6 Owner Operator: Equity and Capital Financial Analysis
6.1 Introduction
This section considers the equity and capital position of dairy farms, with additional information about trends over time in these positions.
Following a large capital expenditure, changes in debt and drawings, a cash surplus of $57,909 was recorded. The operating return on dairy assets increased to 5.1 percent in 2019-20 and the total return on assets was 1.4 percent. Total return on equity decreased -1.1 percent. Equity levels decreased 2.1 percent (-$85,307), with the positive growth in equity from profit more than offset by the decrease in asset values and small increase in liabilities. Total liabilities as a percentage of total assets (loan to value ratio) decreased to 51 percent at the end of the season. Closing term liabilities per kilogram milksolids decreased to $23.25.
6.2 Dairy Assets
The number of dairy farms sold in 2019-20 was down 35 farms (-24%), to 113. The REINZ average sales price per kilogram milksolids and per hectare for the last five seasons is shown in Table 6.1. Hectares are measured as total, rather than effective area which is generally used in this publication. Raw data from REINZ was weighted by the number of farms in each region and the analysis only includes farms considered to be economic units. Dairy land prices have remained reasonably static over the last seven seasons at around $40 per kilogram milksolids and around $38,000 per hectare. In 2019-20 the land price decreased to $37 per kilogram milksolids and $33,410 per hectare.
| 2010-11 | 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | |
|---|---|---|---|---|---|---|---|---|---|---|
| FARM SALES: | ||||||||||
| Farms sold | 143 | 157 | 197 | 312 | 244 | 192 | 217 | 226 | 148 | 113 |
| Average $ sale price/kg MS | 38 | 41 | 36 | 42 | 44 | 39 | 40 | 40 | 38 | 37 |
| Average $ sale price/ha | 32,735 | 32,376 | 33,557 | 36,369 | 39,577 | 36,557 | 37,835 | 38,015 | 36,846 | 33,410 |
| Average $ sale price/ha (real 2019-20 dollars) | 36,307 | 35,569 | 36,636 | 39,055 | 42,326 | 38,937 | 39,613 | 39,214 | 37,382 | 33,410 |
6.3 Liabilities and Debt Servicing
Interest is the cash cost of borrowing funds, while rent is the cost of borrowing assets. Interest and rent totalled $1.12 per kilogram milksolids. Borrowing costs represented 14.7 percent of gross farm revenue (Table 6.2). Therefore, for every dollar of gross income earned, 14.7 cents is required to pay interest and rent.
| 2010-11 | 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | |
|---|---|---|---|---|---|---|---|---|---|---|
| DEBT SERVICING: | ||||||||||
| Interest & rent $/kg MS | 1.54 | 1.31 | 1.39 | 1.29 | 1.36 | 1.36 | 1.35 | 1.31 | 1.24 | 1.12 |
| Interest & rent % GFR | 19.6% | 18.1% | 20.2% | 15.6% | 21.5% | 30.5% | 21.2% | 18.2% | 17.7% | 14.7% |
| Term liabilities $/kg MS | 20.44 | 19.24 | 20.82 | 20.14 | 21.26 | 22.49 | 25.00 | 25.31 | 24.92 | 23.25 |
The debt to asset ratio decreased from 53 percent at the close of 2018-19 to 51 percent in 2019-20 (Table 12.6). Debt to asset values had been around 50 percent for the past five seasons but were at lower levels prior to that.
Figure 6.1 shows the debt to asset distribution in 2018-19, with an average of 51 percent. Thirty-two percent of farms have debt to asset ratios below 40 percent. Eighteen percent of the farms had debt to asset ratios over 70 percent, with nearly seven percent sitting in the high-risk area of over 90 percent.
Figure 6.1: Debt to Asset Distribution
Over the last 10 years, the average farm has increased its milksolids production by 28 percent, while term liabilities have increased nearly twice as fast (+47%) to $4 million per farm. Over the last few seasons farms have started to increase levels of principal repayments, increasing liquidity pressure on some farms through higher payments.
6.4 Liquidity
Given the high profitability and cash available for living and growth, a cash operating surplus of $537,460 was recorded in 2019-20, increasing $90,759 compared to last season. Table 6.3 shows a breakdown of the change in working capital, including the source and application of cash funds. The majority of the source of funds in 2019-20 was from the current year’s farming operations. Term debt and introduced funds decreased this season. Cash from the income equalisation scheme was at -$475 per farm in 2019-20. After farming operations, forty-two percent of the cash was spent on interest and rent payments for borrowing, while net capital transactions, development and purchases (25%) was the other large cash expenditure area in 2019-20. Drawings from the dairy business, for farm family living and so forth was (20.6%) and tax payments (11.8%), was where the remainder of the cash was spent.
| 2010-11 | 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | |
|---|---|---|---|---|---|---|---|---|---|---|
| WORKING CAPITAL: | ||||||||||
| Change in current assets | 58,298 | −33,122 | 17,733 | 58,063 | −99,057 | −24,651 | 56,493 | −12,326 | −17,418 | 205,720 |
| - Change in current liabilities | 18,596 | 5,959 | −25,702 | 24,417 | −20,779 | −2,678 | −9,780 | 29,949 | −5,362 | −7,441 |
| Change in working capital | 39,702 | −39,081 | 43,435 | 33,646 | −78,278 | −21,973 | 66,273 | −42,275 | −12,056 | 213,162 |
| SOURCE OF FUNDS: | ||||||||||
| Cash operating surplus | 496,585 | 464,654 | 375,176 | 572,586 | 361,272 | 141,757 | 415,410 | 478,511 | 446,701 | 537,460 |
| + Change in working capital | 39,702 | −39,081 | 43,435 | 33,646 | −78,278 | −21,973 | 66,273 | −42,275 | −12,056 | 213,162 |
| + Net non-dairy cash income | 2,446 | 790 | 1,125 | 2,355 | 486 | 904 | 3,371 | 6,064 | 7,040 | 10,682 |
| + Net off-farm income | 12,323 | 11,018 | 12,427 | 9,991 | 12,078 | 9,238 | 19,811 | 18,114 | 6,670 | 13,167 |
| + Introduced funds | 6,240 | −2,871 | 40,918 | −44,275 | 28,307 | 77,696 | −24,004 | −40,908 | −2,774 | −18,560 |
| + Income equalisation | −274 | −2,004 | 1,178 | −4,756 | −9,579 | 16,765 | 1,307 | 40 | 307 | −475 |
| + Increase in term debt | −2,991 | −22,153 | 123,346 | 10,790 | 93,026 | 111,778 | 75,868 | 92,523 | 74,554 | −49,483 |
| = Total source of funds | 554,031 | 410,353 | 597,605 | 580,337 | 407,312 | 336,165 | 558,036 | 512,069 | 520,442 | 705,952 |
| APPLICATION OF FUNDS: | ||||||||||
| Rent (excl support block) | 20,040 | 19,374 | 22,812 | 23,366 | 22,250 | 20,047 | 19,582 | 20,703 | 12,499 | 17,280 |
| + Interest | 184,707 | 174,518 | 174,136 | 171,597 | 195,984 | 197,277 | 197,343 | 191,459 | 194,022 | 172,460 |
| + Tax | 36,388 | 46,816 | 35,383 | 58,155 | 34,078 | 7,939 | 16,773 | 41,532 | 38,315 | 52,696 |
| + Net capital transactions | 136,393 | 164,026 | 185,532 | 143,703 | 201,119 | 76,697 | 109,749 | 238,591 | 207,027 | 113,522 |
| + Drawings | 97,099 | 83,781 | 92,872 | 116,224 | 110,437 | 78,151 | 82,043 | 104,334 | 95,173 | 92,090 |
| = Total application of funds | 474,627 | 488,515 | 510,735 | 513,045 | 563,868 | 380,111 | 425,490 | 596,619 | 547,036 | 448,048 |
| Source less application of funds | 79,404 | −78,162 | 86,870 | 67,292 | −156,556 | −43,946 | 132,546 | −84,550 | −26,593 | 257,903 |
6.5 Equity
Equity (shareholders’ funds or net worth) is the net value of the assets owned by the farm business (i.e. total assets less total liabilities at open and close of each year). At the opening of the 2019-20 season, dairy farm businesses had an average equity of $4.05 million or 49 percent of total assets. This decreased to $3.96 million at the end of the season or 48 percent of total closing asset values.
The equity value of the average dairy farm business decreased $519,637 between 2015 and 2020 (Figure 6.2). Over the past five years, growth has been driven by increases in dairy and non-dairy assets (+$36,505 and +$55,505 respectively), and offset by the decline in the value of land and buildings (-$163,680), investments (-$76,729) and other assets (-$248,880). Liabilities have increased $309,927 over the past five years.
Figure 6.2: Components of Equity Change ($000)
6.6 Returns
The return on dairy assets is discussed under farm profitability (Section 5.4). The total return on assets takes into account operating profit from both dairy and non-dairy farming operations, plus the change in value of capital assets. The total return on assets in 2019-20 was 1.4 percent. The 2019-20 total return on assets comprised 5.1 percent net return from all farming operations with -3.7 percent net return from capital. For the past decade the total return on assets has ranged between -4.1 percent and 9.6 percent, driven by changes in the value of land and buildings, dairy company share values, livestock values and profits (Table 12.7).
Figure 6.3: Owner Operator Total Return on Assets
The percentage return on equity is the return on owner’s funds, including capital changes after interest is paid (Table 12.7). The return on equity will be higher than the total return on assets when the latter is greater than the cost of debt and vice versa. In 2019-20 the total return on equity was -1.1 percent compared to 1.4 percent total return on assets. Both 2014-15 and 2015-16 realised negative returns on equity due to low profitability, but in 2017-18, 2018-19 and 2019-20 the negative return was due to reduced capital values. Ideally, the return on assets should be above the returns for alternative investments of similar risk, such as shares or other forms of property investment.