Intensive Dairies - Drivers of Adoption and Profitability

Interest in NSW and Australia in intensive dairy systems has grown significantly in the last decade due to many factors. These systems require significant capital investment, so it is important that if this is a system that interests you, you really do your homework. 

Through DairyUP, a large research, development and extension program in NSW, NSW DPI with joint funding from Dairy Australia, has undertaken an economic and social science project looking at the profitability of intensive farms in NSW and why people are considering and adopting them. 

This month Sheena discusses the project with Nikki Reichelt, a Research Fellow from the University of Melbourne’s Rural Innovation Research Group who undertook the farmer and consultant interviews to understand the ‘why’ of the interest and adoption in NSW and Karen Romano, National Feeding Systems Lead at Dairy Australia. Karen is responsible for a program that is providing farmers with excellent information and resources to help them in their decision making and implementation of system intensification and has a strong background in extension and farm systems. 

Useful resources related to this podcast: 

Adapting Dairy Farm Systems website (includes links to the National Guidelines for Dairy Feedpads and Contained Housing Systems and the Farm System Evaluator) 

DairyUP website - further information on the Intensive Dairies project and others R,D & E programs funded by this initiative. 

This podcast is an initiative of the NSW DPI Dairy Business Advisory Unit  (further information and resources are available here) 

It is brought to you in partnership the Hunter Local Land Services 

Please share this podcast with your fellow farmers and colleagues and feel free to contact us with suggestions or comments via this email address thebusinessofdairy@gmail.com 

Further NSW DPI Dairy channels to follow and subscribe to include; 

NSW DPI Dairy Facebook page 

DPI Intensive Livestock Twitter feed 

NSW DPI Dairy Newsletter 

Transcript here 

Produced by Video Lift 

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

Transcript

The Business of Dairy 

Episode #27 Transcript – “Intensive Dairies - Drivers of Adoption and Profitability”

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. Interest in New South Wales and Australia in intensive dairy systems has grown significantly in the last decade due to many factors. These systems require significant capital investment, so it is important that if this is a system that interests you, you really do your homework. Through Dairy UP a large research development and extension program in New South Wales, New South Wales, with joint funding from Dairy Australia, has undertaken an economic and social science project looking at the profitability of intensive farms in New South Wales and why people are considering and adopting them. 

I am joined by Nikki Reichelt, a Research Fellow from the University of Melbourne's Rural Innovation Research Group, who undertook the farmer and consultant interviews to understand the why of the interest and adoption in New South Wales and Karen Romano, National Feeding Systems lead at Dairy Australia. Karen is responsible for a program that is providing farmers with excellent information and resources to help them in their decision making and implementation of system intensification and has a strong background in extension and farm systems. 

Welcome to the Business of Dairy Podcast, Nikki. 

Nikki Reichelt: Thanks, Sheena. I'm very glad to be here today. 

Sheena Carter: And also to you, Karen. We've had a lot to do with each other over the years as well, so it's nice to have you as part of the podcast today. 

Karen Romano: Yeah, it's a pleasure to be here, Sheena. 

Sheena Carter: Well, thank you both. I think this area of intensification in the Australian dairy industry is something that we're seeing a lot of interest in. And I would guess that, you know, historically Australia has been very much a grazing-based system and we are seeing, through levels of inquiry and also research through the University of Melbourne and other anecdotal stories, are a shift in people's interest to intensifying their system. I'd just like to be clear on what we're talking about when we're talking about intensification, because it's partly to do with feeding systems and partly to do with how the cows or milking herd might be housed. So, Karen, would you just mind giving us a bit of an explanation about intensification through those two lenses of feeding system and housing? 

Karen Romano: Thanks, Sheena, and it's pretty important to go through those so we are clear about what we're talking about. So in Australia, as dairy farmers, we have primarily five main feeding systems, so they're a with forages and low level of concentrate. We then can step up to the same type of system with higher concentrates and then we morph into systems where we start to have some partial mixed rations, so maybe the integration of feeding infrastructure, still grazing in those systems, and then the final type of system that we start to see emerging in Australia is what we call an intensive system. 

That system is designed with zero grazing animals, fed a complete ration in front of them, and they leave whichever facility they're in to be milked at the end of the day. Now in Australia we've got different types of feeding and housing infrastructure to support grazing industries or intensive industries. So if we're looking at the grazing sector at the moment where the intent is to still have part of the diet to come from the paddock, we might have feeding infrastructure such as a basic feed pad, an earthen feed pad or a concrete feed pad in situations where we want to start to protect the cows from the elements, albeit the heat or rain, you'll see some systems that are still grazing that have a roof over them. 

So that might be a clear plastic roof like a red car shelter, or it might be a more structured steel roof with facility. But the intent of those systems is that when conditions allow, the cows will be grazed pasture and when conditions are not conducive to grazing, there's that opportunity to take cows off pasture, protect the paddocks or to take them out of the elements and still feed them a diet on that type of feeding infrastructure. Then we cross the line. We start to talk about these intensive zero grazing systems. 

So with those systems, grazing is no longer part of the picture. The grazing pastures of those systems are often converted from a feed-based perspective to forages, which are harvested, stored as silage and then fed back to the animals and incorporated as part of the total mixed ration with grains and other by-products potentially. Now right now in Australia we've got three types of these systems that have emerged. We have what we define as a dairy dry lot which originated from Arizona. So a dairy dry lot is a raised mound with a grade on it. 

So water will drain away from the mound. It tends to have shade in place for animals that they can go and stand out under, which can have a compost bedded pack under the shade. And then it needs a course, some sort of feeding infrastructure. So more often or not a centralised feed pad where we can drive, mix the wagon down to feed those animals on a daily basis. So low end sort of infrastructure, often regarded as a steppingstone infrastructure. And in environments where we tend to get high levels of rainfall, they can become compromised if stocking rates are too high on those types of setups. 

So then we move into our housed facilities. So we have a definition of two types. The first one I'll discuss is what we know is loose housing or in Australia sometimes we refer to them as barns and they can have either a compost bedded pack or they can have a deep litter pack and I'll discuss both of them. So a loose housing facility allows has the same elements as your dairy dry lot. So it's got a centralized feedlane and it has an area where animals can stand and loaf, but that area where they stand tends to be a nice compost prepared bedding where animals can lie down comfortably, feel warm, but also have the ability to move anywhere within that facility. Once again, fed a TMR in front of those cows. In Australia we're looking to make sure that we provide enough space for those animals in those facilities so that we don't compromise the dryness of that pack as well. And then at the far end of the scale, the last intensive system that's been prevalent in Australia for many years is what we call a free stall. So a free stall system is designed once again with a feeding alley or concrete feed pad incorporated into a housed system. 

But then the animals actually rest in individual stalls rather than an open area. So with the stalls and these systems, we have a few different types that are prevalent right now here in Australia. The Gold Star where we talk about freestyle systems is of is a sand stall. So a sand is an inert product. So less issues with mastitis and so forth, or harbouring organisms which might cause animal health diseases. 

But there has complexity with sand as well, because sand doesn't agree with pumps and effluent systems. In a free stall system, it's all about 100% effluent recovery. So we've really got to make sure they're engineered well to deal with sand. The other type of bedding that we see in these freestyle systems is a mattress type arrangement. So a mattress is fitted into these stalls and more often or not, we try to top that mattress with a with a bedding product which is designed to wick moisture away from the animal. 

And so there's one example that I can think of that's using a straw as the base which is topped up on a daily basis to keep that bedding comfortable for animals when they loaf in that space. And then the last place type of bedding that we've see in Australia is the use of recycled manure into the beds in some systems in Australia. Now with the seasonal issues that we had last year, so from June through to probably December, January, we had high levels, our increased level of rain, higher number of cloudy days and more moisture in the air. 

It actually for the first time resulted in problems with that type of bedding in Australia. So we ended up with some significant mastitis outbreaks in some systems and that's primarily because of our operating environment. Going to think about this, a lot of this knowledge comes from the US in different climatic environments, very dry in California, for example, and so quite easy to dry the bedding that we've just seen here. As an example, when we have these conditions where we can't dry bedding properly, we can lead to these animal health issues as well. 

But primarily just to go over those intensive systems, dairy dry lot, loose housing facilities and freestalls are what we see in Australia right now. 

Sheena Carter: Excellent. So that highlights that there's lots of things to be considered when people are looking at these systems and lots of things that they will need to then manage that won't have been part of a, you know, predominantly pasture based system. So and I think Nikki will probably have a bit of a discussion about some of that as we come, sort of some of the management and skill sets required in these systems as well as the, you know, significant capital investment that comes with these systems. 

Karen, can you just I know that you've, you know, worked quite closely with Scott McDonald from Agriculture Victoria, and he has had a lot of inquiry from farmers over the years regarding these systems. What and yourself as well through your interactions with industry, what have you seen as a trend in the level of interest in these systems? 

Karen Romano: Great question, Sheena. And seeing significant differences, we're starting to see there. So you're right. Scott McDonald has been working alongside farmers who are looking to intensify their businesses since pre 2010. Back then, there were probably only six systems on the radar that that were going towards intensification. And back then around 2010, the only intensive system that people were considering was freestall. That was all it was available. And we were thinking back at that particular time, about 2003 13, the barns started to arrive in Australia. 

We had 1 or 2 that were built. Fast track to now to 2023, and we've got three types of intensive systems that are prevalent in Australia. As I said, the freestall the loose housing barns and the dairy dry lots and we've moved from six systems in 2010 to Scott's records back in April 2023 of 161 farms that he's worked with. But importantly, this is something to consider is that we've got more providers working in this space with farmers now. 

So the these multiple providers are also providing advice and support to farmers building these systems beyond Agriculture Victoria. And so we actually think that number today of intensive systems is closer to the 200 mark here in Australia. Now looking at those numbers across the state by state basis, it starts to tell a different story as well. Victoria in the north or northern regions in Murray Dairy region, they've led the charge and we now know that it's probably over or close to 60, those systems in place in that region. 

But closely following the Murray Dairy region is New South Wales, with almost 50 on Scott's records and then Queensland and South Australia very close contenders as well. But importantly, this is a real difference that we've never predicted is that we're also seeing these systems appear in every dairy region across Australia. So in Gippsland for example, and Tasmania places we never considered that they would appear, they are. And the next piece to start to really get our minds thinking about is that recent industry events such as flood succession, successive floods in New South Wales and flood impacts in other regions have started to make farmers think more closely about building infrastructure. 

So we think and we are the levelling inquiry has ramped up and there's a significant wave waiting in the ranks to move to these systems as well, Sheena. So right now we reckon that these systems represent close to 20% of our milk pool in Australia. In ten years’ time, predictions are that's a bit closer to 40 to 50% of the milk pool will be coming from these more intensive systems. 

So interesting to contemplate. But certainly it's not just a passing trend. It's here to stay I think Sheena, in what we're seeing right now. 

Sheena Carter: Interesting, interesting numbers. Karen And yeah, surprisingly large numbers. I think, you know, there's certainly a lot of anecdotal talk about farmers that are interested and going down that direction, that path. But those, those numbers are, yeah, quite startling. And I think we'll move to you now. Nikki. I think, you know, you've done a lot of work in the project from a New South Wales perspective in understanding why people within the industry are looking at these systems and also in northern Victoria. 

But we'll focus on New South Wales today. You did some interviews with TMR or intensive farmers and also consultants and an online survey of the New South Wales dairying industry as well. Can you explain some of the key reasons or drivers that we see New South Wales farmers looking to intensify their system? 

Nikki Reichelt: Yeah, sure. Sheena. This is a really interesting question because there was both a common driver relating to responding to climate and weather events from many of the dairy farmers we interviewed and surveyed. But this was also combined with various other external triggers and internal motivations that differed between dairy farmers. So for climate and weather events, it was common for dairy farmers to mention that experiencing wet weather, floods and general changing climatic conditions were a trigger for them to start thinking about intensifying their feeding systems. 

However, the full story was that there were other factors that went into that feeding system consideration and decision making. So what I'm talking about here is some farmers in the irrigation districts, they were facing greater water insecurity and this means there's less water to maintain their pastures. So they were really triggered to finding feeding systems that demand less water. And some of these more intensive systems were applicable to that that context. 

Look, some farmers mentioned that they're having aging infrastructure that's no longer fit for purpose, such as old fencing and laneways. And this means that some farmers were taking this opportunity to reimagine their dairy system and upgrade their infrastructure by putting in a feed pad or more permanent feeding and housing and infrastructure. It was also mentioned, interestingly, that there's been a spike in land prices in their dairy production region, particularly in the coastal regions, which means that some dairy farmers cannot readily expand their business by buying more pasture land because it's too expensive and therefore they triggered to consider increasing the herd size and or increasing their dairy milk production performance of their animals through dairy system intensification. 

So as you can see, there's a range of responses on top of that climate and weather event. And I haven't even mentioned the internal motivations as well. So to provide a more fuller story. Some farmers were also considering wanting to improve the animal welfare and well-being of their cow herd, and this is by improving their nutrition, the physical comfort of their cows and avoiding their cows being exposed to extreme weather. So it was a real animal welfare driver for them and others were really wanting to manage their dairy farms for more environmental sustainability outcomes by being able to reuse their animal effluent on the farm for soil enrichment and really close that production circle so that whatever they were producing on farm was being reused on the farm as another resource. 

So there was also the idea of just wanting to increase their productivity and efficiency of the dairy business by reducing feed wastage, being able to control the quality of the cows diet better, capturing nutrients in their farming system and increasing production. So as you can see, it's not just a straightforward trigger of climate and weather events. Yes, that's an underlying driver, but there's many other things that are involved in this decision making process around dairy feeding system intensification. 

But I just want to say in summary, it was common for dairy farmers to refer to feeding system intensification as either a way for gaining more control of managing their cowherd and diet quality, or it was adding more flexibility into their system by having the option for grazing pastures or switching to contain feeding depending on the seasons. So the idea of control was more around the intensive dairy housing systems and the flexibility was more associated with the TMR and feed pad systems. 

So just an interesting pattern there that was coming out of the research. 

Sheena Carter: Yeah, it is interesting, isn't it? I guess different people's approach to management and how they like to operate their business and given the resources that they have available to them, I guess, um, in your survey, obviously it wasn't all respondents that wanted to intensify. Can you recall some of the reasons why perhaps people weren't looking to further intensify their system? 

Nikki Reichelt: From the online survey, the main reasons we captured for not considering to intensify was that they had just changed to a TMR system and they believed it was the best option for their situation. So they had already intensified and they weren't looking to intensifying any further. Some farmers were happy with the way they were running things at the moment and that might have been pasture based, a TMR or a hybrid system. And so they felt there was no need to change at this point. 

You know, to quote one farmer, they just said, we are happy with our partial mixed ration; “You know, it's not complex. It's working well within our margins. You know, we're happy with how things are and we're too old to invest in any more expensive infrastructure”. So yeah, there was a range of reasons under people being happy with the way they're currently running things for just a couple of other reasons. Were some farmers mentioned the cost of investment was too high for the more intense dairy feeding systems. 

So I gather they were referring to the house systems and they thought that the labour was too intensive in these more intensive dairy feeding systems, plus it would be too expensive to install the infrastructure and machinery necessary. So I guess it was an economic decision for some dairy farmers and also just for some dairy farmers. It's just not the right time to change. It's the next generation's decision. So I guess they were thinking of succession planning and perhaps their sons and daughters coming into the system over the next five years. 

It was up to that generation to make that decision. Some farmers mentioned their land was unsuitable for this sort of change, and once again, they were just happy with how things were running for them at the moment. 

Sheena Carter: Yeah, and I think, you know, I would have mentioned in the introduction, but it's very much, you know, we're looking at options for people and helping, aiming to help people in their decision making around intensification and whether that is right for their business, their circumstances, their location and resources that they've got. We're not necessarily advocating that this is the system that everyone needs to be moving to. It's very much helping people make it, make informed decisions and understand sort of some of the risks that they will face in these type of systems as well, I guess, in. 

With farmers moving along this journey who have decided to intensify. It's a prolonged and protracted process from your work or interviews with farmers. Can you describe some of the challenges that farmers have experienced along this journey? You know, from the considering intensification through to operating these systems. 

Nikki Reichelt: Yeah. So I really think she into (?) this particular challenges for each of the phases that you just mentioned. So the consider phase, the invest phase and the operation phase. It's really good to be aware that I think there are particular challenges for each phase. And so with the consider phase, I pretty much consider this a cognitive challenge because it's referring to all the thinking and information seeking that needs to go on before an investment decision is made and a lot of time is needed for information gathering. 

Yeah, identifying all the different options and determining what option makes the most sense for your own situation. And there is a lot of information out there. At the same time, it's not necessarily all the options are readily available. So if you're wanting to take a certain option, you might have to do more research that might take you to overseas expertise in the USA, as Karen mentioned before, or it might be talking to farmers in Australia that have already intensified their systems and, you know, having a really good look at their farm system for a day or two to really understand how it might work for themselves. 

So there's a lot of considering of the options and it's not always clear what all your options are. So it is really good to not only do your own research, but really to reach out to advisors and the Dairy Australia and other bodies to really get that full range. So you're making an informed decision. But you know, this can be up to, you know, some farmers mentioned the consideration phase for them is up to ten years. 

So it might take, you know, a year for some people. But for some people it really took ten years. And that consideration phase can be disrupted by personal family issues or just, you know, running, keeping the dairy business running as per usual. Sometimes there's a pause in that consideration phase where you do a lot of research, you reflect on it. Then life gets in the way and you put it aside and then you might come back to that information gathering phase again for another run. 

So I can't say that it's straightforward from what the dairy farmers were telling us, but they did a lot of research and it really showed that that was very critical for them to do that, to get the details up front about the different options, because that can help with the informed decision. And they're really didn't want to make a mistake. But if I'm if I have a moment to just quote a farming couple, if I may, just to really. 

Yeah. Provide an example of this consideration phase. You know, Shelley and Nathan said last year that it's been such a long road for them. You know, Shelley said, “I've talked to about I've talked a lot about this from 2010 to 2016, and there was a whole lot of dreaming and a whole lot of looking and deciding what we wanted to do. It was 2018 when we got serious to go, and then in the weeks that ensured after the raise the roof and conversations with another bank,” that's really when they started to make their investment decision. 

“And it was a really good reset for us to have been part of that Raise the Roof event that Dairy Australia put on and conversations with the bank.” But really that took up to eight years for them to come to that investment decision. So that just gives you an indication. 

Sheena Carter: Yeah, a very long journey. And I think you've mentioned a couple of other things in there as well. You know, talking about financing, obviously there's that process to go through in talking to banks or whoever you're going to source your funding for. And yeah, it's it is a big, involved process that once you've made the commitment, you then have to 

get the project managed and built implemented on farm and then you have to, have to operate it, which then brings a whole other level of management skills required in the business. I think I might just flick quickly to Karen because a lot of the stuff that you've spoken about in the Consider phase, Karen, you've developed a tool for farmers to help them through this process. Do you want to quickly outline what this tool does and how it helps people in this phase and where people can access it? 

Karen Romano: Yeah. Thanks, Sheena. 

And it is really relevant. And I hear what you're saying, Nikki, in this long decision process for consider. I've just had some similar stories drafted up for Victoria where these journeys have been about the same timeline along ten years. So this consider this consider phase, It's a lot of flip flopping, looking at others going to the US, doing your research, changing your mind, not being certain. And because we know this happens in industry, Agriculture Victoria Dairy Australia and the New South Wales Government have partnered together to to start to develop a process to help farmers step through some logical steps when they're going through this consideration fast phase. 

And that's resulted in the development of this tool called Farm System Evaluator, and purely that has been developed to incorporate these triggers or motivators that you spoke about making farmers want to make a change to their farm system right through to getting to asking questions about how they currently operate their system and helps them determine which type of feeding or housing infrastructure might be most suited to mitigate those issues. That's affecting the way they operate their farms. 

So that could be grazing infrastructure from a basic concrete feed pad right through to intensive infrastructure as well. The logic in that tool has been pulled together by a team of experts working with these systems with years of experience. And we've just released that tool last week and now it's available to farmers. So this is going to be a great starting point when people start to consider about moving towards feeding or housing infrastructure. 

But I want to emphasise, as Nikki said, it's a starting point starting point for the journey and then there's probably another 2 or 3, maybe four years of work that go ahead in that consider phase before you're ready to invest. And that's where the National Guidelines for Dairy Feedpads and Contained Housing Systems comes into play. It's available so in the Australia website and that steps through the thinking that you need to contemplate. When you're moving through that, consider phase right through to investments. 

So some good resources. Now Nikki and ?Sheena? are to support farmers thinking moving ahead in our industry. 

Sheena Carter: Yeah. And they are excellent resources and we'll put a link in the show notes to them, Karen, so that people can access them. And perhaps your email address is a contact point as well. I know you're speaking with many farmers that are in operating in this space or thinking about operating in this space. I do just want to move on in the interest of time just to talk about some of the economic work from New South Wales. So this is also been done in in northern Victoria, but I guess part of the decision making process for farmers looking at these systems

well, should include trying to understand some of the cost structures and, you know, the profitability of these systems. Up until now, we've really had an absence of this sort of information within Australia and in northern Victoria and New South Wales we were able to do an economic study where we looked at the performance of some intensive farms in New South Wales. We looked at seven farms. 

They're anonymous for obvious reasons, but they were seven farms were very kind and generous and shared their physical and financial data with us. So I must emphasise that it's very much a baseline data set. There is, you know, there's a bit of noise in the data set in that we've got some of these farms are still in the transition phase, meaning they haven't been operating the intensive system for the six-year period in which we did the analysis. 

They're also spread throughout New South Wales, predominantly in the inland regions of New South Wales, but from more or less the Queensland border to the Victorian border. So we know we've got a lot of differences across that geographical region in terms of environmental conditions, milk pricing, land values, all those sorts of things. So these are, I'm mentioning these because they do impact the performance that we see. So I think just in general terms, the data showed that these farms on average and so I'm talking averages, obviously there's a range, but they tend to have much larger usable land areas to manage than our farm monitor farm. 

So I should explain, we've done the economic analysis using the Dairy Farm Monitor methodology, which has given us a common language and performance measures to compare or look at the performance against Farm Monitor farms. And also we've looked at it relative to the top 25% of our Dairy Farm Monitor farms. So typically much larger land areas, which is not surprising given their geographical location higher per cow production, which we would also expect within these systems. I will say within our data set, I think, you know, on average we're looking at 8500 litres per cow compared to about 6800 for our Dairy Farm Monitor farms on average. 

So obviously there is a range in that the farms, the intensive farms that have been operating their systems for a while, we do see in excess of 10,000 litres per cow and some of these farms with exceptionally efficient cows. And by that I mean when we're looking at cow efficiency, we're looking at kilograms of milk solids produced per kilo of cow live weight. And so there's a number of these farms that are greater than 100% in terms of cow efficiency. So there's a lot of management things that are being done well. 

That's enabling them to achieve these efficiencies and obviously they are tend to be larger, larger herds. So I think our average herd size is about 560 cows in the intensive herds compared to about 360 in our Farm Monitor data set. They also have more employees, which is not surprising. Obviously they're milking more cows, but they've also got that larger land area and they're growing a lot of their own fodder. 

So there's much more tractor and paddock work in these businesses than our more conventional farm monitor farms. If I quickly jump straight to the profitability of these businesses in Australia, we look at profitability through Dairy Farm Monitor, through Earnings Before Interest and Tax or EBIT, also known as operating profit. So, operating profit is calculated as gross farm income minus our variable cost and overhead costs. 

And there's cash and non-cash costs included in that. So. There's a target figure in the Australian dairy industry for a sustainable industry of about $1.50 per kilo milk solids, just to sort of give people a baseline to think about. Once you've got your EBIT, then from that the resulting out of that you can then pay, you know, interest in lease costs, principal costs, capital expenditure and your tax. 

So in terms of EBIT, we see a very similar profit compared between the farms and the Dairy Farm Monitor farms. So, you know, that's telling us that these systems, our intensive systems, can be as profitable as a conventional or, you know, what we tend to see in our dairy farm monitor farms. When we look at it on a return on total assets basis the intensive farms come out as slightly more profitable, so Return on Total Assets in Dairy Farm Monitor is return on total assets managed. So that includes any leased land as well. And it's EBIT divided by the value of all those assets managed. So it's the amount of profit earned relative to the amount of money invested in the business. We see that the ROTA or return on total assets is slightly better on the intensive farms than the farm monitor farms, which is slightly confounded by land value. 

So in our more coastal regions of New South Wales, land values can be up to three times higher than what we see in our inland regions. So this then impacts the return on total assets. So as an example, there's a coastal farm that had an EBIT of $2.90 per kilo milk solids that translated into a 3.3% return on total assets, whereas we had an intensive farm with an EBIT of 2.64, and that translated into a 7.3% return on total assets. 

So there is, you know, that sort of compounding factor with land values in our farm monitor data set. If we look at gross farm income, this is interesting in New South Wales in that we see while the farms are intensive, farms have a similar gross farm income to our farm monitor farms, the actual what makes that gross farm income come up is slightly different. 

So gross farm income is our milk income, livestock trading profit, feed and water sales and other farm income like farm rental house income. So the proportion of livestock trading, profit and feed sales in our intensive farms is much higher than what we see in our farm monitor farms. Livestock trading profit is on average about one and a half times higher than our farm monitor farms and feed sales are about 12 times higher than what we see on our farm monitor farms. So this sort of indicates some strategic business diversification in these intensive systems, which is not surprising when we see we've got larger land areas, they've got more resources available to do this. 

In terms of variable costs, obviously our biggest cost within a dairy system are our feed costs and we see quite clearly that on the TMR farms they have higher total feed costs on a dollars per kilo milk solids basis relative to our farm monitor farms, they purchase a lot more feed. However, when we look at it on a cost per tonne of dry matter, we see that the farms tend to spend less on that basis, but they're buying more of it. 

Sometimes this is partly due to the fact that they forward contract when they're purchasing, but also I think we need to bear in mind that these farms I've already mentioned, they're in the in the inland regions and this tends to be the belt of New South Wales where that grain is grown and, you know, fodder crops grown. So compared to farm monitor farms and that coastal strip, often they have a freight component in getting that grain, particularly from the inland region to the coastal regions. 

So that partially also explains why it's a lower cost on a dollar per tonne basis for our TMR farms. Interestingly, in the feed space we see that some of these TMR farms are aimed to produce enough home grown feed to have at least two years’ worth of feed in front of them, which is a, you know, strategic risk management strategy that they have. Some of the businesses also, when we're talking about feed, their businesses set up around a unique by-product available to them because of where they're located. 

So and they are accessing this at a relatively good price. And obviously, you know, all the diet is based around that and balanced around that. The big thing that we see with these businesses, obviously where they're heavily??reliant? or have higher purchased feed costs. When we hit the situation, which we did in ‘18-‘19 and ‘19-’20, 19-20 financial year. 

You may recall that was the height of some very severe drought conditions. And we saw that those farms, the farms that were exposed to that purchase feed market really, really had their profitability impacted. You know, we had a couple of farms that had less than 10% home grown feed in their diet. So they were exposed to exorbitant feed costs and also the feed quality, you know, during that period in the drought wasn't necessarily particularly good. 

It was difficult to get and it was difficult to get quality feed as well. So I think a key message from this is to ensure if you're entering into this kind of system, you're either able to grow the vast majority of your own feed or have a secure, reliable source from an external supplier that is going to get you through these kind of conditions. Uh, labour, I think I've mentioned we've, you know, they've already got, they've got more labour within the businesses because of, you know, herd sizes, other operations on the farm. 

They tend to employ about seven and a half full time labour equivalents, which is 2400 hours as a full time labour equivalent, um, seven and a half FTE in the farms compared to about four and a half FTE in our farm monitor farms. They do have slightly better labour efficiency than our farm monitor farms. Um, but not, not as efficient as our top 25% farms. There's a few other costs of interest that I might just quickly talk about. Repairs and maintenance, we did think that we'd see slightly higher repairs and maintenance costs in these more intensive systems, but the numbers at this point haven't shown that. And part of the reason I think for this is that within New South Wales we've already spoken about a lot of farms already having feed pads or some type of system to feed fodder to their herds for some businesses is because they're in a partial mixed ration system or a hybrid system. 

Other businesses will have feedpads, just as an opportunistic resource in, you know, to feed cows when there's a feed gap in their system. So with a feed pad comes associated feed out equipment, hence repairs and maintenance costs. The other thing I think we see in New South Wales is it's quite difficult to get contractors and we do see that a lot of farms own their own gear so that they can do their own paddock work and fodder conservation in a timely manner so that that sort of repairs and maintenance is, you know, at a similar level to what we've been seeing in the TMR data set. 

Um, I think that's, you know, that's probably some of the main points in terms of cost structures. When we look at the consistently profitable TMR farms, a few key features, they tend to be the businesses that are well established in these systems and have been doing this for a while. They have, as I've mentioned, a strategic income diversification. They tend to have very productive and efficient cows. They manage their feed sources very well, so they're largely self-sufficient with fodder or that reliable external source, and they tend to have very good overhead cost control and they're constantly looking to identify aspects of their business that they can improve and whether that's through the use of technology, technology within their systems or modifying the current intensive system that they've already got. 

Karen sort of spoke about dry lot, dairy dry lots, and we do see some of these farms moving to further intensify from a dairy dry lot system. That was a quick and high level explanation of what we've seen in New South Wales in those seven farms. It is very much a baseline data set and we are going to hopefully continue to, you know, study these farms and see what the results look like over time. But in summary, they can be just as profitable as our dairy farm monitor farms. 

So just like to flick back to you, Nikki, before we wrap up, um, if you've got a couple of key points you'd like to leave with farmers who might be considering intensifying their systems. 

Nikki Reichelt: Just that I think there are a whole range of options and it's just really important to understand the spectrum of options that are available with dairy feeding systems and to really explore, take the time to explore them. And yeah, just make sure that you understand the whole spectrum of options and not just focus on 1 or 2 that you know of because there's a lot of potential for adapting to varying conditions. It's, you know, it's a good story. There are there are different ways of managing dairy farms in the future. There are many options available. 

Sheena Carter: Yes, I think thorough research is paramount here. You don't know what you don't know which will lead me to you, Karen. Some of the things you would like to leave farmers with, and I would suggest a couple of resources might be on your list. 

Karen Romano: Yeah. Thanks, Sheena. And I agree with you, Nikki. It's really important to put the groundwork in place. And my biggest piece of advice for farmers contemplating this change is start with the end in mind. So think ahead five, ten, 15 years from now, what the system could be because you don't actually have to build it straight away. You can actually build do a stage development, particularly if capital is tight. My second piece of advice is, um, do your homework. 

Use tools like the Farm System Evaluator. Think about what you might want to refine your thinking about what it is. It might be, for example, a free stall, but then go and talk to other farmers have built a free stall asking the questions. What have you learned? If you had your time again, what would you do differently? Because once you see many systems, then that can start to formulate your thinking. Um, and then if you decide to actually go further along this pathway, assemble the right team around you to support you through this journey. Because if you try and do it yourself and run the farm at the same time, the wheels will fall off at some stage. 

So where you know, you've got contacts in industry now through myself at Dairy Australia, Scott McDonald at Agriculture Victoria, a whole gamut of providers out there supporting farmers going through these transition journeys, tap into those resources because once you get your team around you, you start to secure a more seamless journey in that transition phase moving towards these farm system changes. Lastly, Sheena, we've invested in the National Guidelines for Feedpads and Contain Housing Systems so that particular documents are global. 

First captures all the known research internationally and actually tailors that research and knowledge to Australian conditions. So this is the blueprint we should be using if we're considering building, feeding or housing infrastructure. So go to the website, take a look at the document. It's not designed to be read all at once, but dip in and out it as you go through your stages of consider, invest, operate. It's a fabulous resource and really should inform farmer and service provider thinking moving forward in the future. 

Sheena Carter:  Thanks, Karen, and thanks, Nikki. I think you've both contributed a lot to our understanding of intensification in New South Wales and Australia more broadly. So it was great to have you both as guests on the podcast today. 

Nikki Reichelt: Terrific, Sheena, Thank you. 

Karen Romano:  Thank you, Sheena. 

Sheena Carter:  Thank you for listening to this month's podcast produced by the New South Wales DPI Dairy Business Advisory Unit. This is a series brought to you with funding and support from the Hunter Local Land Services. The show notes to this episode include links to the Dairy Up website where you can find further information on this project and Dairy Australia's adapting Dairy Farm Systems 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.