By David Beca, RED SKY Agricultural
With lower milk prices, a rising Australian dollar, and a stagnant world economy, the usual challenges are being directed at farmers, consultants and accountants alike. How can we improve our profit in these conditions? The high price of supplements due to drought has exacerbated these questions, although these feed costs will have fallen significantly by the end of this year.
For ALL farmers, it is essential to maintain a low cost structure for most standard areas such as animal health, breeding, dairy expenses, repairs and maintenance, vehicle expenses and administration fees. But what about the big variable costs? What price can you afford to pay for supplements? What is a sustainable level of expenses as a percentage of revenue? What is a sustainable level of expenses per kilogram of milkfat or milksolids (milkfat protein)?
Some of you will be tired of hearing the same questions being asked year after year just as some of you may be frustrated by not receiving a simple and clear answer. Unfortunately the answer to each of these questions is different for each farmer and can only be answered by some thorough financial analysis. There is no doubt that some farmers can pay $190-$220 per tonne for high quality hays and still make a sound profit from this while other farmers cannot make a profit from the purchase of $100-$150 per tonne hay.
Sustainable levels of expenses as a percentage of revenue or expenses per kilogram of milkfat or milksolids (‘expense ratios’) depend on the farming system being run. A lower supplemented farming system would typically need to run a lower level of expenses as a percentage of revenue to generate the same profit as a highly supplemented farming system. Expense ratios primarily tell us about the risk profile of a farm and not the likely level of profit. In almost every case we increase the expense ratios when we add supplement to pasture based farming as pasture is usually our lowest cost feed. Although the intent is to increase profit, it also increases risk.
Some average lower supplemented farmers will focus on improving pasture harvest to improve profit. Some top lower supplemented farmers will include more cost effective supplements to improve per cow performance and farm productivity. Some average supplemented farmers will focus on improving pasture harvest and/or reducing their cost of supplements to improve profit.
The key to answering all these questions is to know how you are performing at present, what level of progress you have made in recent years, what factors have driven that progress, and how you compare to your peers as this may provide a guide to future improvements.
If there are no absolute answers to the questions regarding affordable supplement purchase price or expense ratios, there are some general principles that can be sustained. When high quality forage supplements exceed $180-$200 per tonne and concentrates exceed $220-$250 per tonne it becomes very difficult to maintain a profitable margin. When expenses exceed 75% of revenue or exceed $4.50-$5.25 per kilogram of milkfat (at a $6.00-$7.00 milkfat) it is difficult to make a sustainable profit. If the level of expenses drops while maintaining the same level of productivity, or supplements of the same quality are purchased for a lower price, then profit must improve.
When analysing farm performance the top performers usually stand out in a number of areas. Their pasture harvest per hectare is high compared to their peers, as is their labour productivity (cows milked per 50-hour staff equivalent). Their combination of stocking rate and milk produced per cow results in high milk production per hectare. And in many other areas (excluding feed costs and nitrogen use) their cost structure is lower than their peers.
Many of those who were feeding increasing amounts of supplement have been hurt by the extraordinarily high recent feed costs. When these reduce later in the year there will be a need to take stock and consider carefully where to from here. Some farmers will be able to make a sound profit at milk prices between $6.30 and $7.00 while others may need to receive $7.50 or more to produce a sound profit. If you require over $7.00/kgMF at long term average feed prices then your only choices may be to substantially reduce your cost of production and/or increase your productivity from these costs OR move back to a lower supplemented system.
On the other hand, for those who are feeding lower amounts of supplement there will still be a considerable variation in cost structure that due to cow performance, stocking rate, pasture harvest, and a range of other factors will determine the level of profit. Again there are no simple answers as to what this group should do to improve profit. There may be some clear opportunities to reduce costs and these are best determined by financial analysis that tracks these costs over time and/or compares these to other farmers. For others it will be essential to increase revenue through improvements to pasture harvest, changes in cow numbers or adding new feed sources.
The key message is: beware of anyone who has simple one-line answers to the complex question of what drives profit on dairy farms. The question over what is an affordable price to pay for supplements effectively has no answer as it is specific to each farm (although lower is better). Target expense ratios (as a percentage of revenue or per kgMF) will be different for each farming system. Every farmer who has pursued higher productivity through feeding supplements has increased these risk ratios in the pursuit of higher profit.
So if you want to take the shortest road to an improved profit, this demands you undertake a comprehensive analysis of your present level of performance. And then the answers to all these questions should become crystal clear. And if they don’t then find a consultant or accountant who can help “clear the fog”.
One software tool to help with farm financial analysis is Red Sky. It is specially designed for dairy business analysis. Farmers with a keen interest in financial analysis use it independently. Others use it in collaboration with their consultant or accountant.