# 7 Owner Operator: Regional and Systems Financial Analysis

## 7.1 Regional Profitability

DairyBase® classifies farms into eight regions, five in the North Island and three in the South Island (refer to Section 2.6). Table shows key 2018-19 performance indicators for the average farm in these eight regions. North Island, South Island, and New Zealand data was weighted by owner-operator herd numbers in each region. Taranaki had the lowest average herd size of 282 cows, 55 cows below the North Island average (337). Waikato had the largest herd size in the North Island (376), followed by the Bay of Plenty (368). Average herd sizes in the South Island were considerably larger than in the North Island, with on average 567 peak cows milked. In the South Island, Marlborough-Canterbury had the largest herd size with 818 cows, 251 cows above the South Island average (567), while the average herd size in Otago-Southland was 543 cows.

There is a range of stocking rates nationwide with West Coast-Tasman (2.3 cows/ha) and Northland (2.4 cows/ha) having the lowest stocking rates. Marlborough-Canterbury had the highest stocking rate at 3.5 cows per hectare, while the rest of the regions had an average stocking rate of either 2.6 and 3.0. Northland recorded the lowest average milksolids production per cow of all the regions (337 kg MS). The other four North Island regions recorded milksolids per cow between 372 and 411 kg MS. Marlborough-Canterbury and Otago-Southland recorded similar production per cow of 436 and 411 kilograms milksolids per cow respectively. However on a per hectare basis Marlborough-Canterbury production is considerably higher due to more cows per hectare.

Farms in most regions recorded average milk payouts between $6.38 and$6.51 per kilogram milksolids, with the exception of West Coast-Tasman where the average milk payout received was $6.11 per kilogram milksolids due to a lower milk price paid by Westland Milk Products in 2018-19. Regional average farm working expenses (FWE) per kilogram milksolids were lowest in Taranaki ($3.86) and Bay of Plenty ($4.06) while all other regions’ average farm working expenses ranged between$4.11 and $4.46 per kilogram milksolids. The bottom of Table 7.1 shows the regional gross farm revenue, operating expenses, and operating profit levels on a per hectare basis in 2018-19. Marlborough-Canterbury ($2,890), Otago-Southland ($2,616) and the Taranaki region ($2,438) recorded the highest operating profits per hectare, while West Coast-Tasman recorded the smallest operating profit at $1,118 per hectare. West Coast-Tasman ($4,414) and Northland ($4,377) recorded the lowest dairy operating expenses per hectare, while Marlborough-Canterbury had the highest at$7,579, followed by the Waikato at $5,968. Due to the much higher gross farm revenue for Marlborough-Canterbury farms, they were the most profitable ($2,890) region on a per hectare basis. Generally, Marlborough-Canterbury, Otago-Southland and Taranaki farms experienced high levels of profitability in 2018-19 relative to other regions.

Table 7.1: Regional Owner-operator Profitability

Northland Waikato Bay of Plenty Taranaki Lower North Island West Coast-Tasman Marlborough-Canterbury Otago-Southland
PHYSICAL CHARACTERISTICS:
Number of herds 34 50 18 50 41 12 31 24
Effective hectares 128.7 126.1 128.7 100.0 136.4 149.1 234.4 197.8
Peak cows milked 306 376 368 282 354 340 818 543
Stocking rate (cows/ha) 2.4 3.0 2.9 2.8 2.6 2.3 3.5 2.7
Kg milksolids sold 103,147 140,165 134,469 115,721 135,454 121,406 357,061 227,150
Milksolids sold per hectare 801 1,112 1,045 1,157 993 814 1,523 1,148
Milksolids sold per cow 337 372 365 411 383 357 436 418
PAYOUT RECEIVED: $/kg MS sold 6.51 6.44 6.40 6.38 6.45 6.11 6.43 6.40 DAIRY CASH INCOME$:
Milk sales (net of dairy levies) 6.51 6.44 6.40 6.38 6.45 6.11 6.43 6.40
Net livestock sales (sales - purchases) 0.68 0.48 0.48 0.41 0.65 0.42 0.34 0.52
Other dairy cash income 0.07 0.05 0.03 0.05 0.05 0.05 0.03 0.01
Net dairy cash income 7.27 6.97 6.92 6.85 7.15 6.58 6.80 6.93
CASH FARM WORKING EXPENSES:
Wages 0.53 0.67 0.56 0.41 0.70 0.63 0.77 0.70
Animal health 0.23 0.25 0.27 0.20 0.21 0.15 0.22 0.21
Breeding & herd improvement 0.17 0.17 0.13 0.15 0.15 0.18 0.16 0.17
Farm dairy 0.07 0.07 0.04 0.06 0.08 0.07 0.04 0.05
Electricity 0.15 0.13 0.12 0.11 0.13 0.10 0.09 0.10
Net feed made, purchased, cropped 0.89 1.22 0.96 1.12 0.99 1.15 0.81 0.87
Stock grazing 0.19 0.29 0.26 0.25 0.20 0.13 0.72 0.62
Support block lease 0.09 0.05 0.06 0.08 0.10 0.24 0.02 0.05
Fertiliser (incl Nitrogen) 0.65 0.47 0.47 0.40 0.38 0.67 0.45 0.42
Irrigation 0.00 0.00 0.04 0.00 0.02 0.03 0.28 0.02
Regrassing 0.09 0.09 0.07 0.04 0.09 0.06 0.06 0.07
Weed & pest 0.05 0.03 0.04 0.03 0.03 0.04 0.02 0.03
Vehicles & fuel 0.28 0.20 0.22 0.20 0.27 0.27 0.13 0.15
Repairs & maintenance 0.46 0.35 0.34 0.36 0.39 0.30 0.32 0.32
Freight & general 0.06 0.06 0.07 0.05 0.06 0.08 0.03 0.03
Administration 0.12 0.11 0.14 0.15 0.14 0.14 0.12 0.14
Insurance 0.09 0.08 0.08 0.10 0.11 0.12 0.07 0.07
ACC 0.04 0.02 0.03 0.02 0.03 0.03 0.02 0.02
Rates 0.13 0.13 0.16 0.13 0.14 0.07 0.06 0.07
Farm working expenses 4.28 4.40 4.06 3.86 4.21 4.46 4.37 4.11
Cash operating surplus 2.98 2.57 2.86 2.99 2.94 2.13 2.43 2.82
Value of change in dairy livestock 0.05 0.03 0.06 0.07 0.11 0.21 0.07 0.00
less Labour adjustment 0.70 0.45 0.58 0.58 0.50 0.47 0.11 0.26
plus Feed inventory adjustment -0.03 -0.04 -0.10 0.06 -0.01 -0.00 0.04 0.13
less Owned support block adjustment 0.09 0.08 0.06 0.05 0.18 0.06 0.06 0.08
less Depreciation 0.36 0.40 0.43 0.38 0.45 0.43 0.47 0.34
Net Adjustments -1.12 -0.94 -1.11 -0.88 -1.04 -0.75 -0.53 -0.54
OPERATING CASH & NON-CASH: MS BASIS
Dairy gross farm revenue 7.32 7.00 6.99 6.91 7.26 6.79 6.87 6.93
Dairy operating expenses 5.46 5.37 5.24 4.81 5.35 5.42 4.98 4.66
Dairy operating profit 1.86 1.63 1.75 2.11 1.90 1.37 1.90 2.28
OPERATING CASH & NON-CASH: HA BASIS
Dairy gross farm revenue 5,868 7,778 7,298 7,999 7,204 5,532 10,469 7,962
Dairy operating expenses 4,377 5,968 5,470 5,561 5,316 4,414 7,579 5,346
Dairy operating profit 1,492 1,810 1,828 2,438 1,888 1,118 2,890 2,616

Regional average operating return on dairy assets ranged from 3.0 percent to 5.7 percent. Otago-Southland (5.7%), and Northland (4.3%) had the highest operating returns on dairy assets in 2018-19. The national total return on assets (including change in asset values) was 0.5% percent. Bay of Plenty and the Lower North Island reported negative total return on assets, -0.5% and -2.4% respectively.
Return on equity is the return on owner’s funds, including capital changes after interest is paid. Northland and Otago-Southland experienced positive returns on equity, while all regions experienced negative total returns on equity. The largest negative return on equity was recorded for Lower North Island (-8.2%) followed by Waikato (-5.6%).

Average term debt per kilogram milksolids increased nationally in 2018-19 and was higher in the North Island ($25.67) compared to the South Island ($19.90 ). There was some variation between regions with Taranaki ($31.01) the highest, while West Coast-Tasman was the lowest ($17.59). Debt to asset levels were lower in the North Island (50.7%) than the South Island (53%) with averages across all regions ranging between 44.6 percent and 57.8 percent.

Table 7.2: Regional Owner-operator Financial Position

Northland Waikato Bay of Plenty Taranaki Lower North Island West Coast-Tasman Marlborough-Canterbury Otago-Southland
Returns:
Operating return on dairy assets % 4.3% 3.0% 3.7% 3.5% 3.8% 4.1% 4.6% 5.7%
Total return on assets % 4.2% -0.5% -0.5% 0.7% -2.4% 3.1% 0.4% 3.5%
Total return on equity % 3.4% -5.6% -3.7% -3.3% -8.2% 1.8% -4.8% 2.5%
Growth in equity % -3.1% -11.5% -7.1% -6.0% -13.4% -1.0% -7.9% -7.0%
Debt:
Closing term liabilities per kg MS 21.83 30.50 20.11 31.01 24.89 17.59 23.25 18.85
Closing debt to asset % 48.6% 55.4% 44.6% 54.7% 50.0% 52.7% 57.8% 48.6%

## 7.2 Production Systems

DairyBase® categorises farms into five production systems based on the quantity of feed purchased (including cow grazing) and the timing and use of imported feed (refer to Section 2.7 for production system descriptions). For the following analysis the systems have been combined to produce three categories; low (systems 1 and 2), medium (system 3) and high (systems 4 and 5). Within each production system there is variation in milksolids production and profitability. Production system type is not a good indicator of profitability as a farm can be profitable (or unprofitable) operating any system. Profit is less to do with the production system type, and more to do with the management, milksolids production and the costs within the production system.

Average herd sizes, milking area and stocking rates increase from low systems through to high. Average milksolids produced per cow and per hectare also follow this trend, reflecting higher inputs of supplementary feed. Milksolids per cow for the average of medium system farms (401 kg MS/cow) was 50 kg MS/cow more compared to the average of low system farms (351 kg MS/cow). High input systems recorded an average of 425 kilograms milksolids per cow, which was 24 kilograms higher than the average for medium farms. Once stocking rates are included, average milksolids per hectare for medium input farms (1,132) was 198 kilograms higher than low input farms (934) and 193 kilograms less than the average for high input farms (1,325).

Dairy cash income per kilogram milksolids was the highest for low input systems at $7.00 due to livestock sales and other dairy income being greater than the other two systems on a per kilogram milksolids basis. Medium ($6.94) and high input systems ($6.89) had similar average dairy cash incomes per kilogram milksolids. Farm working expenses per kilogram milksolids was$3.98 for low input systems and $4.16 medium input systems, while high input systems had average farm working expenses$4.50 per kilogram milksolids.

Cash operating surplus per kilogram milksolids was the highest for low input systems ($3.02) and$2.78 for medium systems. High input systems recorded the lowest average cash operating surplus of $2.39 per kilogram milksolids. Operating profit per kilogram of milksolids was the highest for the average of medium input farms, although the spread between each of the system averages was only 33 cents in 2018-19. Operating profit per hectare was highest for average medium input systems ($2,294), while the profits were slightly lower for high input system farms ($2,247). Low input systems averaged less profit ($1,825) in 2018-19.

The operating return on dairy assets was lower for average low input farms (3.8%). Medium input farms operating return on dairy assets averaged 4.2 percent and was 3.9 percent for average high input farms. Once capital and non-dairy operations were accounted for, total returns on assets were 0.0% for medium and 0.4% high input systems. Low input systems averaged slightly higher for total return on assets (1.4%). The total return on equity was -4% for medium, -5.1% for high input systems, and low input systems were higher (-1.3%), though still negative. The debt to asset ratio was moderate for low (49.5%) and medium (50.8%) input systems and a little higher (59.8%) for high input systems. Closing term liabilities per kilogram milksolids were highest for low input systems ($26.44). The average term liabilities for high input systems was$24.79, while medium input systems ($23.64) had the lowest level in 2018-19. All farm system types had negative average growth in equity percentages, the opposite of last season. Growth in equity for low input systems was -7.1 percent, medium input systems at -8.6 percent, while high input systems recorded the largest negative growth in equity of -9.7 percent. Table 7.3: Owner-operator Production Systems Profitability 1&2 (Low) 3 (Medium) 4&5 (High) PHYSICAL CHARACTERISTICS: Number of herds 81 120 59 Effective hectares 130.3 136.7 176.9 Peak cows milked 347 386 551 Stocking rate (cows/ha) 2.7 2.8 3.1 Kg milksolids sold 121,655 154,764 234,356 Milksolids sold per hectare 934 1,132 1,325 Milksolids sold per cow 351 401 425 PAYOUT RECEIVED:$/kg MS sold 6.41 6.44 6.40
DAIRY CASH INCOME \$:
Milk sales (net of dairy levies) 6.41 6.44 6.40
Net livestock sales (sales - purchases) 0.53 0.46 0.46
Other dairy cash income 0.06 0.04 0.02
Net dairy cash income 7.00 6.94 6.89
CASH FARM WORKING EXPENSES:
Wages 0.62 0.64 0.67
Animal health 0.21 0.22 0.24
Breeding & herd improvement 0.18 0.15 0.16
Farm dairy 0.06 0.06 0.06
Electricity 0.13 0.11 0.10
Net feed made, purchased, cropped 0.75 0.99 1.12
Stock grazing 0.28 0.39 0.52
Support block lease 0.07 0.07 0.05
Fertiliser (incl Nitrogen) 0.50 0.44 0.46
Irrigation 0.01 0.05 0.18
Regrassing 0.06 0.07 0.07
Weed & pest 0.04 0.03 0.03
Vehicles & fuel 0.22 0.19 0.17
Repairs & maintenance 0.41 0.33 0.34
Freight & general 0.06 0.05 0.04
Insurance 0.09 0.09 0.07
ACC 0.03 0.02 0.02
Rates 0.14 0.11 0.08
Farm working expenses 3.98 4.16 4.50
Cash operating surplus 3.02 2.78 2.39
Value of change in dairy livestock 0.00 0.08 0.07
less Labour adjustment 0.56 0.40 0.25
plus Feed inventory adjustment 0.01 0.03 0.01
less Owned support block adjustment 0.12 0.07 0.07
less Depreciation 0.40 0.40 0.45
OPERATING CASH & NON-CASH: MS BASIS
Dairy gross farm revenue 7.00 7.02 6.96
Dairy operating expenses 5.05 5.00 5.26
Dairy operating profit 1.95 2.03 1.70
OPERATING CASH & NON-CASH: HA BASIS
Dairy gross farm revenue 6,537 7,953 9,221
Dairy operating expenses 4,712 5,659 6,974
Dairy operating profit 1,825 2,294 2,247

Table 7.4: Owner-operator Production Systems Financial Position

1&2 (Low) 3 (Medium) 4&5 (High)
Returns:
Operating return on dairy assets % 3.8% 4.2% 3.9%
Total return on assets % 1.4% 0.0% 0.4%
Total return on equity % -1.3% -4.0% -5.1%
Growth in equity % -7.1% -8.6% -9.7%
Debt:
Closing term liabilities per kg MS 26.44 23.64 24.79
Closing debt to asset % 49.5% 50.8% 59.8%