A Profitable Year With Challenges

NSW Dairy Farm Monitor results were recently released for the 21/22FY. Analysis of the performance of the 36 farms involved in the project showed a wide range in profitability. All farms experienced above average rainfall for the year - many of them subject to significant flooding and prolonged wet conditions which impacted on performance. However, despite the impact of the incredibly wet year and higher input costs, strong milk prices and livestock trading conditions enabled the second highest average profit position in 11 years of DFMP in NSW at an average of $1.71/kgMS.

Useful resources related to this podcast:

NSW Dairy Farm Monitor Annual Report and resources

NSW DFMP Interactive Report

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The information discussed in this podcast are for informative and educational purposes only and do not constitute advice. 

Transcript

The Business of Dairy 

Episode #20 Transcript – “A Profitable Year With Challenges”

Sheena Carter: Welcome to The Business of Dairy podcast, I'm Sheena Carter, development officer with the New South Wales Department of Primary Industries Dairy Team. The New South Wales Dairy Farm Monitor results were recently released for the 21/22 financial year. Analysis of the performance of the 36 farms involved in the project showed a wide range in profitability. All farms experienced above average rainfall for the year, many of them subject to significant flooding and prolonged wet conditions which impacted on performance. However, despite the impact of the incredibly wet year and higher input costs, strong milk prices and livestock trading conditions enabled the second highest average profit position in 11 years of Dairy Farm Monitor in New South Wales at an average of $1.71 per kilo milk solids. The Department of Primary Industries managed this project in New South Wales with funding and support from Dairy Australia. This month I'm interviewed about some of the drivers behind the results by my colleague Tori Alexander. 

Tori Alexander: Okay, welcome to The Business of Dairy podcast. It is a pleasure to be here today to discuss results from the 2021/22 New South Wales Dairy Farm Monitor project, which is also called the New South Wales DFMP. So for a bit of context, Sheena, what is the New South Wales DFMP and how does it work? 

Sheena Carter: Yeah, thanks, Tori. So the Farm Monitor project is a physical and financial analysis of dairy businesses in New South Wales – New South Wales dairy businesses. So it enables us to have an understanding of the profitability of the New South Wales industry as a result of the conditions that farm businesses were exposed to across that financial year, including weather, input costs, milk prices, etc.. So the information is then used widely across industry. It helps inform industry reports and helps us understand some sort of trends over time within the industry. But it also sits as the comparative data behind Dairy Base and the Farm Business Snapshot tool, which are online tools available to farmers and service providers to help them do their own farm performance analysis. I should say that in New South Wales this is our 11th year of Dairy Farm Monitor for the state also. 

Tori Alexander: Yeah, great. Also, how many farms participated this year and why do they participate? What is it that they get out of being involved? 

Sheena Carter: Yeah, good question, Tori. So we had 36 farms this year, 18 in the north and 18 in the south. That is down a bit on the previous year, but there was some pretty challenging conditions and some farmers opted out of the project this year because of that. So as you say, it does rely on the generosity of these wonderful farmers who are happy to open up their books and share with us their financial and physical information. The benefit to them as a participant, and they are anonymous for obvious reasons, although some do choose to identify themselves, but the benefit to them is that they get an individual farm report and it is very detailed on the physical and financials of their business. If they're in the project for a number of years, obviously they've got a fantastic record of historical performance. But for the year just gone, they can use those reports to look and see where they've gone well in the business and perhaps where there's, you know, maybe some challenges in the business areas that they might be able to focus on to improve, you know, contexting that with the conditions that they were dealing with at the time, sometimes you might have a weak area in the business, but that is because of some conditions that have been experienced. So the value for them is that individual report that they get that they can use to help inform decisions going forwards. 

Tori Alexander: Well, as you said, we are very grateful for their generosity and it is a privilege to have access to the data which has such a huge benefit to the industry and as you've just said, to the participating farms as well. So I guess this is where the rubber hits the road. What a tough year this year has been for so many with the widespread, repeated flooding immediately coming to mind. Sheena, what kind of year was this year? Was it a profitable one for farmers? 

Sheena Carter: Yes, well as you say, it was a very challenging year and we did see a range of performances across the state with that. At a top-line level, our average profit, so earnings before interest and tax or EBIT was $1.71 per kilo milk solids. And this is the second highest profit we've seen in 11 years of the project and it translates through to a 3.5% return on total assets. So it is actually down on the previous year, which was $2.07 cents per kilo on milk solids, however, it is still above the long term average profit that we have seen for New South Wales, which is around a $1.16 per kilo milk solids. 

So the strong profit that we've seen has mainly been supported by the continuation of strong milk prices and strong livestock trading conditions across the board. However, the margin has reduced due to an increase in costs and these increases in costs was seen across most areas of the business, which we'll talk about as we progress through the podcast. 

Tori Alexander: Yeah, okay. So that's the state average, but was there variation in profitability between the north and the south of the state? 

Sheena Carter: Yes, good question, and this is one of the things that… or the benefits of Farm Monitor, and it enables us to see regional variation, and as part of the project, we split New South Wales into a north cohort and a south cohort. So in the south the average operating profit was $2.08 per kilo milk solids, and in the north it was $1.33 per kilo milk solids. So this continues the trend that we see with a difference in profitability between the north and the south over the last 11 years the south, on average, has been more profitable than the north. Obviously, there's a lot of variation in individual farm performances. For example, this year the farm with the highest EBIT or operating profit was a northern farm, but there were three farms also in that north cohort that experienced a negative profit, which, unfortunately they were some farms that were, well, quite exposed to the wet conditions that were experienced throughout the year, and that has affected their performance. 

Tori Alexander: As we always say, it's important to context the numbers and try to determine what is behind them. We've touched on it a little bit being that it was a tough year with the extraordinarily wet conditions across most of the state, was this a factor when looking at farm performance? 

Sheena Carter: Yes, well and truly, all 36 farms in the group experienced above average rainfall for the year. So we saw a lot of rainfall on farms from early spring and through summer, both in the coastal regions – north and south, but also inland, and unfortunately, the rain kept falling. In autumn we had extraordinary amounts of rain, particularly on the coast, and we saw those record flood levels in the far north of the state – you know, one in 100 year flooding instances. Several farms were in areas where they received a total of just under 3000 millimetres of rain for the year – so three metres rain, that's a lot of rain. And the flooding obviously had major impacts with feed. We saw the percentage of home grown feed being grazed and consumed was less, particularly in the north, than the previous year and there was also less feed able to be conserved in the form of hay and silage, particularly in the north over the year. 

So another thing that came out of the farm files was we had seven farms in that northern region that lost a total of 500 tonnes of dry matter, combined between them, in the form of stored hay and silage. And given the timing of the events, it meant that many of the farms, they weren't able to get back on paddocks, so we had a loss of potential silage harvest. We had many maize crops that just weren't able to come off and also pasture that would have been turned into silage that just didn't eventuate. 

So of course this feed had to be replaced with purchased feed on most of these farms and they also couldn't get on farm, on paddocks, to graze pastures. And then they also couldn't get on to sow pastures in autumn, which is, sort of, most farms usually do this around autumn, so sowing either didn't happen or it happened extremely late, you know, there was some farmers sowing into late winter. So this was devastating for many businesses and it really did mean that they had to purchase feed in abnormal to what they would normally do. 

Fortunately, there were grants made available to flood affected, or wet affected farmers, in various local government areas, and this really helped farmers with business continuity and being able to buy in feed and keep the herd fed. And the grants were also available to farmers to help them with flood damage to infrastructure such as laneways and fences, so it enabled them to keep functioning. So it was a really challenging year and I think it's, yes, there's the impact of the immediate flooding, but the prolonged wet period, I mean, for some farms we've seen up to six months of just wet conditions, which is really tough and exhausting. 

Tori Alexander: Yeah, it's just sometimes so hard to wrap your head around, isn't it? Just how absolutely prolonged it's been, not just this year, but even previous years. From a cow perspective, of course the wet conditions would also have an impact on the cows, so can you tell us what you saw when it came to cow related factors? 

Sheena Carter: Yeah, look, obviously with these wet conditions, they are extreme conditions and they do have a significant impact on herd health, and particularly in the areas of lameness and mastitis. So, obviously, this adds cost to the business because farms have to treat these conditions and try and manage it. So herd costs did increase on average across the group of farms and, obviously, with the flooding in particular, we did see milk having to be tipped on farms, whether it was lack of access for tankers and things like that. But with the flooding there's that medium to longer term effect where we see declines in milk production from animals, and that has certainly shown in Dairy Australia's milk production reports that come out each year, or each month, and so milk production and milk intake throughout New South Wales certainly did decline as a result of the flooding. 

Tori Alexander: You mentioned that the coastal areas, particularly, received extremely high rainfall but inland areas also were quite wet. Can you expand a little bit more on what happened with those farms that are a little bit more inland? How did they perform this year? 

Sheena Carter: Yeah, it's interesting, the inland region, and look, there was still flooding in parts of those inland regions around the central west, which did have an impact on those businesses, but I think it's probably fair to say they were less extreme conditions than what was experienced on the coast. And I don't want to trivialise that by any means, I mean, flooding certainly impacts businesses in terms of, you know, getting on paddocks and loss of pastures or crops and other things, but we're comparing a wet year between regions, and so yeah, the impact on the inland farms wasn't as great as it was on those coastal farms. And it did mean that some of these inland farms actually had quite a good year and they were able to capitalise on the good new prices and good livestock trading conditions. And in Dairy Farm Monitor, we do look at the top 25% farms in the group and this is based on return on total assets managed. So this year, obviously 36 farms, there were nine farms in that top 25% group and seven of the nine farms were from that inland region. So they still experienced the wet, not to the same degree as the coastal farms, and some farms did have really good operating conditions and were quite profitable because of that. 

Tori Alexander: All right, thanks, Sheena. Moving into costs, there's been a lot of commentary around increases in costs on farm, what did we see in DFMP this year? 

Sheena Carter: Yes, look, costs are definitely up. There's all sorts of reasons for this. It's a really complex world at the moment and we've got all sorts of things like supply chain issues from COVID to the war in the Ukraine and these factors have had an inflationary impact on input costs. So, I guess, two key inputs that have had a lot of attention are fertiliser prices and fuel and oil costs. So if we look at the 36 farms in the data set, fertiliser usage was actually down around 20% across the group. 

This is partly due to the wet conditions and the inability to get on paddocks and put fertiliser on, but also we saw some extraordinarily high fertiliser costs because of supply issues. So while the amount of fertiliser that was applied was down on the previous year, the actual dollar cost of purchasing and using the fertiliser was up. That's obviously a homegrown feed cost, or that's where it's accounted for, similarly with fuel, we've also seen very high prices and they're still quite high, same with fertiliser, still quite high. So both of these inputs have added to homegrown feed costs on farm, but we also saw higher purchased feed prices as well. So all in all, we had a higher total feed costs and they were up by approximately 8% on the previous year. 

Tori Alexander: What about Labour? Generally it's the largest overhead operating cost in a business and it's hard to find. What was seen this year for labour?

Sheena Carter: Yeah, and labour costs increased again this year. So on a dollars per kilo milk solids basis, they were up an average of 10% on the previous year. So this is for total labour, paid and imputed – or that family labour in a business, and we need to remember that there's an efficiency component to this cost. So if you had the same labour cost in total dollars as the previous year but less production, or kilos of milk solids produced, we would see a more expensive cost on a dollars per kilo milk solids basis. And there was an increase in cost of labour in general across the board. And there was also a decrease in efficiency as well with reduced production. So we saw, if we look at labour efficiency on a kilos of milk solids per full time labour equivalent, we saw a reduction in efficiency this year on average on the 36 farms. So the previous year, the 20/21 year, the labour efficiency figure was around 38 and a half thousand kilos of milk solids per FTE, and in a 21/22 year, it was down to a bit over 36 and a half thousand kilos of milk solids per FTE. 

Tori Alexander: Okay, thanks. As part of the DFMP, you survey farmers about expectations for the coming year. What were responses like? 

Sheena Carter: We do survey the farmers and I guess it's important to context surveys with when they're being asked, or the results from surveys, with when the questions are being asked. So the data's collected, sort of, August, July/August, so you know, we were at the point where it had been a tough year in terms of seasonal conditions, also at that point, we hadn't experienced the subsequent flooding inland that happened after the end of the financial year. Again, it was, you know, a major event, but we asked them about what they see the profitability of their business being like for the 12 months ahead, which is the current financial year that we're in, and in general there was optimism across the board in the north. We saw 84% of respondents anticipated improvement or at least profits remaining stable. However, in the South it was much higher. There were 94% of respondents expecting returns to improve or remain stable, at the point in time when they were surveyed. And we also asked them about issues of concern to their business. So they select seven, or they’re provided with seven issues, and they ranked them according to the order of importance to them. The main issue of concern to farmers was around seasonal conditions, which is not surprising given the timing of when the questions were asked and the year that was. This was followed by input costs and labour, they were the second and third highest ranked issue. When we project this out over a five year period, so we ask a short term perspective and a longer term perspective, over a five year horizon it did flip a bit. It was the input costs and labour were equally ranked as the issues of biggest concern, and then this was followed by seasonal conditions as the third concern. So there is a bit of a flip when we look at it in a more longer term frame. 

Tori Alexander: Yeah, interesting. Be good to see how in next year's data, how everybody's thoughts for the coming year play out when those results come in. Well, thanks, Sheena. Is there any final points you'd like to leave us with? 

Sheena Carter: Yeah, I think it has been a challenging period, the last financial year, which is also on the back of a continuous run of challenging years, two wet years really, and preceded by three years of drought experienced by many farms. So it has been a tough period and I think we're going to see a bit of time for farmers to adjust and recover from that. And particularly, again, I mentioned earlier that inland flooding that we saw at the beginning of this financial year, and that's going to have an impact on businesses as well. So I think, you know, we need to be mindful, we have got strong gross farm incomes with strong milk pricing and strong cattle prices at the moment. I think, you know, we need to also be mindful in our businesses that everything goes in cycles where we will see a point in time when these perhaps come back a bit from the levels that we've got them at the moment. So, you know, if you're able to capitalise on those prices at the moment, and certainly into the short term future, it's certainly a time to do that. But I think, you know, we've seen some strong business performances in these 36 farms and we are seeing farmers still grow their businesses, so there is still confidence in the industry despite the challenges that we're seeing. 

Tori Alexander: Perfect, thanks Sheena. Also, where can farmers go if they'd like to get some more information on the project? 

Sheena Carter: I'll put a link in the show notes for this podcast episode, but you can access our annual report. We pull together an annual report which gives a bit more information on the results, both at a state-wide level and a north and a south level, that's available online on our Dairy Business Advisory Unit website and also on the Dairy Australia website. We also have, for New South Wales, we've developed an interactive farm report so you can look at some metrics in graphical form, so you know, it's a bit easier to digest than reading an annual report, if you want to have a quick and easy look. So we'll put a link in the show notes so that people can access those. 

And also just a shout-out, if there's any farmers that are interested in participating in Dairy Farm Monitor, please get in touch with me. We're always keen to involve more farmers that are interested because the reports that they get out of them really are valuable and useful to them in managing their business. 

Tori Alexander: Thanks so much, Sheena, we will wrap up here. It's always a pleasure, always lovely to listen to you talking, your knowledge and expertise and experience with New South Wales DFMP and also business management, it's a wealth of knowledge, so thank you. And again, thank you to our farmers who participated this year. It couldn't happen without their generosity and once again we get another valuable year of DFMP data in New South Wales, and it's in big part due to those farmers who do contribute, open their books and share their data with us, so thank you again. 

Sheena Carter: Thanks, Tori. 

Sheena Carter: Thank you for listening to this month's The Business of Dairy podcast, produced by the New South Wales Department of Primary Industries Dairy Business Advisory Unit, and thank you to Tori for hosting this month. This series is also brought to you with funding and support from the Hunter Local Land Services. This month's show notes contains a transcript of the podcast and a link to the Dairy Farm Monitor annual reports and the New South Wales Farm Monitor Interactive Report available on the New South Wales DPI Dairy website. We'd love you to share this podcast with your networks and feel free to send any feedback or suggestions for future episodes to thebusinessofdairy@gmail.com. You can also subscribe to our New South Wales DPI Dairy Facebook and DPI Livestock Twitter Feed and view or subscribe to our quarterly DPI Dairy Newsletter using the links provided.