What is Your Dairy farm Profit?

What is dairy farm profit? Is profit a dirty word? Too few New Zealand dairy farmers know their profit? Discussion groups rarely discuss or compare profit. Few farmers financially benchmark. Why do farmers and consultants continue to use profit per hectare to compare farms?

PROFIT = GROSS FARM REVENUE - FARM OPERATING EXPENSES + NON-CASH Adjustments.

Non-Cash Adjustments include changes in feed & livestock inventory, inclusion of Family labour & Management and depreciation. See NZDairybase

 

Why do so few NZ dairy farmers know what their profit is? Profit per hectare is not enough, although every farmer should calculate Profit/hectare. 

Operating Profit Margin (OPM) is a better measure of financial efficiency. Dairy farms should aim to have a consistant OPM of greater than 40% i.e. Operating Expenses (which include Family Labour adjustment and depreciation) not to exceed 60% of Gross Farm Revenue (GFR). 

Return on Equity (RoE) and Return on Assets (RoA) are very important profit metrics.

In NZ there is a trend to more intense farming systems (more System 4 & 5 and less System 1 & 2). New Zealand farmers have a comparative advantage in growing pasture. So pasture efficiency & grazing management remains a core fundamental (in NZ) and is directly linked to profitability. NZ does not have a comparative advantage in TMR, cereals or purchased feeds. The choice of farm system, high or low input, TAD or OAD milking, is a personal decision.

System 1 - All grass self-contained, all stock on the dairy platform No feed is imported.  No supplement fed to the herd except supplement harvested off the effective milking area and dry cows are not grazed off the effective milking area.

System 2 - Feed imported, either supplement or grazing off, fed to dry cows Approx 4 - 14% of total feed is imported. Large variation in % as in high rainfall areas and cold climates such as Southland, most of the cows are wintered off.

System 3 - Feed imported to extend lactation (typically autumn feed) and for dry cows Approx 10-20% of total feed is imported.  Westland - feed to extend lactation may be imported in spring rather than autumn.

System 4 - Feed imported and used at both ends of lactation and for dry cows  Approx 20 - 30% of total feed is imported onto the farm.

System 5 - Imported feed used all year, throughout lactation & for dry cows Approx 25 - 40% (but can be up to 55%) of total feed is imported.

*Note: Farms feeding 1-2kg of meal or grain per cow per day for most of the season will best fit in System 3.

Read more: 5 Production Systems in NZ

OneFarm Research has shown that the difference in profitability between systems is insignificant. Operating Profit was a poor tool to compare different systems because it doesn’t take into account the additional capital invested as farms intensify.  

Read Nicola Shadbolt's Farm BusinessManagement Research

Farms must be profitable to be sustainable in an increasingly turbulent world. Sustainability in dairy farming includes being environmentally, people and animal welfare sustainable as well as profitable. 
Which farming system you chose for your business depends on what you most like doing, the lifestyle you wish for your family and your attitude toward risk.

 All farms face both environmental risks e.g. droughts and market risks e.g. milk price or world cereal prices.

There are both upside risks (e.g. opportunities like increased milk price or excellent grass growing season) and downside risks (e.g. negative impacts like milk price dropping, droughts or interest rates rising) in agriculture. The farm businesses that capture upside risks/opportunities are different from the farm businesses that best cope with adverse or downside risks. 

The most important Key Performance Indicators (KPIs) are Operating Profit Margin (OPM) and Milk Solids per hectare.

Resilience is a prerequisite for achieving sustainability in a turbulent environment. There are five critical factors. Read the OneFarm: Dairy Farm  Business Resilience Research  

1. Technical efficiency….Milk Solids per hectare and per person.

2. Financial efficiency ….OPM and higher Return on Assets (RoA).

3. Available Farm Cash Surplus….more available discretionary cash or free cash…Cash is King.

4. The ability to manage debt servicing capacity…always having sufficient funds to meet debts.

5. Farm cost control is critical.

In NZ, System 3 farms which are neither high nor low input tended to be more resilient over different seasons and had greater ability to flex with the season.

Profit alone (or worse still at any cost) should not be sole purpose for being in business. Rather it is an essential to enable farmers to achieve their personal & family goals. A balanced business scoreboard is the target not just profit. Increasingly society will impose a ‘license to farm’ on all farmers that will include environmental, animal welfare and people sustainable objectives. 

What is your business mission or vision? Is your farm business vision written? What are the values that drive & steer your farm business?

Much could be learnt from the leading Maori Trust farms in New Zealand that have a “Quadruple Bottom Line” business objective of “Culture, People, Environment and Profit” not solely a profit motive that is driven by self-interest and an individual approach.