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.
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.
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.
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.
