February 29, 2024 • 25 mins
What were some of the features of the Top 25% of NSW Dairy Farm Monitor farms in the 2023 financial year? This month’s podcast provides insights into some of the physical and financial metrics associated with their productivity and profitability compared to that of the remaining 75% of farms in the project.
Links to useful resources related to this podcast:
Link to January 2024 podcast: Highs and Lows of Dairy Farm Monitor 2023
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It is brought to you in partnership the Hunter Local Land Services
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Episode Transcript
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(00:03):
Welcome to the Businessof Dairy podcast.
I'm your host, Sheena Carter,development officer with the
New South Wales Department ofPrimary Industries dairy team.
This month, I'm sharing someinsights into features of the
most profitable New South Walesdairy farms in the 2023
financial year, as measured bythe New South Wales Dairy
(00:23):
Farm Monitor project.
Now a quick background intoDairy Farm Monitor.
It's a national program thatlooks at the physical and
financial performance of dairyfarms in each dairying
region of Australia.
In New South Wales,it's delivered in partnership
with the New South Wales DPIand Dairy Australia, and it's
now run for 12 years.
I've taken a look at our NewSouth Wales data in a slightly
(00:46):
different manner to how wereport on the performance in
our annual report, so you canaccess the 2023 Farm Monitor
Annual Report via the shownotes in this episode, and you
can also listen to ourJanuary podcast, in which I
discuss the results asdescribed in the annual report.
So, this looks at the averageperformance of all farms at a
(01:07):
state and regional level.
This discussion willexplore some physical and
financial metrics associatedwith the productivity and
profitability of the top 25%farms in Farm Monitor,
compared to the rest of theFarm Monitor farms, so the
other 75% of farms.
So, we're looking atthem as two separate groups.
(01:28):
Firstly, I need to clarify howwe identify the top 25% farms
in Farm Monitor.
Farms are ranked based on theirreturn on total assets managed
– so that's leasedand owned assets.
Return on total assets iscalculated dividing EBIT,
so earnings before interest andtax, by the value of all the
(01:50):
assets under management.
Given we had 36 farms in FarmMonitor for the year, when that
represents about 8% ofthe New South Wales industry,
this translates to ninebusinesses in the top 25 and 27
in the remaining 75%, which Iwill refer to that group as
the main cohort.
(02:10):
Of the nine top 25% farms,two are in the north and seven
of these were inthe south of the state.
Also, all farmsthat participate, they're very
generous in sharing theirrecords and information as part
of Farm Monitor, and they doremain anonymous, so I'll not
be discussing specifics ofany individual businesses.
(02:35):
Right, well clearly the firstplace to start this discussion
is with profitability ofthe two groups,
and for context, the 2023financial year saw the
strongest year for New SouthWales in terms of profit in all
the 12 years of FarmMonitor in New South Wales.
It was also a year with thestrongest milk price and the
highest cost of production.
(02:55):
When we look at the performanceof the top 25%, they had an
average earnings beforeinterest and tax, or EBIT,
of $4.27 per kilo milk solids,compared to $2.28 for
the main cohort.
So this translates to a returnon total assets of 12.3% for
(03:16):
the top 25 and 3.9% forthe main cohort, on average.
Now, with the top 25 having anEBIT that's about $2 per kilo
milk solids higher, or nearlydouble that of the rest,
you might wonder why there issuch a large variation in
return on total assets.
(03:37):
What do I mean?
Well, if the main cohort havean EBIT of $2.28 and a return
on total assets of 3.9%,why isn't the top 25% return on
total assets more like 9%?
This is explained byasset value, which is heavily
influenced by land values.
(03:58):
And with our top 25%,more than half of these farms
are inland, and the majority ofthe cohort farms are located in
areas where land values arevery high due to
competition for land.
So, we've got,you know, competition
with lifestyle blocks,they're often in popular
(04:19):
coastal locations or they're inareas where there are competing
intensive – particularlyhorticulture – competing
intensive orresource focused industries.
So the higher asset value hasprecluded some farms which
generate a very high EBIT frombeing included in the top 25%.
(04:39):
So, there are farms with ahigher EBIT than some of the
top 25% farms, but their assetvalue means a lower return
on total assets.
Let's now take a look at someof the physical characteristics
of the top 25% andmain cohort groups.
(05:01):
So, the top 25 tendto have larger herd sizes.
They tend to havelarger usable areas, so that's
both milking areaand support area, and as
I've just said,larger milking area.
So, that group tend to have amilking area that averages
around 241 hectares,compared to 123 hectares for
(05:26):
the main cohort group.
Both groups contain totalmixed ration herds, or zero
grazing farms, where themilking herd doesn't actually
graze any pasture – they'refully fed on a feed pad, in a
housed system, whatever thecase may be.
So, looking at stocking rate onthe usable area, which is used
when comparing farms ofdifferent systems, we see that
(05:49):
the main cohort had a slightlyhigher stocking rate of 1.4
cows per hectare, compared to1.1 for the top 25 group.
Milk production per cow,so litres and solids,
was higher on the top 25farms, but when we look
at the productivity of theusable land in relation to the
production of milk, both groupswere reasonably similar,
(06:11):
however, the main cohortgenerated around 3%,
bit over 3%, more kilograms ofmilk solids per hectare than
the top 25 group – so that was667 versus 645 kilos of milk
solids perhectare, respectively.
Another commonly used measurein dairy production systems
(06:33):
is cow efficiency.
This is theamount of milk solids,
so fat and protein, that isproduced per kilo of
cow live weight, and ideally wesee an efficient cow producing
around one kilo of milk solidsper kilogram of live weight.
Now, there are many things thatwill influence cow efficiency,
(06:55):
so it's multi-factorial, as withso many things in
a dairy system.
Some of thekey drivers include good
pasture management skills,so grazing quality pastures at
the right time with low wastage;cow reproductive efficiency and,
you know, having cows that havegot genetics that are
suited to the farm system;animal husbandry practices and
(07:15):
good owner operatormanagement skills, including,
you know, milking the righttype of cow for the resources
and system that they operate.
In this year, the top 25% farmshad cows that were 18% more
efficient on average than therest of the farms.
So if we look at this inrelation to profitability,
(07:37):
these top 25% farms tend tohave cows that are 90% and up
to around 125% efficient.
Now, it's worth noting that wesee some farms in the main
cohort which averaged similarcow efficiency, but they
weren't as profitable.
(07:58):
Okay, so now let's takea look at the financials.
Here the obvious starting pointis milk income, given it's the
primary source of income ina dairy business.
Now, many of you might thinkthat in order to achieve the
highest profit, you need thehighest milk price, and this is
absolutely not the case.
We see a large variation inmilk price throughout New
(08:19):
South Wales, depending largelyon farm location.
So, farms in the north tend toreceive higher milk prices than
those in the south, and I'vealready mentioned that seven of
the nine top 25%group are in the south.
So, if we look at thetwo groups, the average milk
price for the top 25% was$10.65 per kilo milk solids,
(08:42):
and the main cohort averagedjust over a dollar more than
that at $11.69 perkilo milk solids.
So, milk price doesn't appearto hamper the profitability of
the top 25 group, however,we certainly need to recognise
that variability in milk priceis a big challenge that farmers
(09:04):
need to manage, particularly inyears of low milk prices,
which willerode business profitability.
So, now if wejump to cost of production, this
clearly impacts profitability.
To be clear with what I'mtalking about here, this is
true cost of production,not cash cost of production.
(09:29):
We'll refer to cashcost of production as
farm working expenses.
So, true cost of productionincludes non-cash costs
as well, you know, such as feedand water inventory change,
livestock inventory change,depreciation,
and imputed labour, so that isgenerally the family labour
that takes drawings outof a business, rather than a
(09:51):
wage or a salary.
So, the average cost ofproduction for the top 25 group
was $7.74 per kilomilk solids, while for the rest
it was 34% higher, at $10.39per kilo milk solids.
Now, there'sobviously variation within,
and between, the two groups interms of cost of production.
(10:13):
So, it should be noted thathaving a high cost of
production doesn't necessarilyexclude a farm from being a
top performing farm.
Some farms are able to manageother aspects of their system
very well in orderto be profitable.
Conversely, a very low cost ofproduction should be looked
(10:33):
at with caution.
While it's got thepotential to result in
a higher profitability, if themoney is spent in the right
areas of the business,it generally won't be
sustainable over thelonger term, and a very low
cost of production is oftendriven by the operating
conditions at the time.
When we look at cost ofproduction in relation to
(10:55):
milk price, there's atrend seen where, as milk
price increases, cost ofproduction tends to increase.
Now the twoaren't definitively linked,
however, there will be numerousfactors that drive the trend,
such as having the ability withstronger milk prices to play
(11:17):
catch up on repairsand maintenance, and other
thingslike fertiliser application.
Also, with a strongermilk price, some businesses
will position themselves tocapitalise on this and produce
marginal milk, which comes withadditional costs relative to
the normal production levelsachieved within the
existing farm system.
However, as owner operators ofa business, it's important to
(11:40):
be wary of cost creepin the business.
You know, it's human naturewhen times are good and there's
a bit more cash available,we do tend to spend
a bit more, and the goodoperators will spend in the
right area of the business.
So, we do need to just think,you know, is this spend
actually driving performance oris it just a 'nice to have'.
(12:02):
If we look at someof the specific costs in
these businesses, our biggestoperational costs in
dairying is feed, obviously.
Our feed costs are purchasedand home grown feed, and we
also capture the impact of feedinventory changes in a
profit analysis, which I'llexplain in a minute.
So, I'm talking about feedcosts in dollars per kilo
(12:25):
milk solids, not dollarsper tonne, dollars per
kilo milk solids.
So, the top 25% averaged $4.29per kilo milk solids for total
feed costs, compared to $5.28for the main cohort.
If we're looking atpurchased feed costs, as a
percentage of the totalfeed costs, the top 25 had a
(12:46):
slightly lower proportion ofpurchased feed expenditure
compared to the rest, and theirproportion of home grown feed
in the milker diet was muchhigher at 58%, compared to 49%
for the main cohort.
Now, we do need to be mindfulof the conditions experienced
on farms in that year,you'll probably recall if you
(13:10):
were a farmer, orliving in New South Wales,
throughout that year we hadsevere flooding in many
locations and prolongedwet weather,
which was very widespread,and this limited the ability to
graze and optimally managepastures and crops.
So, the severity ofthese conditions, it's likely
to have impacted the maincohort of farms to a larger
(13:32):
degree than the top25% farms, just given
their geographical locations.
Now, I mentioned feed inventorychange earlier, I'll just give
you a quick explanation.
In a profit analysis,we're looking at all the costs
incurred during the year thatare related to milk production
(13:54):
within that year.
So, sometimes a business willbe in a position where
they can conserve, or have onhand at the end of the year,
more feed than they didat the beginning of the year.
So, in this instance,the businesses incurred a cost
to do this, but the feed thatis still in the shed hasn't
been used to produce milkin that year, so, the value of
(14:16):
this feed on hand becomesa negative cost.
Now that value of the feed isalso captured in the balance
sheet as an asset.
In the following year, if thefarm draws down on their stored
feed over that 12month period, then the value of
the feed used will be incurredas a positive feed cost,
(14:36):
as it's been used to producethe milk in that year,
so, I hope thatmakes a bit of sense.
In the 2023 financial year,we saw the top 25 had a much
higher value of feed inventoryon hand at the end of
the year, at an average of...
it's a negative, of -$0.36 perkilo milk solids compared to
(14:59):
the main cohort group,which had a -$0.07 per
kilo milk solids.
So, while this doesn't tell usactual tonnages, it does
suggest the top 25 werein a better position to build
inventory over the courseof the year.
So, this is often a...
it's a keyrisk management strategy used
in businesses, so, it's makingthe most of conditions,
(15:20):
when they allow, to build uphay and silage stores to have
on hand when they don't haveenough feed available
in the paddock, and potentiallylimit their exposure to,
you know, often higherpriced fodder markets.
So, if we move on to herd andshed costs, these make up a
relatively small proportion ofour cost of production,
(15:43):
however, some farms have highercosts in each of these
categories than others,depending on many things
within their system.
So, the average herd and shedcosts were significantly lower
on the top 25% farms, and forthis year, it's important to
remember these wet conditionsthat we had, they are likely to
(16:04):
have impacted herd costs on themain cohort farms, relative to
the top 25% group, partly dueto higher herd health costs,
but this will only be onefactor impacting herd costs.
For example, farms that,you know, they're
passionate about genetics,or stud farms, they'll often
have higher herd or breedingcosts relative to other farms.
(16:27):
And we're also seeing, with theincreased uptake of sexed semen
and genomics acrossthe industry, we're seeing,
you know,slightly higher herd costs.
Well, with shed costs,it's likely that
we shed costs, with larger andmore efficient dairies,
the top 25%, they're able toreduce shed costs on a dollars
(16:49):
per kilo milk solids basisrelative to the main cohort.
Now we look at overhead costs,which include items such
as labour, both paidand imputed labour, repairs
and maintenance,depreciation, insurance and
other general overheads.
It's important that these costsare managed well because if
these take up a largeproportion of operating costs,
(17:11):
then there are fewer funds tospend in areas of the business
that can drive productionand income, such as production
of higher quality feed.
Average overhead costs for thetop 25 were $3.05 per kilo
milk solids, and $4.36 forthe main cohort.
(17:31):
So, if we look at overheadcosts in relation to total milk
solids produced, there is atrend, it isn't a
direct relationship, but there'sa trend to lower
overheads with highertotal solid production.
It also appears, that belowabout 170,000 kilos
of milk solids, there tends tobe insufficient milk production
(17:55):
to dilute overhead costs unlessthey have a very efficient
business with goodoverall cost control.
So, we'll now take alook at some of the bigger
overhead costs,starting with labour.
I've mentioned that thetop 25% have good overhead
cost control, and their labourefficiency is one of the key
(18:15):
drivers of this.
We report labour efficiency asthe quantity of milk solids
produced per labour unit,with one labour unit
representing 2400 hours workedacross the year, so, I'll refer
to this as afull time equivalent or FTE.
So, the top 25% were56% more efficient than the
(18:37):
main cohort, producing 51,208kgof milk solids per FTE,
compared to an average of32,837 for the main cohort,
and nearly half ofthe top 25% group were
exceptionally efficient,producing well over that 50,000
(18:57):
kilos of milk solids.
They're able to achieve this innumerous ways, as they're not
necessarily the largest farms.
In terms of total labour,so, paid and imputed,
total labour cost, the top 25%averaged $1.81 per kilo
milk solids, compared to $2.63for the main cohort.
(19:18):
You know, interestingly,for both groups, labour costs,
total labour costs,averaged around 60% of
total overhead costs.
Some of the factors thatcontribute to lower labour
efficiency and higher costs caninclude things that...
You know, smaller operationswith a greater proportion
of family labour,typically have high
(19:39):
imputed labour costs, and inbusinesses where there's been a
lack of investment, or regularmaintenance in on-
farm infrastructure, there canbe higher
repairs and maintenance,and labour costs, you know,
due to inefficiencies aroundthe use of that labour.
So, for example, the dairymight not have been upgraded in
(20:00):
a long time, there mightbe cow flow issues with
slightly larger herds, and allthese things will impact your
labour usage and theefficiency of that.
The next one we'll lookat is depreciation.
Now, this is a non-cash costof great importance.
(20:21):
It's the cost of assets,mainly plant and equipment,
that decrease in value overtime and ultimately have
to be replaced.
In the 2023 financial year,we saw an increase in the value
of plant and equipment on manyof the farms in our Farm
Monitored data set.
There's a number of factorsthat will have driven this,
(20:42):
including things like theinstant asset tax write off,
which was available atthe time, stronger cash flows
and also the higher value ofboth new and used machinery,
which is primarily as a resultof supply chain issues
in recent years.
So, with the FarmMonitor farms, this increase in
(21:05):
plant and equipment andsignificant buildings was more
evident in the north ofthe state, where the majority
of the main cohortfarms are located.
So, we do seewhat we would class as over
capitalisation insome businesses, which will
impact depreciation and repairsand maintenance costs.
In some instances withsmaller farms, there's an
(21:28):
issue of scale.
So, the amount of equipmentthey have, it might be more
than is required bythe business, but it isn't
possible to actually have lessequipment to exactly
meet their needs.
So, it's not possibleto have half a tractor.
In other cases, it's a functionof the type of system they have.
(21:50):
So, they might have a feed padthat's used opportunistically
throughout the year,but they still need
the associated equipment,such as loaders and
mixer wagons, which depreciateover time and also require
repairs and maintenance.
Also, with the challenges ofaccessing contractors in
(22:11):
some areas, many businesseshave elected to purchase their
own equipment, you know,for sowing
or fodder conservation.
It enables them to getcrops, pastures, sown in
a timely manner, and probablyharvested in a
more timely manner,than waiting for a contractor,
who can be difficult to get.
(22:33):
But by having all thisequipment that's used
periodically throughoutthe year,
it's often underutilised,but again, it still has all
the associated costs.
And some peoplejust love machinery.
So, the average depreciationcost was $0.35 per kilo milk
solids for the top 25 group,and it was 69% higher at $0.59
(22:58):
per kilo milk solids forthe main cohort.
So, that wraps up some of thekey points in my analysis of
differences between the NewSouth Wales top 25% farms and
the rest of theFarm Monitor group in that
23/24 financial year.
(23:18):
I guess some key pointsto take away.
It's not the highest milk pricethat necessarily generates
the highest profit.
The productivity of that top25% group is often key to
their performance,particularly in areas such as
cow and labour efficiency.
This helps with management oftheir cost of production,
(23:40):
as does management of theirfeed base, with good production
from the milker diet and lowertotal feed costs on a dollars
per kilo milk solids basis.
I think also it's apparent thatoverhead cost control can be
challenging insmaller businesses, with the
lower production often notbeing enough to dilute
(24:02):
their overhead costs.
And it's important, I think,also to remember that every
business is unique.
They all have different goals,different resources,
and productive capability,and ultimately their
performance is influenced byhow the manager uses their
(24:22):
skills to manage all thecomplexities and variables
in their business.
And I'd just like to goback to goals, I mentioned the
goals of the business,it's also important to remember
that not every business isaiming to make
the biggest profit.
People are in the business ofdairying for many reasons,
such as lifestyle, a passionfor cows, you know,
(24:42):
and many other [reasons],so, the biggest profit isn't,
or the highestand strongest profit, isn't the
be all and end all.
So, finally, a big thank you toall the 36 farms that
participated in Farm Monitorfor the 2023 financial year.
Without them, we would not beable to have unbiased
discussions and insight intothe performance of the New
(25:05):
South Wales dairy industry.
So, I'd strongly encourageother farmers who are
interested in understanding theperformance of their business
to use Dairy Australia's freelyavailable online tool called
DairyBase, or become a dairyFarm Monitor Farm in 2024.
(25:28):
So, that wraps it up,thank you for listening and
thanks again to the HunterLocal Land Services, who we
produce this podcast withfunding and support from them.
Also, feel free to share thepodcast with your friends
and networks, and send anyfeedback or suggestions for
(25:50):
future episodes tothebusinessofdairy@gmail.com
Welcome to the Businessof Dairy podcast.
I'm your host, Sheena Carter,development officer with the
New South Wales Department ofPrimary Industries dairy team.
This month, I'm sharing someinsights into features of the
most profitable New South Walesdairy farms in the 2023
financial year, as measured bythe New South Wales Dairy
(00:23):
Farm Monitor project.
Now a quick background intoDairy Farm Monitor.
It's a national program thatlooks at the physical and
financial performance of dairyfarms in each dairying
region of Australia.
In New South Wales,it's delivered in partnership
with the New South Wales DPIand Dairy Australia, and it's
now run for 12 years.
I've taken a look at our NewSouth Wales data in a slightly
(00:46):
different manner to how wereport on the performance in
our annual report, so you canaccess the 2023 Farm Monitor
Annual Report via the shownotes in this episode, and you
can also listen to ourJanuary podcast, in which I
discuss the results asdescribed in the annual report.
So, this looks at the averageperformance of all farms at a
(01:07):
state and regional level.
This discussion willexplore some physical and
financial metrics associatedwith the productivity and
profitability of the top 25%farms in Farm Monitor,
compared to the rest of theFarm Monitor farms, so the
other 75% of farms.
So, we're looking atthem as two separate groups.
(01:28):
Firstly, I need to clarify howwe identify the top 25% farms
in Farm Monitor.
Farms are ranked based on theirreturn on total assets managed
– so that's leasedand owned assets.
Return on total assets iscalculated dividing EBIT,
so earnings before interest andtax, by the value of all the
(01:50):
assets under management.
Given we had 36 farms in FarmMonitor for the year, when that
represents about 8% ofthe New South Wales industry,
this translates to ninebusinesses in the top 25 and 27
in the remaining 75%, which Iwill refer to that group as
the main cohort.
(02:10):
Of the nine top 25% farms,two are in the north and seven
of these were inthe south of the state.
Also, all farmsthat participate, they're very
generous in sharing theirrecords and information as part
of Farm Monitor, and they doremain anonymous, so I'll not
be discussing specifics ofany individual businesses.
(02:35):
Right, well clearly the firstplace to start this discussion
is with profitability ofthe two groups,
and for context, the 2023financial year saw the
strongest year for New SouthWales in terms of profit in all
the 12 years of FarmMonitor in New South Wales.
It was also a year with thestrongest milk price and the
highest cost of production.
(02:55):
When we look at the performanceof the top 25%, they had an
average earnings beforeinterest and tax, or EBIT,
of $4.27 per kilo milk solids,compared to $2.28 for
the main cohort.
So this translates to a returnon total assets of 12.3% for
(03:16):
the top 25 and 3.9% forthe main cohort, on average.
Now, with the top 25 having anEBIT that's about $2 per kilo
milk solids higher, or nearlydouble that of the rest,
you might wonder why there issuch a large variation in
return on total assets.
(03:37):
What do I mean?
Well, if the main cohort havean EBIT of $2.28 and a return
on total assets of 3.9%,why isn't the top 25% return on
total assets more like 9%?
This is explained byasset value, which is heavily
influenced by land values.
(03:58):
And with our top 25%,more than half of these farms
are inland, and the majority ofthe cohort farms are located in
areas where land values arevery high due to
competition for land.
So, we've got,you know, competition
with lifestyle blocks,they're often in popular
(04:19):
coastal locations or they're inareas where there are competing
intensive – particularlyhorticulture – competing
intensive orresource focused industries.
So the higher asset value hasprecluded some farms which
generate a very high EBIT frombeing included in the top 25%.
(04:39):
So, there are farms with ahigher EBIT than some of the
top 25% farms, but their assetvalue means a lower return
on total assets.
Let's now take a look at someof the physical characteristics
of the top 25% andmain cohort groups.
(05:01):
So, the top 25 tendto have larger herd sizes.
They tend to havelarger usable areas, so that's
both milking areaand support area, and as
I've just said,larger milking area.
So, that group tend to have amilking area that averages
around 241 hectares,compared to 123 hectares for
(05:26):
the main cohort group.
Both groups contain totalmixed ration herds, or zero
grazing farms, where themilking herd doesn't actually
graze any pasture – they'refully fed on a feed pad, in a
housed system, whatever thecase may be.
So, looking at stocking rate onthe usable area, which is used
when comparing farms ofdifferent systems, we see that
(05:49):
the main cohort had a slightlyhigher stocking rate of 1.4
cows per hectare, compared to1.1 for the top 25 group.
Milk production per cow,so litres and solids,
was higher on the top 25farms, but when we look
at the productivity of theusable land in relation to the
production of milk, both groupswere reasonably similar,
(06:11):
however, the main cohortgenerated around 3%,
bit over 3%, more kilograms ofmilk solids per hectare than
the top 25 group – so that was667 versus 645 kilos of milk
solids perhectare, respectively.
Another commonly used measurein dairy production systems
(06:33):
is cow efficiency.
This is theamount of milk solids,
so fat and protein, that isproduced per kilo of
cow live weight, and ideally wesee an efficient cow producing
around one kilo of milk solidsper kilogram of live weight.
Now, there are many things thatwill influence cow efficiency,
(06:55):
so it's multi-factorial, as withso many things in
a dairy system.
Some of thekey drivers include good
pasture management skills,so grazing quality pastures at
the right time with low wastage;cow reproductive efficiency and,
you know, having cows that havegot genetics that are
suited to the farm system;animal husbandry practices and
(07:15):
good owner operatormanagement skills, including,
you know, milking the righttype of cow for the resources
and system that they operate.
In this year, the top 25% farmshad cows that were 18% more
efficient on average than therest of the farms.
So if we look at this inrelation to profitability,
(07:37):
these top 25% farms tend tohave cows that are 90% and up
to around 125% efficient.
Now, it's worth noting that wesee some farms in the main
cohort which averaged similarcow efficiency, but they
weren't as profitable.
(07:58):
Okay, so now let's takea look at the financials.
Here the obvious starting pointis milk income, given it's the
primary source of income ina dairy business.
Now, many of you might thinkthat in order to achieve the
highest profit, you need thehighest milk price, and this is
absolutely not the case.
We see a large variation inmilk price throughout New
(08:19):
South Wales, depending largelyon farm location.
So, farms in the north tend toreceive higher milk prices than
those in the south, and I'vealready mentioned that seven of
the nine top 25%group are in the south.
So, if we look at thetwo groups, the average milk
price for the top 25% was$10.65 per kilo milk solids,
(08:42):
and the main cohort averagedjust over a dollar more than
that at $11.69 perkilo milk solids.
So, milk price doesn't appearto hamper the profitability of
the top 25 group, however,we certainly need to recognise
that variability in milk priceis a big challenge that farmers
(09:04):
need to manage, particularly inyears of low milk prices,
which willerode business profitability.
So, now if wejump to cost of production, this
clearly impacts profitability.
To be clear with what I'mtalking about here, this is
true cost of production,not cash cost of production.
(09:29):
We'll refer to cashcost of production as
farm working expenses.
So, true cost of productionincludes non-cash costs
as well, you know, such as feedand water inventory change,
livestock inventory change,depreciation,
and imputed labour, so that isgenerally the family labour
that takes drawings outof a business, rather than a
(09:51):
wage or a salary.
So, the average cost ofproduction for the top 25 group
was $7.74 per kilomilk solids, while for the rest
it was 34% higher, at $10.39per kilo milk solids.
Now, there'sobviously variation within,
and between, the two groups interms of cost of production.
(10:13):
So, it should be noted thathaving a high cost of
production doesn't necessarilyexclude a farm from being a
top performing farm.
Some farms are able to manageother aspects of their system
very well in orderto be profitable.
Conversely, a very low cost ofproduction should be looked
(10:33):
at with caution.
While it's got thepotential to result in
a higher profitability, if themoney is spent in the right
areas of the business,it generally won't be
sustainable over thelonger term, and a very low
cost of production is oftendriven by the operating
conditions at the time.
When we look at cost ofproduction in relation to
(10:55):
milk price, there's atrend seen where, as milk
price increases, cost ofproduction tends to increase.
Now the twoaren't definitively linked,
however, there will be numerousfactors that drive the trend,
such as having the ability withstronger milk prices to play
(11:17):
catch up on repairsand maintenance, and other
thingslike fertiliser application.
Also, with a strongermilk price, some businesses
will position themselves tocapitalise on this and produce
marginal milk, which comes withadditional costs relative to
the normal production levelsachieved within the
existing farm system.
However, as owner operators ofa business, it's important to
(11:40):
be wary of cost creepin the business.
You know, it's human naturewhen times are good and there's
a bit more cash available,we do tend to spend
a bit more, and the goodoperators will spend in the
right area of the business.
So, we do need to just think,you know, is this spend
actually driving performance oris it just a 'nice to have'.
(12:02):
If we look at someof the specific costs in
these businesses, our biggestoperational costs in
dairying is feed, obviously.
Our feed costs are purchasedand home grown feed, and we
also capture the impact of feedinventory changes in a
profit analysis, which I'llexplain in a minute.
So, I'm talking about feedcosts in dollars per kilo
(12:25):
milk solids, not dollarsper tonne, dollars per
kilo milk solids.
So, the top 25% averaged $4.29per kilo milk solids for total
feed costs, compared to $5.28for the main cohort.
If we're looking atpurchased feed costs, as a
percentage of the totalfeed costs, the top 25 had a
(12:46):
slightly lower proportion ofpurchased feed expenditure
compared to the rest, and theirproportion of home grown feed
in the milker diet was muchhigher at 58%, compared to 49%
for the main cohort.
Now, we do need to be mindfulof the conditions experienced
on farms in that year,you'll probably recall if you
(13:10):
were a farmer, orliving in New South Wales,
throughout that year we hadsevere flooding in many
locations and prolongedwet weather,
which was very widespread,and this limited the ability to
graze and optimally managepastures and crops.
So, the severity ofthese conditions, it's likely
to have impacted the maincohort of farms to a larger
(13:32):
degree than the top25% farms, just given
their geographical locations.
Now, I mentioned feed inventorychange earlier, I'll just give
you a quick explanation.
In a profit analysis,we're looking at all the costs
incurred during the year thatare related to milk production
(13:54):
within that year.
So, sometimes a business willbe in a position where
they can conserve, or have onhand at the end of the year,
more feed than they didat the beginning of the year.
So, in this instance,the businesses incurred a cost
to do this, but the feed thatis still in the shed hasn't
been used to produce milkin that year, so, the value of
(14:16):
this feed on hand becomesa negative cost.
Now that value of the feed isalso captured in the balance
sheet as an asset.
In the following year, if thefarm draws down on their stored
feed over that 12month period, then the value of
the feed used will be incurredas a positive feed cost,
(14:36):
as it's been used to producethe milk in that year,
so, I hope thatmakes a bit of sense.
In the 2023 financial year,we saw the top 25 had a much
higher value of feed inventoryon hand at the end of
the year, at an average of...
it's a negative, of -$0.36 perkilo milk solids compared to
(14:59):
the main cohort group,which had a -$0.07 per
kilo milk solids.
So, while this doesn't tell usactual tonnages, it does
suggest the top 25 werein a better position to build
inventory over the courseof the year.
So, this is often a...
it's a keyrisk management strategy used
in businesses, so, it's makingthe most of conditions,
(15:20):
when they allow, to build uphay and silage stores to have
on hand when they don't haveenough feed available
in the paddock, and potentiallylimit their exposure to,
you know, often higherpriced fodder markets.
So, if we move on to herd andshed costs, these make up a
relatively small proportion ofour cost of production,
(15:43):
however, some farms have highercosts in each of these
categories than others,depending on many things
within their system.
So, the average herd and shedcosts were significantly lower
on the top 25% farms, and forthis year, it's important to
remember these wet conditionsthat we had, they are likely to
(16:04):
have impacted herd costs on themain cohort farms, relative to
the top 25% group, partly dueto higher herd health costs,
but this will only be onefactor impacting herd costs.
For example, farms that,you know, they're
passionate about genetics,or stud farms, they'll often
have higher herd or breedingcosts relative to other farms.
(16:27):
And we're also seeing, with theincreased uptake of sexed semen
and genomics acrossthe industry, we're seeing,
you know,slightly higher herd costs.
Well, with shed costs,it's likely that
we shed costs, with larger andmore efficient dairies,
the top 25%, they're able toreduce shed costs on a dollars
(16:49):
per kilo milk solids basisrelative to the main cohort.
Now we look at overhead costs,which include items such
as labour, both paidand imputed labour, repairs
and maintenance,depreciation, insurance and
other general overheads.
It's important that these costsare managed well because if
these take up a largeproportion of operating costs,
(17:11):
then there are fewer funds tospend in areas of the business
that can drive productionand income, such as production
of higher quality feed.
Average overhead costs for thetop 25 were $3.05 per kilo
milk solids, and $4.36 forthe main cohort.
(17:31):
So, if we look at overheadcosts in relation to total milk
solids produced, there is atrend, it isn't a
direct relationship, but there'sa trend to lower
overheads with highertotal solid production.
It also appears, that belowabout 170,000 kilos
of milk solids, there tends tobe insufficient milk production
(17:55):
to dilute overhead costs unlessthey have a very efficient
business with goodoverall cost control.
So, we'll now take alook at some of the bigger
overhead costs,starting with labour.
I've mentioned that thetop 25% have good overhead
cost control, and their labourefficiency is one of the key
(18:15):
drivers of this.
We report labour efficiency asthe quantity of milk solids
produced per labour unit,with one labour unit
representing 2400 hours workedacross the year, so, I'll refer
to this as afull time equivalent or FTE.
So, the top 25% were56% more efficient than the
(18:37):
main cohort, producing 51,208kgof milk solids per FTE,
compared to an average of32,837 for the main cohort,
and nearly half ofthe top 25% group were
exceptionally efficient,producing well over that 50,000
(18:57):
kilos of milk solids.
They're able to achieve this innumerous ways, as they're not
necessarily the largest farms.
In terms of total labour,so, paid and imputed,
total labour cost, the top 25%averaged $1.81 per kilo
milk solids, compared to $2.63for the main cohort.
(19:18):
You know, interestingly,for both groups, labour costs,
total labour costs,averaged around 60% of
total overhead costs.
Some of the factors thatcontribute to lower labour
efficiency and higher costs caninclude things that...
You know, smaller operationswith a greater proportion
of family labour,typically have high
(19:39):
imputed labour costs, and inbusinesses where there's been a
lack of investment, or regularmaintenance in on-
farm infrastructure, there canbe higher
repairs and maintenance,and labour costs, you know,
due to inefficiencies aroundthe use of that labour.
So, for example, the dairymight not have been upgraded in
(20:00):
a long time, there mightbe cow flow issues with
slightly larger herds, and allthese things will impact your
labour usage and theefficiency of that.
The next one we'll lookat is depreciation.
Now, this is a non-cash costof great importance.
(20:21):
It's the cost of assets,mainly plant and equipment,
that decrease in value overtime and ultimately have
to be replaced.
In the 2023 financial year,we saw an increase in the value
of plant and equipment on manyof the farms in our Farm
Monitored data set.
There's a number of factorsthat will have driven this,
(20:42):
including things like theinstant asset tax write off,
which was available atthe time, stronger cash flows
and also the higher value ofboth new and used machinery,
which is primarily as a resultof supply chain issues
in recent years.
So, with the FarmMonitor farms, this increase in
(21:05):
plant and equipment andsignificant buildings was more
evident in the north ofthe state, where the majority
of the main cohortfarms are located.
So, we do seewhat we would class as over
capitalisation insome businesses, which will
impact depreciation and repairsand maintenance costs.
In some instances withsmaller farms, there's an
(21:28):
issue of scale.
So, the amount of equipmentthey have, it might be more
than is required bythe business, but it isn't
possible to actually have lessequipment to exactly
meet their needs.
So, it's not possibleto have half a tractor.
In other cases, it's a functionof the type of system they have.
(21:50):
So, they might have a feed padthat's used opportunistically
throughout the year,but they still need
the associated equipment,such as loaders and
mixer wagons, which depreciateover time and also require
repairs and maintenance.
Also, with the challenges ofaccessing contractors in
(22:11):
some areas, many businesseshave elected to purchase their
own equipment, you know,for sowing
or fodder conservation.
It enables them to getcrops, pastures, sown in
a timely manner, and probablyharvested in a
more timely manner,than waiting for a contractor,
who can be difficult to get.
(22:33):
But by having all thisequipment that's used
periodically throughoutthe year,
it's often underutilised,but again, it still has all
the associated costs.
And some peoplejust love machinery.
So, the average depreciationcost was $0.35 per kilo milk
solids for the top 25 group,and it was 69% higher at $0.59
(22:58):
per kilo milk solids forthe main cohort.
So, that wraps up some of thekey points in my analysis of
differences between the NewSouth Wales top 25% farms and
the rest of theFarm Monitor group in that
23/24 financial year.
(23:18):
I guess some key pointsto take away.
It's not the highest milk pricethat necessarily generates
the highest profit.
The productivity of that top25% group is often key to
their performance,particularly in areas such as
cow and labour efficiency.
This helps with management oftheir cost of production,
(23:40):
as does management of theirfeed base, with good production
from the milker diet and lowertotal feed costs on a dollars
per kilo milk solids basis.
I think also it's apparent thatoverhead cost control can be
challenging insmaller businesses, with the
lower production often notbeing enough to dilute
(24:02):
their overhead costs.
And it's important, I think,also to remember that every
business is unique.
They all have different goals,different resources,
and productive capability,and ultimately their
performance is influenced byhow the manager uses their
(24:22):
skills to manage all thecomplexities and variables
in their business.
And I'd just like to goback to goals, I mentioned the
goals of the business,it's also important to remember
that not every business isaiming to make
the biggest profit.
People are in the business ofdairying for many reasons,
such as lifestyle, a passionfor cows, you know,
(24:42):
and many other [reasons],so, the biggest profit isn't,
or the highestand strongest profit, isn't the
be all and end all.
So, finally, a big thank you toall the 36 farms that
participated in Farm Monitorfor the 2023 financial year.
Without them, we would not beable to have unbiased
discussions and insight intothe performance of the New
(25:05):
South Wales dairy industry.
So, I'd strongly encourageother farmers who are
interested in understanding theperformance of their business
to use Dairy Australia's freelyavailable online tool called
DairyBase, or become a dairyFarm Monitor Farm in 2024.
(25:28):
So, that wraps it up,thank you for listening and
thanks again to the HunterLocal Land Services, who we
produce this podcast withfunding and support from them.
Also, feel free to share thepodcast with your friends
and networks, and send anyfeedback or suggestions for
(25:50):
future episodes tothebusinessofdairy@gmail.com
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