8 50:50 Sharemilkers: Operational Financial Analysis
Operating profit per hectare for 50:50 sharemilkers (herd owning sharemilkers) recorded an increase (+35%) to $1,050 per hectare in 2019-20. Higher milk payouts received (+28 cents per kilogram milksolids) were partially offset by a small decrease in kilogram milksolids produced per cow and a decrease in cows milked. Operating expenses per kilogram milksolids increased 13 cents to $3.13. Production per cow and hectare increased from last season. The average cash available for living and growth increased to $161,640 per farm. With increased capital expenditure, drawings and debt, a cash surplus of $41,334 was recorded in 2019-20.
Tables 13.1, 13.2, 13.3 and 13.4 show net cash income, cash farm working expenses and the adjustments made to calculate operating profit for the average New Zealand 50:50 sharemilker on a per farm, per cow, per hectare and per kilogram milksolids sold basis.
The price received for milk increased from $3.17 to $3.45 per kilogram milksolids in 2019-20, an increase of 28 cents (+8.8%) from the previous season. This is the third time that the price surpassed the decadal average of $3.13 since 2013/14. Income from milk sales increased by 3.5 percent to $606,847, alongside net livestock sales of $60,008 and other dairy income of $3,280. These contribute to a total net dairy cash income for the average farm of $670,136 for the season, which is less than 1 percent above the result for 2018-19. Figure 8.1 shows the trend for the past decade. Milk production per herd decreased for sharemilkers (-5%), reflecting a decrease in herd size, effective hectares and milksolids per cow.
Net livestock sales have become a more prominent source of income for sharemilkers over the last five seasons. Annual average livestock sales were $87 per cow over 2010-11 to 2014-15, but the annual average rose to $139 between 2015-16 and 2019-20. Net livestock sales for the current season were $139, the same as the average over the last five seasons. Nonetheless, livestock sales as a proportion of net dairy cash income fell from its historical high (per kilogram milksolids) reported in 2018-19, to a level closer to its long-term average.
Farm working expenses (FWE) increased relative to last season. It averaged $439,763 per sharemilking business or $2.50 per kilogram milksolids. Farm expense items remained relatively similar to last season’s on a per kilogram milksolids basis. After adjustments for resources used but not paid for in the cash account (e.g. unpaid family labour), operating expenses per kilogram milksolids were $3.13, higher than last season’s value of $3.00.
The components of 50:50 sharemilking operating expenditure are shown in Figure 8.3. Labour continues to be the largest category of expenditure at 29 percent in 2019-20. Feed was the second highest operating expense for 50:50 sharemilker farms at 26.8 percent of total operating expenditure. Maintenance and animal health contributed 15.7 and 14.1 percent respectively in the year to June 2020.
Dairy operating profit per kilogram milksolids in 2019-20 was $0.86 for the average 50:50 sharemilker, up 23 cents compared to the 2018-19 season. Net dairy cash income per kilogram milksolids also increased by 23 cents relative to last season. In comparison, operating profit per effective cow and per hectare both increased by 35%.
Figure 8.4 shows the distribution of 2019-20 operating profit per hectare. It is approximately normally distributed around the mean of $1,050 per hectare. Ninety-seven percent of sharemilkers had positive operating profit, leaving 3% of sharemilkers below $0 per hectare. Eighteen percent of sharemilkers achieved operating profits of over $1,400 per hectare.
Business profit before tax is another measure of profitability that considers the cost of borrowing and other non-dairy activities, measuring the overall profitability of the business enterprise and not just the dairy farm operation (Table 8.1).
|Dairy operating profit||166,913||167,173||99,142||182,709||65,599||−53,678||91,877||98,570||117,177||151,293|
|+ Labour adjustment||74,092||76,757||74,703||68,733||77,508||73,553||72,041||80,608||80,071||82,559|
|+ Owned support block adjustment||2,218||1,217||3,315||685||1,245||695||508||251||299||479|
|- Rent (excl support block)||2,111||3,450||4,385||3,401||5,154||1,407||1,047||2,320||827||1,220|
|Business profit before tax||204,439||211,673||144,313||220,149||113,971||−12,038||133,967||154,478||166,064||217,779|
|Business profit before tax per all effective hectares||1,266||1,268||854||1,484||755||−75||841||967||951||1,260|
The average sharemilker in 2019-20 made a business profit before tax of $217,779, up $51,715 per farm compared to the previous season. This business profit is equivalent to $1,260 per all effective hectares (effective dairy + effective dairy support block + effective non-dairy). The dairy operating profit increased by $34,116 on the previous season. Combined interest and rent payments were slightly down on last season (-$9,067). Total effective hectares decreased by 1.8 hectares from the season prior to 172.8 effective dairy hectares.
8.5 Cash Flow
The cash operating surplus is the difference between net dairy cash income and farm working expenses. In 2019-20, the average sharemilker cash operating surplus of $230,372 increased by 8 percent from the previous season. On a per kilogram milksolids basis, the $1.31 cash operating surplus was up 16 cents from last season. Once rent, interest and tax are paid, and net income from non-dairy farming activities are added, the remaining value is discretionary cash. Total discretionary cash in 2019-20 was at $171,895, equating to $0.98 per kilogram milksolids (refer to Table 13.5).
Many farm businesses include cash funds and off-farm income in their annual accounts. The cash available after including these activities and any change of funds deposited or withdrawn from the IRD Income Equalisation Scheme is the cash available for drawings, debt repayments and/or capital development and purchases. Cash available for living and business growth in 2019-20 was $161,640 per farm, up 20 percent from last season.
Cash for living and growth can also be used to repay debt and for farm family drawings. During the year, term debt decreased $8,192 per farm, and capital transactions of $57,631 were down 49 percent from last season. Drawings decreased (-$1,711) to $65,458 per farm. Tax payments increased to $39,336 per farm (Table 13.5).
8.6 Operating Profit Margin
Operating profit margin in 2019-20 was 21.6% for the average 50:50 sharemilker, up 4.2% compared to the 2018-19 season and 3.7% higher than the ten-year average.
Figure 8.7 shows the distribution of operating profit margin for the 2019-20 season. Over ninety-six percent of sharemilkers had a positive operating profit margin, leaving 3.2% of sharemilkers below 0%. Approximately twelve percent of sharemilker achieved an operating profit margin of 30% or more.