Dairy Industry Farm Monitor Project Essay Example

relevant discussion format.

The methodology used in this report is a combination of that used in the South West Farm Monitor Project, Taking Stock, and various other referenced sources. It is important to consider the methodology when comparing figures from this report with figures generated through other methods. Part II provides more detail on the methodology. Percentage differences are calculated using the formula [(new value – original value)/original value]. For example, if costs went from $80/ha to $120/ha, it would be a 50% increase: [{(120-80)/80} x (100/1)] = [(40/80) x 100] = 0.

When calculating percentages, the result can be determined by multiplying 5 by 100, resulting in 50%. However, it should be noted that this may vary depending on specific instructions or conditions. The top quarter of farms, constituting 25%, includes a total of 6 farms from various regions such as North, South West, and Gippsland. Additionally, there are 18 farms included in this category statewide. It is worth mentioning that these 18 farms were selected by evaluating all 71 farms as one sample instead of separately choosing top farms from each region. The term 'last year' refers to the report on the Dairy Industry Farm Monitor Project for the period of 2008/09. It is important to acknowledge that not all participants from the previous report are included in the current report for 2009/10; moreover, there are new participants who were not present in previous years within this dataset. These variations should be taken into consideration when comparing datasets from different years.

The regional chapters in this report have notes indicating the farms included in last year's sample. It is important to note that the text explaining

terms will be duplicated in different chapters. The report visually presents data for the 2009/10 year, including individual farm data, regional averages, and the top 25% of farms ranked by earnings before interest and tax per hectare. The reported averages are calculated as the mean.

The averages provided cannot be seen as representative of the entire farm population in the region due to the limited number of farms included in the sample and the non-random selection process. The regional overview graphs highlight the top 25% of farms using striped bars. To identify the best performing farms, we have decided to use earnings before interest and tax per hectare as this is a more reliable measure than return on assets, which can be subjective due to asset valuation. The tables also include the Q1 - Q3 data range for key indicators to show the extent of variation in the data.

The Q1 value represents the first quartile, denoting that 25% of the data within that range is less than this value. In contrast, the Q3 value signifies the third quartile, indicating that 75% of the data within that range is greater than this value. This implies that the middle 50% of the data falls between the Q1-Q3 range. It is important to exercise caution when comparing different regions due to disparities in data.

The report will use regional names to refer to the group of participating farms in each region, aiming to reduce wordiness. The North represents the group of 22 participating farms in Northern Victoria, while the South West refers to the group of 25 participating farms in South Western Victoria. Additionally, Gippsland is used to represent the

group of 24 participating farms in the Gippsland region. The Dairy Industry Farm Monitor Project | Annual Report 2009/10 highlights changes since the previous year's report and introduces a new section called 'Farm Monitor Method'.

This section provides an explanation of the calculation of financial figures in the project and puts farm business economic terminology into perspective. The imputed labour value or rate has been raised from $15/hr to $20/hr. Consequently, when comparing imputed people costs with those in the 2008/09 report, the data will require conversion. To perform this conversion, multiply last year's results by 1.33 or multiply this year's results by 0.

The regional chapter figures now incorporate the average data from the 2008/09 report, if applicable. In the appendix tables, certain terms have been altered to maintain consistency throughout the report. Specifically, 'Other income' has been rebranded as 'All other income', and 'Total income' is now referred to as 'Gross farm income'. Additionally, slight modifications have been made to the appendix tables.

When comparing data from different years, it is important to exercise caution. Moreover, the glossary has been expanded. To access further reports and updates on the project, including the 2009/10 Dairy Industry Farm Monitor Project Feature Article, please visit the project website. On September 30th, an online feature article will examine how different calving patterns affect milk price, production costs, and overall business profitability. The project website can be found at www.dpi.

The project website, vic.gov.au/dairyfarmmonitor, provides ongoing reports and updates about the 2009/10 Dairy Industry Farm Monitor Project. These updates can be found at www.dpi.vic.gov.

au/ dairyfarmmonitor

Farm Services Division

Executive Summary Publication title

The

Dairy Industry Farm Monitor Project in Victoria has been in operation for four years. This project aims to gather farm level data on profitability and productivity performance of dairy farm businesses in Victoria. Data was collected from 71 farms in Northern Victoria, South West Victoria, and Gippsland. Farms were selected to ensure a distribution of sizes, herd sizes, and geographical locations within each region.

The results in this report do not represent population averages as the participant farms were not randomly sampled from the population. The year 2009/10 started with lower opening prices compared to the previous two years due to the impact of the global financial crisis in 2008/09. During this time, global dairy commodity prices fell, leading to a reduction in farm gate milk prices. However, confidence in the industry gradually improved as the year went on, and milk companies announced several increases in prices. Ultimately, the milk price ended up in the range of $4.20/kg MS to $4.

Most farms in this study experienced a milk price of $50/kg MS. Along with the rise in milk prices, farmers were able to increase production and reduce costs due to competitive grain and input prices, favorable seasonal conditions, and irrigation allocations in Victoria. Despite the improved market conditions and weather, dairy farmers did not immediately become profitable again. The 2008/09 season had lasting effects, including a decrease in milk prices and high input prices, as well as ongoing drought conditions. As a result, many farms faced financial difficulties during the 2009/10 period.

The average profitability for participant farms was $0.65 per kilogram of milk solids sold or $507 per hectare. These figures indicate a decline of 37%

and 36% respectively compared to the levels reported in the 2008/09 Dairy Industry Farm Monitor Project Report, and a decrease of 71% and 65% from the previous record highs recorded in 2007/08.

Additionally, there was a drop in the year-on-year return on assets across the state, falling from 3.8% to 2.2%.

In Victoria, the South West and Gippsland regions have the highest number of profitable farms, with over 80% reporting positive earnings before interest and tax. Conversely, approximately 66% of farms in the North region were profitable. The recent volatility has had a significant impact on surveyed farms, with more than 50% experiencing a negative return on equity in the 2009/10 period. This means that their net worth is now lower compared to a year ago because the costs associated with accessing additional capital through interest and lease have exceeded the returns generated by that capital. The North region was particularly affected, with over 70% of participating farms having a negative return on equity. However, there is optimism for the dairy industry as farmers overwhelmingly anticipate improved farm business returns in 2010/11 according to the business confidence survey.

This year, farmers are more optimistic about the coming year than ever before since the Dairy Industry Farm Monitor Project began. They expect both milk price and production to increase, and feed prices to remain stable. Similar to last year, the biggest challenges farmers anticipate in the next 12 months are milk price and climate and water availability. In the long term, succession planning is the main issue for farmers, while addressing climate and water availability remains a significant concern. The Australian National Greenhouse Gas Inventory method was used to

conduct a greenhouse gas emission audit.

The average level of greenhouse gases emitted has remained relatively stable at 10.2 tonnes per tonne of milk solids produced, compared to previous years' emissions of 10.4 in 2008/09, 10.8 in 2007/08, and 10.

3 in 2006/07. The average profitability across the participant farms was $0.65 per kilogram of milk solids sold or $507 per hectare. The Farm Services division II utilizes the Farm Monitor method to calculate and interpret figures in the Dairy Industry Farm Monitor Project (DIFMP) report.

This report utilized a method based on The Farming Game (Malcolm et al. 2005) to generate profitability and productivity data. It follows the same approach as previous DIFMP reports. It is important to note that other benchmarking programs may have different methods and terms for farm financial reporting. The allocation of items such as lease costs, overhead costs, and imputed people costs to farm enterprises is in line with farm economic theory, though it may not always be executed effectively. Additionally, standard dollar values for stock, feed on hand, and imputed labor rates may vary.

It is important to approach the results of different benchmarking programs with caution due to the following reason: The results are obtained by investing in assets that generate income higher than the production costs and debt interest. These assets can be acquired through equity (own capital) and debt (borrowed capital), as demonstrated in Figure 1 above. To generate income, these assets must be cultivated and managed, which incurs costs.

The growth of a dairy farming business depends on the relationship between income, operating costs, and interest costs. The business can generate total farm income from various sources, including cash

income from milk or non-cash changes in inventory of livestock or feed. Milk is the main source of income and is determined by multiplying the price received per unit by the number of units (e.g., dollars per kilogram milk solids multiplied by kilograms of milk solids). By subtracting specific costs unique to the enterprise, such as herd, shed, and feed costs, from the total income, a gross margin for the dairy enterprise can be calculated.

Gross margins are frequently used for comparison in similar enterprises, particularly in broad acre cropping and livestock. However, they are not commonly utilized in economic analysis of dairy farming businesses as dairy farming usually involves a single enterprise. The growth in equity is calculated by adding equity debt to total assets as of June 30. Overhead costs, on the other hand, are expenses incurred during the general operation of a business and are not directly related to its output. These costs do not vary in proportion to output changes. In the DIFMP, overhead costs are separated into cash overheads and non-cash overheads. This distinction is made to separate the cash flows of the business from profit measurements that include all costs, both cash and non-cash.

Cash overheads refer to fixed costs that require a cash payment, such as permanent labor, rates, insurances, and administration. On the other hand, non-cash overheads include costs that do not involve actual cash expenditure, such as equipment depreciation. Additionally, imputed costs related to owner-operators and family labor that is not paid a market wage are considered non-cash overheads. These non-cash overheads must be accounted for and subtracted from income in order to obtain a realistic estimate of

costs, profit, and the return on the business's capital. In cases where an owner-operator runs this type of business, they are paid an equivalent market wage even if they do not fully receive this amount as cash wages. Net farm income is calculated by subtracting the financing costs of interest and lease costs from EBIT (Earnings Before Interest and Taxes), and it represents the return on the farmer's own capital. Interest and lease costs pertain to borrowed money or leased land.

Net farm income after income tax reflects the increase in equity, considering any cash flow consumption that exceeds the operator's allowance. This growth can be achieved through reinvestment or debt repayment. Return on Assets (RoA) and Return on Equity (RoE) are two economic indicators commonly used to assess the overall performance of a farm. RoA measures the return on the total assets of the farm, regardless of its capital structure.

EBIT or operating profit as a percentage of total assets, including leased assets, represents the return on farming. Additionally, any increase in asset value, like land value, contributes to the total return on investment. Comparing this return on total assets with similar risk investments in the economy determines performance.

Figure 1 visually presents the total assets of a farm business in terms of debt and equity. The ratio of debt to equity, also known as the equity percentage of total capital, can differ based on factors such as the specific details of the farm business and the owners' risk preferences. Return on Equity (RoE) is a measure of the owners' rate of return on their investment in the business. It calculates the net profit as a percentage

of the total equity (one's own capital).

The DIFMP provides reports on the Return on Equity (RoE) both with and without capital appreciation. This differentiation allows for the identification of productivity gains (RoE without capital appreciation) and capital gains (RoE with capital appreciation). The Earnings Before Interest and Tax (EBIT) or Operating Profit is calculated by deducting overhead costs from the total farm gross margin. This figure represents the return on all assets, including owned, debt, and leased assets, that are utilized in the business. It serves as an indicator of how efficiently the manager is utilizing all the farm resources under their control.

Assets, also known as capital, are measured in the DIFMP. EBIT is the final financial measure used to assess the profitability of a farming business in the DIFMP. It allows for a comparison of whole farm performance between different farming businesses as it disregards the financing of the operation. In terms of seasonal conditions, the average rainfall across the farms in each region exceeded the long term averages. The North received 556mm of rainfall over the year, which is approximately 107% of the long term average of 519mm for these farms. On the other hand, farms in the South West received an average of 849mm of rainfall, equivalent to 104% of their long term average of 816mm.

Gippsland received 894mm of rainfall, which is equivalent to 103% of their long term average of 871mm. Figure 3 displays the year's rainfall pattern and the significant variability that occurred. For more detailed information on the 2009/10 seasonal conditions, refer to the regional chapters provided. The Farm Services division consists of Part One: Statewide Rainfall (mm/month), with

the corresponding monthly values shown. On average, farms in the South West had the largest herds and covered the largest area. Gippsland, on the other hand, had a smaller average usable area of 172 hectares but a higher average stocking rate of 1.7 cows per hectare.

On both a per cow and per hectare basis, cows in the North had the highest average milk production at 515 kg MS and 806 kg MS respectively. The North and South West had similar total water use per hectare due to higher allocations in the northern irrigation region. The Murray and Goulburn systems closed at 100% and 71% allocation of high reliability water shares for the year. The Macalister Irrigation District in Gippsland also had a 100% allocation of high reliability water shares and a 45% allocation of low reliability water shares.

Table 1 shows that farms in the North used twice as much water for irrigation per hectare compared to farms in Gippsland in 2009/10. This table also presents average farm characteristics for each region. More detailed information can be found in Appendix Tables 2 for each region. The Annual Report 2009/10 of the Dairy Industry Farm Monitor Project includes this data. In addition, Figure 4 provides a visual representation of the average farm financial performance.

The vertical blue colours in Figure 4 represent income per hectare, which is added to calculate gross income. By subtracting the green variable costs from gross income, we obtain the grey gross margin values. From the gross margin, we deduct the red/orange overhead costs to determine yellow earnings before interest and tax. The legend for Figure 4 and category values can be found in

Table 2. Gross farm income encompasses all farm-related revenue, including milk sales, stock/feed inventory increases, and cash income from livestock trading. Other income sources like farm owned shares, bank account interest, and rebates/grants are also included.

The difference in gross farm income per hectare among the regions mirrors the milk solids production per hectare in those regions. Figure 4 demonstrates the significant dominance of milk income over gross income, although other sources remain significant for the farm business as well. In the North, income from non-milk sources reached $587 per hectare, which is nearly four times higher than the average earnings before interest and tax of $153 per hectare. Farm Services division Part One: Statewide Overview Variable costs Variable costs refer to costs that are directly related to production.

Various services and expenses contribute to the overall costs of animal management, including animal health, contract services, supplementary feeding, agistment, and pasture costs. The high costs associated with purchased feed and agistment, indicated by the dark green in Figure 4, are particularly significant in the North region. Additionally, homegrown feed represents another major variable cost. Across all regions, approximately 84% of total variable costs are allocated to feed expenses, with a slight increase in the North region. Refer to Appendix Tables 6 for a detailed breakdown of variable costs as a percentage of total costs in each region.

The gross margin is calculated by subtracting total variable costs from gross income. It is often used to compare enterprises with similar capital structures, such as sheep or beef farming. In the dairy industry, it can also be useful for analyzing on-farm changes that do not require capital investment.

The statewide average

gross margin for this year was $1,862/ha, which is a 7% decrease compared to last year's figure of $2,007/ha. It is also a 24% decrease from the recorded figure of $2,457/ha in 2007/08.

Overhead costs, also known as fixed costs, are not easily affected by small changes in the scale of a business's operations.

Examples of costs that are considered in business include depreciation, administration, repairs and maintenance, and the cost of people’s time. Imputed people cost refers to an estimate of the cost of the time spent in the business by individuals who have a stake in the business, such as the owner, the owner’s family, or a sharefarmer who has assets in the business. The calculation for imputed people cost is based on either $400 per cow minus paid labor (as utilized in Taking Stock) or $20 per hour of imputed people time, whichever amount is greater. This represents an increase from the previous hourly rate of $15 that was used in all previous editions of the Dairy Industry Farm Monitor Project.

Table 2 reveals that participants in the North region had higher average imputed people costs and lower average employed people costs per hectare compared to those in the other two regions. This suggests that owner/operators in the North perform most tasks on their farms. On the other hand, the South West region had lower total overhead costs per hectare, primarily due to lower imputed people costs and repairs and maintenance costs. However, when considering the cost per kilogram of milk solids (refer to Appendix Tables 5), the South West region had the highest overhead costs. This indicates that their lower per hectare costs are

mainly attributed to larger farm sizes. Earnings Before Interest and Tax (EBIT) represents the gross income minus variable costs and overhead costs, including imputed costs. Since this measure does not include tax, interest, and lease costs, it can be used to evaluate the operational efficiency of the entire farm business.

Average EBIT is positive in all three dairying regions, both in terms of per kilogram of milk solids (Figure 5) and per hectare (Table 2). Similar to 2008/09, EBIT per hectare has once again decreased from the previous year's levels, with reductions of 66%, 31%, and 38% for the North, South West, and Gippsland regions respectively. Among the farms with negative return on equity, 32 lost between 0% and 10% equity, while 4 lost over 10% of their equity during the year. Among the farms with positive return on assets, 31 had returns on equity between 0% and 10%, while only 4 farms had returns on equity greater than 10%.

16 Farm Services division Part One: Statewide Overview Further discussion of return on assets and return on equity occur overleaf in the risk section and later in the regional chapters. Appendix Tables 1 present all the return on assets and return on equity for the individual farms.