9 50:50 Sharemilkers: Equity and Capital Financial Analysis
9.1 Introduction
This section considers the equity and capital position of dairy farms, with additional information about trends over time in these positions.
Operating return on dairy assets was at 16.8 percent for sharemilkers, while total return on assets was measured at 9.3 percent. The level of debt to assets decreased to 47.9 percent at close, while term liabilities of $3.19 per kilogram milksolids, a 15.6 percent decrease compared to the previous season.
9.2 Dairy Assets
Total dairy assets increased in value by $78,756 during the 2019-20 season, closing at $1.1 million per farm. Livestock accounted for 71 percent of total closing dairy assets, following a small increase in value throughout the season.
9.3 Liabilities and Debt Servicing
The flow of funds (Table 9.1) shows the components of the change in working capital, including the source and application of cash funds. Funds for 2019-20 were mostly from farm operations. Term debt decreased ($8,192) on loans by the close of the season. Of the funds applied, 34% was spent on drawings, 30% was spent on capital transactions and 14% was spent on interest payments. Tax payments required 21 percent of funds at $39,336 per herd.
| 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 | 23,742 | −1,003 | −22,966 | 32,816 | −23,771 | −16,221 | 22,455 | 2,932 | −24,375 | 112,605 |
| - Change in current liabilities | 6,999 | −2,464 | 7,412 | 13,755 | −1,920 | 23,954 | −9,244 | 15,668 | −10,322 | −10,193 |
| Change in working capital | 16,743 | 1,461 | −30,378 | 19,061 | −21,851 | −40,175 | 31,699 | −12,736 | −14,053 | 122,798 |
| SOURCE OF FUNDS: | ||||||||||
| Cash operating surplus | 224,026 | 235,759 | 120,735 | 201,958 | 137,419 | 11,433 | 167,540 | 169,323 | 213,273 | 230,372 |
| + Change in working capital | 16,743 | 1,461 | −30,378 | 19,061 | −21,851 | −40,175 | 31,699 | −12,736 | −14,053 | 122,798 |
| + Net non-dairy cash income | 2,645 | 1,458 | 139 | 2,036 | 2,511 | 2,243 | 1,798 | 1,996 | 2,659 | −1,380 |
| + Net off-farm income | 5,508 | 3,753 | 4,244 | 3,989 | 3,817 | 4,546 | 2,281 | 4,071 | 5,230 | 10,975 |
| + Introduced funds | 8,612 | 11,331 | 8,480 | 13,155 | 24,197 | 26,601 | 12,583 | 14,806 | −19,006 | −10,255 |
| + Income equalisation | 519 | −379 | 4,325 | −2,621 | −6,091 | 5,707 | 1,412 | 0 | 470 | 0 |
| + Increase in term debt | −58,537 | −56,442 | 40,067 | 973 | 50,721 | 37,011 | −17,644 | −20,730 | 33,643 | −8,192 |
| = Total source of funds | 199,516 | 196,941 | 147,612 | 238,551 | 190,723 | 47,366 | 199,669 | 156,730 | 222,216 | 344,318 |
| APPLICATION OF FUNDS: | ||||||||||
| Rent (excl support block) | 2,111 | 3,450 | 4,385 | 3,401 | 5,154 | 1,407 | 1,047 | 2,320 | 827 | 1,220 |
| + Interest | 44,577 | 34,423 | 33,043 | 34,599 | 31,805 | 37,949 | 34,629 | 31,626 | 36,976 | 27,516 |
| + Tax | 23,930 | 31,344 | 27,351 | 29,237 | 25,101 | 5,492 | 6,220 | 24,199 | 30,109 | 39,336 |
| + Net capital transactions | 27,519 | 48,945 | 70,590 | 60,379 | 89,030 | 26,407 | 36,654 | 49,540 | 113,811 | 57,631 |
| + Drawings | 67,893 | 75,857 | 72,999 | 72,813 | 83,335 | 56,461 | 57,721 | 74,517 | 67,169 | 65,458 |
| = Total application of funds | 166,030 | 194,019 | 208,368 | 200,429 | 234,425 | 127,716 | 136,271 | 182,202 | 248,891 | 191,161 |
| Source less application of funds | 33,486 | 2,922 | −60,756 | 38,122 | −43,702 | −80,350 | 63,398 | −25,472 | −26,675 | 153,157 |
The average 50:50 sharemilkers cash operating surplus was $230,372, which was well above the previous season’s $213,273. This level of cash operating surplus for 2019-20 translates to around $1.15 per kilogram milksolids, the same as last season’s level. The 2019-20 average level of discretionary cash was $171,895, well above last season’s average of $148,021. Average discretionary cash on farms has maintained a strong position since the 2016-17 season, in strong contrast to the 2015-16 season where it was negative (-$31,172). Typically, these funds are required to reduce debt, sustain drawings and to fund capital expenditure. Term liabilities declined from $3.78 at the close of the 2018-19 season to $3.19 at the close of the 2019-20 season. Interest and rent expenditure at 16 cents per kilogram milksolids was 4 cents less than the previous year. Interest and rent per dollar of gross farm revenue decreased from 5.6% to 4.1% (Table 9.2).
| 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 | 0.35 | 0.26 | 0.27 | 0.27 | 0.24 | 0.27 | 0.25 | 0.23 | 0.20 | 0.16 |
| Interest & rent % GFR | 8.2% | 6.5% | 7.0% | 6.2% | 7.1% | 11.5% | 7.3% | 6.1% | 5.6% | 4.1% |
| Term liabilities $/kg MS | 3.98 | 3.09 | 3.64 | 3.71 | 3.36 | 4.07 | 4.05 | 3.81 | 3.78 | 3.19 |
The debt to asset ratio decreased from 61.6 percent at the close of 2018-19 to 47.9 percent in 2019-20 (Table 13.6). Debt to asset values have fluctuated between 70 and 50 percent for the past four seasons but were at lower levels prior to that.
Figure 9.1 shows the debt to asset distribution in 2019-20, with an average of 47.9 percent. Fourty-one percent of farms have debt to asset ratios below 40 percent. Fourteen percent of the farms had debt to asset ratios over 70 percent, with no 50:50 sharemilker farms sitting in the high-risk area of over 90 percent debt.
Figure 9.1: Debt to Asset Distribution
9.4 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, 50:50 sharemilker farm businesses had an average equity of $615,525 or 48 percent of total assets. This increased to $712,919 at the end of the season or 52 percent of total closing asset values.
The equity value of the average 50:50 sharemilker farm business increased $209,502 between 2015 and 2020 (Figure 9.2). Over the past five years, growth has primarily been driven by increases in non-dairy assets and livestock (+$97,246 and +$77,603 respectively), and offset by the increase in total liabilities (-$33,951) over the past five years.
Figure 9.2: Components of Equity Change ($000)
9.5 Returns
Total return on assets (profit including capital change generated by the assets employed) in 2019-20 was 9.3 percent, as shown in Figure 9.3. Net returns from dairy activity yielded $150,552 across the 2019-20 season, combined with an average change in capital value of -$31,459 per herd. Sharemilker returns are more volatile than those earned by Owner-operators due to livestock being their most significant asset class and livestock values fluctuating with greater magnitude than land prices.
Figure 9.3: Sharemilker Total Return on Assets
Total returns on sharemilkers equity averaged an increase of 16.9 percent in 2019-20. This was a decrease from last season’s 36.7 percent return.