5 Owner Operator: Operational Financial Analysis
5.1 Introduction
Operating profit of $2,154 per hectare in 2018-19 was down 3.8 percent on the previous season. The milk payout received of $6.42 per kilogram milksolids was down 20 cents (-3%) on the price received in 2017-18. Both milksolids per cow (+5%) and milksolids per hectare (+7%) increased in 2018-19. Livestock income in 2018-19 increased to $0.47 per kg MS. Gross farm revenue was $6.98 per kilogram milksolids in 2018-19 and was down 25 cents compared to the previous season. Farm working expenses (FWE) of $4.25 per kilogram milksolids was 5 cents higher than last season. Operating expenses decreased 3 cents to $5.10 per kilogram milksolids, though still not far below the record high of $5.17 in 2013-14. The cash available for living and growth in 2018-19 was $213,109 per farm, the highest level in five years.
5.2 Revenue
The milk payout received (including dividend payments) in 2018-19 decreased 20 cents (-3.0%) from the previous season to $6.42 per kilogram milksolids. Milk production per cow and hectare, recorded by Economic Survey farms, increased slightly in 2018-19 from the 2017-18 season. Milk sales per farm (net of dairy levies) exceeded 1 million dollars ($1,073,346) for the third time, the first being in 2013-14 following record high milk prices. Milk revenue in 2018-19 accounted for ninety-two percent of gross farm revenue. Revenue from livestock sales of $77,911 in 2018-19. Livestock revenue accounted for 6.7 percent of the total gross farm revenue per farm.
There is variation ($1.80 per kg MS) in the milk price farmers receive within a season (Figure 5.1) due to differences in milk composition, transport distances, milk production timing, annual account balance dates, milk companies supplied, different systems such as organics, penalties faced (grades), and whether a particular farm operated in the previous season. More than ninety percent of farms received a milk payout (milk price plus dividend) between $6.10 and $6.70 per kilogram milksolids in 2018-19. Within this, 54 percent received a milk payout between $6.30 and $6.50 per kilogram milksolids.
Figure 5.1: Distribution of Milk Payout Received
Cash income from net livestock sales decreased slightly to $0.47 per kilogram milksolids in 2018-19, compared to $0.50 per kilogram milksolids in 2017-18. High beef schedule prices have bolstered dairy farm incomes over the last five seasons.
Figure 5.2: Net Livestock Sales ($ per kg MS)
Dairy gross farm revenue on a typical New Zealand dairy farm was $1,166,413 million and was similar to the previous season ($1,168,061 in 2017-18). On a per hectare basis, gross farm revenue of $7,991, was higher than the per hectare gross farm revenue in 2017-18. At $6.98 per kilogram milksolids, gross farm revenue in 2018-19 was 25 cents (-3.5%) below the previous seasons.
Tables 12.1, 12.2, 12.3 and 12.4 show net cash income, cash farm working expenses and the adjustments made to calculate operating profit for the average New Zealand owner-operator on a per farm, per cow, per hectare and per kilogram milksolids sold basis.
5.3 Expenditure
Feed continues to be the largest category of expenditure at 28.5 percent in 2018-19 and has been the largest expenses category since 2007-08. Labour was the second highest operating expense for dairy farms at 21.1 percent of total operating expenditure. Maintenance and running costs and fertiliser contributed 16.7 and 9.44 percent respectively in the year to June 2019. Figure 5.3 shows the major 2018-19 expenditure categories.
Figure 5.3: Proportion of Dairy Operating Expenditure 2018-19
Changes in total farm expenditure are affected by changes in farm area and herd size, therefore per cow, per hectare and per kilogram milksolids are more appropriate measures of movement in individual items. Average farm working expenses (i.e. cash expenses) per kilogram milksolids increased 5 cents (+1.2%) to $4.25. This was the second highest expenditure, behind the $4.33 per kilogram milksolids recorded in 2013-14 prior to the downturn in milk prices.
Dairy operating expenses per kilogram milksolids was $5.10, 3 cents below the previous season. This was the third highest level of operating expenses and only the fourth-time operating expenses per kilogram milksolids has exceeded $5. Table 12.4 shows the changes in the categories of operating expenses per kilogram milksolids. Animal health and breeding, labour, depreciation and overheads have remained steady over the past decade but feed, fertiliser, and maintenance and running costs have been more variable, reflecting significant changes in income levels from one season to the next.
5.4 Profitability
Operating profit is a key indicator of dairy farm financial performance. This measure, expressed on a per hectare basis, is particularly useful for comparing the profitability between farms. Operating profit incorporates adjustments to allow comparisons between farms, but does not include interest. Table 12.3 shows the revenue and expenditure items included in operating profit. Operating profit per hectare was $2,154 in 2018-19, down 3.8 percent on the previous season.
Operating profit per hectare was normally distributed around the mean ($2,154) per hectare, reflecting a wide range between farms. 97.3 percent of farmers had operating profits between $0 and $4,500 per hectare, while 9.3 percent of farmers had operating profits of over $3,500 per hectare. Only 1.15 percent of farms recorded negative operating profits in 2018-19 (Figure 5.4).
Figure 5.4: Distribution of Owner-operating Profit ($ per hectare)
Operating profit per hectare can be decomposed using the following equation:
\[\begin{array}{ccccc} \frac{\text{Operating Profit \$}}{\text{ha}} & = & \frac{\text{kg MS}}{\text{ha}} & \times & \frac{(\text{Gross Farm Revenue \$ - Operating Expenses \$})}{\text{kg MS}} \end{array}\]
Operating profit for an average New Zealand dairy farm in 2017-18 had the following components:
\[ \begin{array}{c} \$2,154 \;\, \text{(operating profit/ha)} = 1,145 \;\, \text{(kg MS/ha)} \times (\$6.42 \;\, \text{GFR/kg MS} - \$5.10 \;\, \text{operating expenses/kg MS}) \atop \end{array} \]
Tables 5.1 and 5.2 show the average size and profitability of farms by quartile. Quartiles have been constructed by ranking farms on operating profit per hectare across New Zealand. Operating profit per hectare for top quartile farms averaged $3,389 compared with $866 for the bottom quartile group. Each quartile group produced more milksolids per hectare compared with the quartile lower. Top quartile farmers produced 63 percent more kilograms milksolids per hectare than bottom quartile farmers, with substantially less farm working expenses per kilogram milksolids.
While there is a range in gross farm revenue across the quartiles the most significant difference between the groups is their operating expenses per kilogram milksolids. Top farms are more efficient as demonstrated by lower operating expenses per kilogram milksolids. Operating expenses increased from the top quartile group through to the bottom quartile group from $4.52 through to $5.99 per kilogram milksolids respectively.
| Bottom Quartile | Lower middle Quartile | Upper middle Quartile | Top Quartile | |
|---|---|---|---|---|
| PHYSICAL CHARACTERISTICS: | ||||
| Number of herds | 65 | 65 | 65 | 65 |
| Effective hectares | 128.1 | 136.3 | 159.0 | 151.9 |
| Peak cows milked | 312 | 386 | 470 | 478 |
| Stocking rate (cows/ha) | 2.4 | 2.8 | 3.0 | 3.1 |
| Kg milksolids sold | 107,699 | 147,694 | 186,304 | 208,344 |
| Milksolids sold per hectare | 841 | 1,083 | 1,172 | 1,372 |
| Milksolids sold per cow | 346 | 383 | 396 | 436 |
| PAYOUT RECEIVED: $/kg MS sold | 6.40 | 6.44 | 6.39 | 6.44 |
| DAIRY CASH INCOME $: | ||||
| Milk sales (net of dairy levies) | 6.40 | 6.44 | 6.39 | 6.44 |
| Net livestock sales (sales - purchases) | 0.55 | 0.50 | 0.46 | 0.43 |
| Other dairy cash income | 0.05 | 0.03 | 0.04 | 0.04 |
| Net dairy cash income | 7.00 | 6.97 | 6.90 | 6.91 |
| CASH FARM WORKING EXPENSES: | ||||
| Wages | 0.63 | 0.66 | 0.67 | 0.62 |
| Animal health | 0.25 | 0.24 | 0.21 | 0.20 |
| Breeding & herd improvement | 0.20 | 0.16 | 0.16 | 0.15 |
| Farm dairy | 0.08 | 0.07 | 0.05 | 0.05 |
| Electricity | 0.13 | 0.12 | 0.11 | 0.09 |
| Net feed made, purchased, cropped | 1.18 | 1.12 | 0.92 | 0.82 |
| Stock grazing | 0.23 | 0.34 | 0.46 | 0.52 |
| Support block lease | 0.09 | 0.05 | 0.09 | 0.03 |
| Fertiliser (incl Nitrogen) | 0.56 | 0.49 | 0.46 | 0.39 |
| Irrigation | 0.01 | 0.05 | 0.08 | 0.14 |
| Regrassing | 0.08 | 0.08 | 0.06 | 0.06 |
| Weed & pest | 0.05 | 0.03 | 0.03 | 0.02 |
| Vehicles & fuel | 0.29 | 0.22 | 0.17 | 0.14 |
| Repairs & maintenance | 0.45 | 0.39 | 0.35 | 0.28 |
| Freight & general | 0.07 | 0.05 | 0.04 | 0.03 |
| Administration | 0.14 | 0.14 | 0.12 | 0.12 |
| Insurance | 0.11 | 0.09 | 0.08 | 0.07 |
| ACC | 0.03 | 0.03 | 0.02 | 0.02 |
| Rates | 0.14 | 0.12 | 0.09 | 0.09 |
| Farm working expenses | 4.73 | 4.45 | 4.18 | 3.86 |
| Cash operating surplus | 2.27 | 2.52 | 2.71 | 3.06 |
| ADJUSTMENTS: | ||||
| Value of change in dairy livestock | 0.02 | 0.08 | 0.06 | 0.08 |
| less Labour adjustment | 0.66 | 0.48 | 0.31 | 0.25 |
| plus Feed inventory adjustment | -0.03 | 0.00 | 0.02 | 0.06 |
| less Owned support block adjustment | 0.09 | 0.10 | 0.08 | 0.07 |
| less Depreciation | 0.48 | 0.44 | 0.38 | 0.39 |
| Net Adjustments | -1.24 | -0.94 | -0.69 | -0.59 |
| OPERATING CASH & NON-CASH: MS BASIS | ||||
| Dairy gross farm revenue | 7.02 | 7.05 | 6.96 | 6.99 |
| Dairy operating expenses | 5.99 | 5.47 | 4.93 | 4.52 |
| Dairy operating profit | 1.03 | 1.58 | 2.03 | 2.47 |
| OPERATING CASH & NON-CASH: HA BASIS | ||||
| Dairy gross farm revenue | 5,901 | 7,632 | 8,153 | 9,589 |
| Dairy operating expenses | 5,035 | 5,925 | 5,778 | 6,199 |
| Dairy operating profit | 866 | 1,707 | 2,375 | 3,389 |
There was over a three percent range between each of the quartiles of operating return on dairy assets. The top quartile averaged 5.4 percent, compared to the bottom quartile of 2.1 percent.
| Bottom Quartile | Lower middle Quartile | Upper middle Quartile | Top Quartile | |
|---|---|---|---|---|
| Returns: | ||||
| Operating return on dairy assets % | 2.1% | 3.2% | 4.4% | 5.4% |
| Total return on assets % | -2.2% | 0.3% | 0.9% | 1.9% |
| Total return on equity % | -7.7% | -3.7% | -3.4% | -0.6% |
| Growth in equity % | -10.2% | -9.1% | -9.4% | -5.9% |
| Debt: | ||||
| Closing term liabilities per kg MS | 24.53 | 25.92 | 24.70 | 23.83 |
| Closing debt to asset % | 49.2% | 51.6% | 57.5% | 52.8% |
In high payout seasons, such as 2007-08, 2010-11, and 2013-14, the correlation between milksolids production per hectare and operating profit per hectare strengthens and the reverse is true in low milk payout seasons. The changes in relationships over the past decade are detailed in Table 5.3. Measuring the cost efficiency of milksolids production (operating expenses/kg MS) relative to milk price is more relevant than production or expenditure alone when focusing on how to achieve high profit margins. The R2 rows in table 5.3 denote the strength of the association between the variables. A value of 0% denotes no association, while a value of 100% denotes a perfect association.
| 2009-10 | 2010-11 | 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CORRELATIONS: | ||||||||||
| Payout received $/kg MS | 6.16 | 7.36 | 6.69 | 6.33 | 7.69 | 5.76 | 3.92 | 5.79 | 6.62 | 6.40 |
| Milksolids kg MS/ha | 962 | 963 | 1,052 | 1,008 | 1,060 | 1,102 | 1,082 | 1,085 | 1,067 | 1,149 |
| Dairy operating expenses $/kg MS | 4.49 | 4.95 | 4.73 | 5.03 | 5.17 | 4.94 | 4.45 | 4.60 | 5.13 | 5.16 |
| Dairy operating profit $/ha | 1,957 | 2,810 | 2,624 | 1,830 | 3,295 | 1,537 | -9 | 1,937 | 2,238 | 2,128 |
| R2 - dairy operating profit $/ha & kg MS/ha | 53.3% | 54.3% | 35.5% | 40.0% | 45.7% | 17.3% | 0.1% | 32.7% | 37.3% | 39.3% |
| R2 - dairy operating profit $/ha & operating expenses $/kg MS | 61.8% | 53.6% | 53.0% | 54.1% | 46.7% | 59.4% | 60.4% | 49.7% | 62.9% | 59.5% |
Operating return on dairy assets is a measure of the operating profit generated by the dairy assets employed at the start of the season. This measure excludes non-dairy activities and any change in capital value. The average operating return on dairy assets was 4.0 percent in 2018-19. Grouping farm systems into low (systems 1 and 2), medium (system 3) and high input (systems 4 and 5) shows that the average operating return on dairy assets was slightly higher for high input farms (Figure 5.5). The range within each system group is very similar across the three system groups, with operating return on dairy assets ranging primarily between one percent to ten percent.
Figure 5.5: Return on Dairy Assets Distribution
Business profit before tax is another measure of profitability which considers the cost of borrowing and other non-dairy activities. This is the overall profitability of the business enterprise and not just the dairy farm operation (Table 5.4).
| 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | |
|---|---|---|---|---|---|---|---|
| BUSINESS PROFIT: | |||||||
| Dairy operating profit | 258,049 | 470,808 | 223,630 | -1,291 | 286,227 | 338,871 | 314,435 |
| + Labour adjustment | 55,162 | 59,309 | 59,021 | 56,341 | 61,154 | 63,920 | 62,545 |
| + Owned support block adjustment | 14,601 | 15,338 | 14,889 | 14,126 | 14,359 | 16,786 | 13,143 |
| + Non-dairy operating profit | 1,288 | 1,724 | -673 | -318 | 3,331 | 5,444 | 6,904 |
| + Net off-farm income | 12,360 | 9,858 | 12,098 | 9,208 | 19,643 | 18,392 | 6,670 |
| - Rent | 22,812 | 23,366 | 22,250 | 20,047 | 19,582 | 20,703 | 12,499 |
| - Interest | 174,136 | 171,597 | 195,984 | 197,277 | 197,343 | 191,459 | 194,022 |
| Business profit before tax | 144,512 | 362,074 | 90,731 | -139,258 | 167,789 | 231,251 | 197,163 |
| Business profit before tax per all effective hectares | 785 | 1,981 | 478 | -734 | 887 | 1,174 | 1,077 |
The average dairy farm in 2018-19 made a business profit before tax of $197,163, down $34,088 per farm compared to the previous season. This business profit is equivalent to $1,077 per all effective hectares (effective dairy + effective dairy support block + effective non-dairy). The dairy operating profit decreased by $24,436 on the previous season. Combined interest and rent payments remained similar to the previous season. Total effective hectares decreased by 5.4 hectares from the season prior, to 146 effective dairy hectares.
5.5 Cash Flow
The cash operating surplus is the difference between net dairy cash income and farm working expenses. In 2018-19 the cash operating surplus of $446,701 decreased by 6.6 percent from the previous season. On a per kilogram milksolids basis the $2.67 cash operating surplus was down 29 cents on the previous season. Once rent, interest and tax are paid and net income from non-dairy farming activities are added, the amount left is discretionary cash. Total discretionary cash in 2018-19 was at $208,906 which equates to $1.25 per kilogram milksolids (refer to Table 12.5).
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 2018-19 was $213,109 per farm, the highest level since 2013-14 and up 2.4 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 increased $74,133 per farm, but there was also a large amount ($207,027) spent on capital transactions. Drawings decreased (-$9,161) to $95,173 per farm. Tax payments decreased to $38,315 per farm (Table 12.5).
Figure 5.6: Annual Change in Revenue and Expenditure 10 years ($ per kg MS)