A cost management analysis of AFS raw milk production: is the present cost structure sustainable on the face of competition and how could it be enhanced?

Abstract

This research was employed in the premises of dairy unit production at American Farm School Thessaloniki, Greece. AFS is an educational institution established in 1904 and providing high education for students coming from Greece and Balkans' region. The farm of AFS is composed of three departments such as: dairy production and processing, poultry and horticulture. All these three departments provide high added value products to the Greek market, where the milk and chickens are the most well-known products. This paper is focused on the dairy department and more specifically on the production aspect. The main objective of this project was to calculate the cost of raw milk produced at AFS dairy farm, and comparison of the selling prices found in Greece and European Union countries. The intention of this paper is to describe and explain a variety of different factors that influence the overall performance of the dairy farm operation. This research aimed to evaluate the final cost and the performance of the business costing structure by extending its analysis into two categories, milking cows and stock replacement herd respectively. The methodology used for this case study relied on principles of qualitative data. Approaching this methodology, direct observations for one week was the initial step. Additionally, in depth-interviews with the director of the farm Mr. Thanasis Giamoustaris and the manager of the dairy farm Mr. Efstratos Souglis were another aspect applied in order to gather a variety of opinions from two different managerial levels. After the collection and analysis of data the main findings were that AFS has a considerable high cost compared to Greek and EU farms. This is primarily because of a non enhanced technology and the high cost of feed used which is GMO free. Nevertheless, its product has been able to maintain its price premium status for several years. However, there are possibilities of escalating the effectiveness of cost and increasing the margin of profit. In this paper, three possible scenarios of achieving this aim are examined. Firstly, it could be achieved by increasing the number of milking cows by 40 percent (121 to 170) and decrease the cost from 0.48 €/kg to 0.42 €/kg. Secondly, decreasing the number of stock replacement by 56.5 %, (115 to 50 female heifers) where the cost would be at the same level 0.42 €/kg. Thirdly, a combination of these scenarios would decrease the final cost to 0.37 €/kg which would give AFS's milk a very competitive edge.