Evaluating expansion strategies for startup European Union dairy farm businesses

Abstract

A stochastic whole-farm simulation model was used to examine alternative strategies for new entrant dairy farmers to grow and develop dairy farm businesses in the context of European Union (EU) milk quota abolition in 2015. Six alternative strategies were compared: remain static, natural growth expansion, waiting until after EU milk quota abolition to expand, a full-scale expansion strategy without milk quotas and not incurring super levy penalties, a full-scale expansion strategy with milk quotas and incurring super levy penalties, and once-a-day milking until EU milk quota abolition, followed by full-scale expansion. Each discrete whole farm investment strategy was evaluated over a 15-yr period (2013-2027) using multiple financial stability and risk indicators, including overall discounted farm business profitability, net worth change, return on investment, and financial risk. The results of this study indicate that, although associated with increased risk, dairy farm expansion will ensure the future profitability of the farm business. Within the context of EU milk quotas until 2015, the most attractive expansion strategy is to increase cow numbers while avoiding super levy fines using once-a-day milking techniques, increasing to the full capacity of the dairy farm once milk quotas are removed. In contrast, the results also indicate that dairy farms that remain static will experience a significant reduction in farm profitability in the coming year due to production cost inflation. Cash flow deficits were observed during the initial year of expansion and, therefore, rapidly expanding dairy farm businesses require a significant cash reserve to alleviate business risk during the initial year of expansion. The results of this analysis also indicate that dairy farm businesses that expand using lower cost capital investments and avoid milk quota super levy fines significantly reduce the financial risks associated with expansion.