exactly like with like as they show 19 enterprises in 2005 compared with 32 enterprises in 2004.

The gross output of the enterprise was mainly affected by the changes to the subsidy regime, as the headage payments ( SCPS, EPS and SPS) were decoupled from the enterprise and the new SBCS was introduced. Gross output dropped from £568/cow to £367/cow, a reduction of 35%. LFASS remained static at around £70/cow.

There was no change in the sales and transfers out figures for weaned of calves between 2004 and 2005.

The replacement cost increased by £10/cow between 2004 and 2005. This was as a result of increased replacement rates in the individual herds, which may be due to the removal of cows born before 1st August 1996 from the herds as a result of the closure of the OTMS.

Within the variable costs, there was a big variation in feed costs year on year. This was mainly attributed to bulk feed. This was a result of the change in the sample - i.e. 38% of bulk feed in 2004 was made up by two farms which were close to distilleries. These were no longer in the sample in 2005.

Total feed and straw was £66/cow in 2005 and £57/cow in 2004. This is a combination of feed and keep taken, home grown straw and purchased bedding. The breakdown of total feed and straw is demonstrated in Table 5.1. There appears to have been a substitute effect as the participants in the sample for 2005 were making more use of home grown straw.

Table 5.1: - Breakdown of Total Feed & Straw

Year	2005 (£/cow)	2004 (£/cow)
Feed & Keep Taken	33	45
Home Grown Straw	23	4
Purchased Bedding	10	8
Total Feed & Straw	66	57

Other variable costs such as vet and medicine, livestock sundries, commission and levies, and haulage remained largely similar, year on year.

In 2005, there were no longer costs for net quota leasing and casual labour.

The forage charge for 2005 was expected to increase as a result of increased fertiliser prices. However it dropped from £33/cow to £26/cow. It was noticed that there was less reseeding undertaken in 2005 also, participants reducing the amount of fertiliser they used as a result of uncertainty over their profitability may have been a factor.

4.1.2 Factors Affecting the Gross Margin

The variation across the sample, possible reasons for the variation and other comments for each of the major revenue and cost centres are discussed below. The results for this section have been presented in tabular form.

Variation in Herd Size
Table 6: - Variation in Herd Size

Herd Size	2005	2004
	Cows	Cows
Weighted Average	84	71
Mean	84	71
Median	70	55
Range - Smallest	14	12
Range - Highest	409	69
Standard Deviation	86	65
Coefficient of Variation	102%	92%

Commentary As in 2004, there was a wide variation in the herd size of the sample. This was further demonstrated by the higher coefficient of variation. The main impact of herd size on the study was the economy of scale likely to be associated with the larger units.
The herd size was up by 20% on 2004.

Calves Weaned
Table 7: - Calves Weaned Percentage

Calves Weaned (as a % of Herd Size)	2005	2004
Weighted Average	94%	95%
Mean	96%	92%
Median	95%	96%
Range - Smallest	76%	39%
Range - Highest	132%	125%
Standard Deviation	14%	17%
Coefficient of Variation	15%	19%

Commentary As one would expect from a suckler herd, the weighted average and mean number of calves weaned as a percentage of the herd size was over 90%. The standard deviation of 14% and coefficient of variation of 15% show that although the level of variation was quite low, it was greater than one would have expected. The range in the calves weaned percentage also reflects this higher than expected variation. Individual participant results are used below to show the reasons for the extreme values.
The calves weaned percentage does not take account of changes in calf valuation, herd size and calving pattern from year to year.
HCS 57 had a weaned calf percentage of 76%. This was due to an increase in the herd and the fact that not all cows had calved at the year-end (average herd size was 71 cows and number of calves weaned was 54).
HCS 32 had a weaned calf percentage of 132%. This occurred as a result of a lower number of calves remaining with their mothers' at the year-end than at the start.

Calf Output Adjusted for Changes in Calf Valuation
Table 8: - Variation in Calf Output Adjusted for Changes in Weaned Calf Valuation

Calf Output Adjusted for Calf Valuation Change*	2005	2004
	£/Cow	£/Cow
Weighted Average	256	265*
Mean	256	246
Median	254	244
Range - Smallest	186	180
Range - Highest	310	329
Standard Deviation	29	34
Coefficient of Variation	12%	14%

Commentary The variation in calf output is slightly smaller compared to that seen in the weaned calf percentage. This is because the variation seen in the calves transferred out was mitigated by including the change in calf valuation. Also, as virtually all the calves leaving the enterprise are transfers to a store or finishing enterprise, the output per calf is standardised. Variation therefore arises purely from the relative productive efficiency i.e. weaned calf % of each unit and does not include variation in value arising from the quality of calves produced.
The distribution in calf output closely follows that of calf weaning percentage.

* Calf output adjusted for calf valuation = sale + male and female transfers + calf valuation change

Headage Payments
Table 9: - Variation in Headage Payments

SBCS Payments	2005	2004
	£/Cow	£/Cow
Weighted Average	42	236
Mean	45	216
Median	42	213
Range - Smallest	35	76
Range - Highest	58	401
Standard Deviation	7	65
Coefficient of Variation	16%	30%

Commentary The variation in the level of SBCS payment received was relatively low. The reason for any change in eligible calf claims was two-fold: number of claims per cow and herd size. This is because there was a larger premium available for the first ten calves claimed (£79.32), decreasing to £39.66 thereafter. This means that the larger the herd (and the greater the number of calves claimed), the smaller the average payment per calf.
HCS 22 has the lowest SBCS payment per cow at £35. This is because the herd expanded through the purchase of cows with calves at foot which had been claimed by the previous owner.
HCS 18 shows a SBCS payment of £58/cow. This is because the herd size was only 14 cows - the smallest in the sample.

LFASS
Table 10: - Variation in LFASS

LFASS	2005	2004
	£/Cow	£/Cow
Weighted Average	70	77
Mean	83	87
Median	68	77
Range - Smallest	34	40
Range - Highest	199	264
Standard Deviation	44	42
Coefficient of Variation	53%	49%

CommentaryLFASS is calculated by the formula in section 3.1.1. There is a high degree of variation in the LFASS payment.
The LFASS payment made up 42% of the gross margin in 2005 compared with 21% in 2004. This demonstrates the shift in farm support from direct subsidy payments to area-based payments and a lower incentive to maintain numbers of breeding cows in particular and livestock in general.

The variation is mainly due to larger units benefiting more when suckler enterprises are operated.

The majority of participants in this study had between 10% and 50% of their livestock units as cows in order to enhance their LFASS payment by 35%.

The large hill units benefited most from this system as long as they were able to maintain their total stocking density above 0.12LU/ha.

This means the smaller upland units were disadvantaged relative to the larger extensive units who were better equipped to take advantage of the minimum stocking requirement of the scheme.

Replacement Cost
Table 11: - Variation in Replacement Cost

Replacement Cost	2005	2004
	£/Cow	£/Cow
Weighted Average	75	65
Mean	62	64
Median	59	55
Range - Smallest	9	(9)
Range - Highest	111	190
Standard Deviation	32	48
Coefficient of Variation	52%	76%

Commentary The variation in replacement costs can be attributed to three factors: -

• The replacement rate associated with a particular herd including the value of sales and purchases.
• Whether bulls had been replaced in the period being investigated.
• Whether the herd increased or decreased over the period.

HCS 22 had the lowest replacement cost of £9/cow. This was because the herd expanded from 74 cows to 111 cows due to the purchase of 38 cows, while only 1 cow was sold out of the enterprise.
One would expect an increasing herd to carry a large replacement charge however the formula per the SSMM for calculating replacement charge does not reflect this. This is discussed in detail in the conclusions section.
HCS 12 has the highest replacement cost of £111/cow. This is because a higher number of cows were sold (107) compared to the number purchased and transferred in (76).

Table 12: - Variation in Net Output

Net Output	2005	2004
	£/Cow	£/Cow
Weighted Average	293	494
Mean	321	488
Median	312	493
Range - Smallest	204	201
Range - Highest	424	652
Standard Deviation	57	96
Coefficient of Variation	18%	20%

Commentary Output, net of replacement charges and calf valuation change shows a relatively small variation when compared to most of the variables considered so far.
The removal of headage payments from the gross margin has reduced the range across the sample, but not the coefficient of variation.
The massive range in performance between participants is therefore still an issue.

Feed & Keep Taken, Straw Bedding and Forage
Table 13: - Variation in Feed, Forage and Bedding Costs

	Feed & Keep		Straw		Forage		All Feed & Bedding
	2005	2004	2005	2004	2005	2004	2005	2004
	£/Cow	£/Cow	£/Cow	£/Cow	£/Cow	£/Cow	£/Cow	£/Cow
Weighted Average	33	45	23	4	26	33	82	82
Mean	35	46	29	13	27	36	91	95
Median	30	39	19	9	23	34	85	87
Range - Smallest	5	1	1	0	0	6	45	32
Range - Highest	90	137	91	57	57	103	218	205
Standard Deviation	24	32	24	15	18	25	38	40
Coefficient of Variation	68%	70%	80%	118%	66%	69%	42%	42%

Commentary There remains a large variation between the costs for the farms in the study. All feed & bedding accounted for 68%, compared to 65% in 2004, of the weighted average total variable costs. The major factors contributing to the variation remain: -

• Whether cows are out-wintered
• Baled silage, clamp silage or straw based diets
• Use of forage replacers i.e. draff
• Type of unit and intensity of production i.e. hill or upland and proportion / use of rough grazing.
• Organic or conventional production system
• Autumn or spring calving herds
• Cubicle or deep straw housing system

Even accounting for the differing systems, the range in feed costs is still very large. The bulk of this variation is likely to be explained by the low cost systems in the sample e.g. the organic and hill farms. However, there still appears to be enough variation that there is opportunity for most businesses to reduce feed costs below current levels. An example of this would be where the calving pattern becomes extended, feed costs increase. This is typical of a situation where tighter management control would reduce costs. The high costs associated with some units raises the question as to whether profit is the main objective for some participants.

Veterinary & Medicine Costs
Table 14: - Variation in Veterinary & Medicine Costs

Veterinary & Medicine	2005	2004
	£/Cow	£/Cow
Weighted Average	18	18
Mean	17	18
Median	14	12
Range - Smallest	2	2
Range - Highest	33	51
Standard Deviation	9	12
Coefficient of Variation	54%	70%

Commentary On average, veterinary and medicine costs were well controlled. The weighted average was close to that expected for an upland suckler herd, however there was still a large amount of variation in the sample.

The factors contributing to the variation were: -

• HCS56 had the smallest cost per cow - the system was very extensive as the cows were out-wintered and very little routine vet intervention was required.
• Remote location - one of the two highest cost units were based in the highlands
• Herd health and requirement for vaccination
• Stocking density
• Accuracy of allocation between suckler and store/finisher enterprises

The range in veterinary and medicine costs shows there is still an opportunity for some farmers to reduce their costs. This demonstrates the individual participants' attitudes to herd health and protection against catastrophic events ( e.g. campylobacter).

Minor Variable Costs: - Livestock Sundries; Commissions, Deductions & Levies, Haulage

All of the above varied widely. Together the minor variable costs accounted for 9% of the weighted average total variable costs. This variation was mainly due to the characteristics of the unit in question, examples are: -

• Commissions, Deductions and Levies by the replacement rate and trading activity associated with the breeding herd ( HCS 12 had the highest costs in this category due to the number of cows bought and sold).
• Haulage is affected by location and availability of own transport as well as trading activity. HCS 8 had high haulage costs as this included transport of cows to and from winter grazing. HCS58 was high as it was on an island.

Note that there was no requirement for quota leasing in 2005. This accounted for 6% of the total variable costs in 2004. But for those units, HCS 22 and HCS 55, it was 73% and 57%, respectively.

Unlike the 2004 study, no units incurred casual labour.

Total Variable Costs
Table 15: - Variation in Total Variable Costs

Total Variable Costs	2005	2004
	£/Cow	£/Cow
Weighted Average	120	127
Mean	120	143
Median	104	113
Range - Smallest	70	46
Range - Highest	258	492
Standard Deviation	46	86
Coefficient of Variation	38%	60%

Commentary The variation in total variable costs, measured by the coefficient of variation (38%) compares to only an 18% value for net output. There was two times the variation in total variable costs as in net output. This reduced from 60%, or three times, the variation in total variable costs in 2004.
This reduction was mainly due to the removal of the quota leasing charge, however the conclusion that there was more potential for reducing variable costs than there was for increasing output is still valid.
HCS 45 had the lowest total variable costs. This appeared to be due to very low levels of feed & bedding costs coupled with good cost control in the other cost centres. Cows being housed on slats and low forage costs also contributed to the lower cost structure.
HCS 27 was the only organic farm in the study. Its total variable costs were £99/cow, which was mainly attributed to straw costs as this was used for feeding and bedding. However forage costs were negligible.
HCS 13 had the highest costs at £258/cow. This was very much higher than the majority of the units and was attributed to high feed and bedding costs.

Gross Margin
Table 16: - Variation in Gross Margin

Gross Margin	2005	2004
	£/Cow	£/Cow
Weighted Average	172	367
Mean	201	345
Median	208	329
Range - Smallest	42	89
Range - Highest	324	534
Standard Deviation	82	112
Coefficient of Variation	41%	33%

Commentary In 2005 the coefficient of variation increased to 41%, despite the range decreasing. This is likely to be a consequence of headage payments insulating poorer performers in 2004.
The weighted average gross margin decreased from 2004 to 2005, this is was due to the reduction in subsidy payments.
It is clear that a number of units need to improve their technical performance.
The farmer who achieved the highest gross margin was the organic farmer, HCS 27, who had low variable costs alongside a good level of calf output.
HCS 13 had the lowest gross margin. This was mainly attributed to very high variable costs.
A more detailed analysis of the variation between individual participants is covered in section 4.1.3.

4.1.3 Participant League Tables

Gross Margin

The table below page shows the participants ranked by suckler cow gross margin.

Table 17: - Participants Ranked by Gross Margin

The table shows the participants ranked in order of gross margin, with their corresponding values for the principal factors contributing to gross margin. Average performance values have been calculated for the whole sample, top third and bottom third participants. Finally, a regression analysis was performed to identify the factors most important in defining gross margin performance.

Average gross margin for the sample was £196/cow, with top third participants lifting performance by 46% or £90/cow to £286. Bottom third producers were only able to generate a gross margin of £99/cow, 51% or £97 below the average and less than half that of the top performers.

The average gross margin of £196/cow is £29 above the weighted average. This is due to the influence of HCS 12, a large unit of 409 cows, and 25.6% of the sample being situated at the lower end of the league table.

It should be noted that for the bottom third producers, the income from SBCS payments and LFASS of £103/cow is greater than the gross margin per cow of £99 whilst for the top third producers SBCS payments and LFASS total £156. So the top third producers actually net £53/cow more in subsidy and are able to generate a further margin of £187/cow than the bottom third of producers.

The results show that the most important factor in determining gross margin remains net output.

This demonstrates that the return from increased levels of technical and management input into the beef enterprise has increased following the removal of headage payments under the reform of the CAP implemented in 2005.

By the same token, the return to the poorer performers has decreased on a relative basis.

The shift away from headage payments has increased the gap between the top third and bottom third performers.

Within net output, LFASS and level of replacement costs are still important contributors in determining gross margin. The percentage of calves weaned is only the third most important factor.

The introduction of the SBCS has increased the importance of herd size relative to gross margin. This is due to the increased weighting of payments towards the smaller units.

Variable Costs

The table below shows the participants ranked by total variable cost complete with a breakdown of all variable costs.

Table 18: - Variable Cost breakdown

1) All feed and bedding comprises of feed and keep taken, straw and bedding and forage charge.

The table shows that some units are able to operate at much lower variable costs than their counterparts. The average total variable costs incurred for the sample were £120, compared to only £84 for the participants with the lowest variable costs (top third performers). The average for those participants with the highest cost structure (bottom third performers) was £167/cow.

The top third performers' variable cost structure is within £1 of the 2004 value at £84 /cow, whilst the bottom third performers have seen a considerable reduction in their variable cost structure, reducing by £61 on 2004 values to £167/cow. Of this £61 reduction, £47 was due to the quota leasing charges.

The major factor contributing to total variable costs is all feeding and bedding costs, which account for 75% of total variable costs. This is made up of three cost centres - feed and keep, straw and bedding and forage charge. Of these individual cost centres, feed and keep had by far the biggest effect on variable costs, followed by straw and bedding. Forage costs, had only a small effect.

All feeding and bedding costs averaged £91/cow with the top third producers averaging £61/cow compared to £129/cow for the bottom third producers. Within the cost centres, the biggest variation was seen in feed and keep with a difference of £46/cow between top third producers (£17/cow) and bottom third producers (£63/cow).

Effectively there is an element of balancing between the cost centres whereby units feeding less concentrates fed more forage. This is demonstrated by the way in which the sum of all the feed, forage and bedding has the best fit with total variable costs.

The influence of veterinary and medicine costs on total variable costs has increased compared with 2004. This is due to the removal of the quota leasing charges.

Livestock sundries had a similar effect on variable costs to vet and medicine costs. The enterprise with the second highest variable costs ( HCS 18) had the highest livestock sundries at £56/cow. This was caused by blood testing costs for the Highlands and Islands Health Scheme.

Commissions etc. and haulage had little impact on total variable costs.

Table 19 on the following page shows the relationship between total variable costs, the major variable costs and the gross margin. Participants are ranked in order of gross margin performance. The term major variable costs is used to identify those variable costs likely to have most effect on gross margin.

Table 19: - Relationship Between Gross Margin and the Major Variable Costs

This table shows that the top third participants were able to save £29/cow compared to the average participant (£120/cow) in the sample and £69/cow compared with the bottom third of participants. 77% of the savings were secured on feed and bedding costs i.e. savings of £53/cow. These savings were achieved without compromising the gross margin.

It is also worth noting that it is all feed / bedding costs that is the most important variable cost centre regarding gross margin performance.