John Mulvany, ONFARM Consulting
Recently at a discussion group meeting, one of the members showed the group a copy of a 2003 fertiliser price sheet with super potash 3 and 1 at $291 per tonne and urea at $400 per tonne.
This lead to a discussion about whether changes in milk price and productivity have kept pace with rising costs. This is essentially a question of how the 'terms of trade' have tracked for dairying over the past 10 years. In general, most agricultural commodities suffer an eroding terms of trade.
The following table attempts to compare the position now to 10 years ago, using data from about forty reasonably profitable dairy farms. A three year average has been used for the periods 2001 – 2004 and 2009 – 2012. Both the periods chosen had reasonable levels of volatility. In general, the cow numbers and stocking rate of the group did not change dramatically over the 10 years, and is around 280 cows at 2.5 milkers per hectare.
What about milk price and production? The figures indicate a difference in milk price of 31 per cent but this is of course deceptive, given the volatility that milk price experiences from year to year. The average production per farm over the period rose by 22 per cent and, even though the ratios in the above table are expressed per kilogram of milk solids, there is no doubt that the extra production has allowed the dilution of some overhead costs.
The level of imported feed has increased from 33 per cent to 39 per cent, a classic example of the production of extra marginal milk, which will be very profitable some years and barely profitable in other years, such as 2012-13. Pasture consumption has increased and this appears to be a secure, sustained increase. The figures suggest that this group of farmers have slightly increased their relative position. When the figures are converted to a zero production increase then it becomes a neutral position - no gain in the past ten years.
|Period 2001 – 2004||Period 2009 – 2012||Change|
|Milk Price $/kg MS||$4.00||$5.23||31%|
|Herd costs /cow|
PKS $/tonne 3 and 1
Good Quality Hay $/T
|Paid Labour (total/40 hour Labour Unit/year)|
Insurance and administration $/cow
|Farm Working Expenses $/ kg MS||2.52||3.42||36%|
|Total Production Cost (including|
depreciation, owner labour) $/kg MS
|Profit (EBIT) $/ kg MS||$1.13||$1.29||14%|
|Milk solids produced/farm (kg)||121, 654||148,268||22%|
|% Off farm supplement||33%||39%||18%|
|Pasture consumed tonnes DM/ha||8.1||9.2||13%|
So does that mean that all dairy farmers should increase production to beat the terms of trade? Definitely not.
We all know that some production increases are profitable and others aren't, especially if the farm is fully developed and stocked at an optimum level. These farms have reached a position where it is difficult to achieve extra production that is consistently very profitable (return on investment of 20 per cent plus) so that they can confidently offset the impact of the terms of trade. As the group members pointed out, if they just keep importing more supplements to increase production, this introduces a new risk profile to the business. The other potential is to invest more capital but again, this has to be evaluated as a separate investment decision, within such things as the context of the stage of life of the operator.
Other than increased production what are some other approaches to try and beat the terms of trade?
Within the group of farmers who see problems with simply increasing production there will be the option for some of the following actions:
- Fertiliser costs scrutinised by using four transect soil tests/100 hectares of milking area every two years - to provide the confidence in reducing rates. Nitrogen applications are very strategic especially in spring, not simply 40 kilograms of N every time the cows leave the paddock.
- Low labour intensive effluent systems to get nutrients that cost nothing are being evaluated and installed. Some farms now have 30–50 per cent of their milking area receiving no purchased PKS.
- Energy audits are being done together with some good action on power bills by the major processors.
- Labour saving equipment is consistently being evaluated: cup removers, yard blasters, and general workability of the farm.
- Equipment is serviced regularly rather than incurring the ever increasing charge out rates for service personnel, particularly out of hours.
- As always, all cost inputs are evaluated to ensure that there is a definite margin as a result of the input.
- No input cost action, but debt reduction and hence more cash flow released to offset the terms of trade so that lifestyle and discretionary expenditure does not suffer
- Profitable increased production where the business has the potential.
The terms of trade issue will not disappear - it can only be offset by lower cost per unit of output, higher milk prices, or extra profitable production. Dairy Australia through Murray Dairy is offering an independent business evaluation via the Taking Stock program. It could be worthwhile having another pair of eyes look at your business as you get towards the end of the 2012-13 year.