written by John Mulvaney, GippsDairy
Statistics in regard to the Gippsland dairy industry show 62 per cent of herds in the region are between 150 and 500 cows in size (av. 280 cows) and this range of operation supplies approximately 67 per cent of the region's milk.
This may come as a surprise given the 'get big or get out' syndrome and push by some towards large herds as a means of increasing profit. 62 per cent of dairy businesses seem to be saying that, for a whole range of reasons, they are not following this path.
Perhaps it has something to do with the fact the viability and profitability of a dairy farm business and number of cows milked do not always have a positive correlation. Just like litres, farmers do not get paid for cow numbers - they get paid for solids. Profit is derived by deducting all the costs associated with the production of those solids.
The following case study of a 158 cow herd (peak number in 2011/2012) in the Warragul district, using the actual interim 2011/2012 returns, highlights profit is possible on lower cow numbers; it all depends on the efficiency and cost control of the operators.
The business operates on an 80 ha titled area of high value ($10,000/ha), with a milking area of 72 ha. A 45 ha turnout area is leased about 8 km's away from the home farm. There is one calving per year commencing on July 23 - it is a traditional seasonal calving herd in a high rainfall area.
The annual farm program has been designed to fit in with the pasture growth curve, be simple and allow an annual overseas holiday for the operators. Production is not geared to an out-of-season milk payment system. Generally the herd is completely dried off and there is no milk sent from late June until the start of calving. Summer fodder crops have been sown when pasture renovation is required, but there have been none grown in the past three seasons - in fact the pasture renovation costs for 2011/2012 total $2,231. The owners make their own silage and hay but their machinery lasts a long time and is well looked after. Employed labour is generally restricted to casuals for occasional time off and the annual holiday - perhaps a drawback of the lower cow numbers.
Table 1 presents the interim physical and financial information from the 2011/12 year. The figures to note
from this table are:
- The Operating Surplus of $246,261 is the real amount left to spend on debt servicing, personals, tax and capital. This is a very impressive figure, especially for 158 cows, but remember they employ very little paid labour.
- Farm working expenses of $2.78 are very low, despite quite high per cow and per hectare production. This highlights the farm efficiency and the operators cost control.
- When profit (EBIT) is calculated, they do take 'a hit' because if we pay them for all the time they work (which we don't do in reality) it totals $104,000 and we only have 158 cows to spread this imputed cost; hence the profit is reduced to $800 per cow, which is still very acceptable.
- When this profit is expressed as a percentage of the valuable Warragul land the return on asset per cent is only 4.2 per cent which may be regarded as low, but this is because of where the farm is situated.
- Tax planning is critical given a profit of $157,761.
The operators still have debt, but have reduced this to a level where the focus is on off-farm investments, superannuation, and FMD's. The existing Operating Surplus will permit additional labour to be employed if required in the future.
Should they be increasing cow numbers to supposedly automatically increase profit? Any such move would have to be very carefully considered, with the focus on the costs associated with chasing that extra production.
Considering the operators have a net worth in excess of $2.2 million, it's not a bad wicket on 158 cows!
As you read this the operators are probably on a beach somewhere in Malaysia.
|Milking Area||72 ha|
|Per cow||556 kg|
|per ha||1,221 kg|
|Stocking rate||2.2 c/ha|
|Grain Fed:||2.02 T/cow|
|Farm||10 T DM /ha|
|Per cow||4.5 T DM/cow|
|Average pasture costs||$58/T DM|
|Average grain plus additive cost||$275/ TDM|
|% Imported feed||
|Income (based on $5.23/kg MS)|
|Overheads and paid labour|
|Total Farm Working Expenses (FWE)|
|Per kg milk solids||$2.78|
|Operating Surplus (Income less FWE)|
|Owner / Operator labour allowance||$103,905|
|EBIT Operating Surplus less owner / operator labour allowances less depreciation|
|Return on asset % (Expensive Warragul land)||4.2%|