Highs and Lows of Dairy Farm Monitor 2023

The 2023 financial year saw the highest average profit for the Dairy Farm Monitor participants in the 12 years of the project in NSW. Jess Bell hosts this month’s episode as she teases out what the main drivers were behind this performance with Sheena Carter. It was yet another very challenging year with more floods which had a big impact on the majority of farms across the state. 

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DFMP Annual Report & Interactive Report

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Farm Business Snapshot

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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 #32 Transcript – “Highs and Lows of Dairy Farm Monitor 2023”

Sheena Carter: Welcome to the Business of Dairy podcast. The 2023 financial year saw the highest average profit for the Dairy Farm Monitor participants in the 12 years of the project in New South Wales. My colleague Jess Bell takes the hosts microphone this episode as we discuss the main drivers behind the strong performance. However, despite the strong performance, it really was yet another very challenging year with widespread floods which had a big impact on the majority of farms across the state. Thank you, Jess, for agreeing to host this month's podcast with me, looking at Dairy Farm Monitor. It's great to have your involvement, and I think, you know, you've had podcast experience in the past in a different organisation, or similar organisation, so it's great to have you participating in this one. 

Jess Bell: Thanks for having me along, Sheena, I've been on a previous episode of The Business of Dairy, so sitting on the other side of the table today, and likewise for you, you're probably not used to being the interviewee, but yeah, let's kick off and have a chat about DFMP this year. So Sheena, if we start, I guess, with a rough explanation of what New South Wales Dairy Farm Monitor is and, I guess, how it works? 

Sheena Carter: Yeah sure, look, Dairy Farm Monitor would not exist without the support and participation of New South Wales dairy farmers, first and foremost, without them, we don't have anything. So they are wonderful people who generously open up their books and provide their time so that we can do a business analysis of their individual farm, and we use that information to, you know, compile reports that give us really good insight into the performance of a portion of the New South Wales industry within a financial year. So the farmers are anonymous, unless they choose to identify themselves, and the results are very widely used. They're used to form a lot of industry reports, such as the Situation and Outlook Report and the In-focus Report, that are produced by Dairy Australia. They're use to help inform strategy and direction for, you know, big picture organisations and how they plan their years ahead and what they're targeting in terms of support for farmers and, yeah, by farmers themselves, obviously, looking at their own reports, but the data also sits behind an online platform called DairyBase. This is free to farmers and industry to use, and it allows them to do their own business analysis, so it's the comparative data that, sort of, sits behind that, so it is very widely used and it is of great value. It gives us some insight into how farms have performed within a financial year, with all the conditions that they've experienced. 

So, you know, obviously weather is always a big one, how they've managed that, but also input prices, milk prices, all those factors play into the performance at the end of the year. So we can see some trends over time. This is now our 12th year of Dairy Farm Monitor in New South Wales, so we've, you know, got some historical insight into what's occurred over those 12 years, which is really good. And we also get to see – New South Wales is a big state – we get to see some of the variation between the different parts of the state in performance. You know, we've got part of the state is in subtropical environment, and then we go all the way down to the south of the state, where it's a more temperate environment. We've got coastal farms, we've got inland farms, so there are regional differences, absolutely. 

Jess Bell: So let's talk a little bit more about that then, Sheena, how many farms participated this year, I guess, where, in terms of in New South Wales, are they located, and what do they get out of it? 

Sheena Carter: Yeah, so this year we had 36 farms and that was 17 farms in the north and 19 in the south. So it's the same number of farms that we had the previous year, but there was movement in and out – we had six farms opt out this year and we replaced them with another six. Some of those six are new to the project and some have returned back to the project this year, which is fantastic on both accounts. So the north is, sort of, north of Sydney, let's say, up to the Queensland border, predominantly along the coast and in that Hunter inland part of that coastal strip. And then the south is, obviously, it's Sydney south and coastal and inland. It does include some farms that, you know, are north of Sydney but inland, and why they're included in the south data set is because of their farming system, it has much more in common with our southern and southern inland farms than it does those, sort of, coastal farming systems – so that's the geographic distribution. So, 36 farms this year, or the end of the financial year, New South Wales had 466 active dairy licences, so this is representing... The 36 farms are representing about 8% of farms in New South Wales. So it is a snapshot into the industry, it's not a survey of the entire industry, but we're pretty comfortable with the representation we've got across the state and all the different farming systems, and we do get a wide range in performance amongst those 36 businesses. 

Jess Bell: And what, sort of, picture did those 36 farms paint in terms of the 2023 financial year? Was it a profitable one for New South Wales farmers? 

Sheena Carter: Yeah, it's an interesting year this one, again, as I said, there is a big range in performance, but at a top line level, the average profit was the highest that we've seen in 12 years of Farm Monitor in New South Wales, and this is also common with other states – the results that have come in from other states. When we talk about profit, we're measuring it in terms of dollars per kilo milk solids, and the profit for New South Wales, average profit, was $2.78 per kilo milk solids, and that translates to a 6% return on total assets. So that's, you know, that's really pleasing, particularly when we consider the challenging year that we had climatically. 

Jess Bell: So $2.78 per kilo of milk solids, that was the average for the state and the highest the project's seen in its 12 years, but was there any variation in profitability between the north and the south of the state, or those northern and southern farms? 

Sheena Carter: Yes, it's interesting when we look at the north and south, there's always a distinct difference between the groups when we look at them through that lens. So, from an average profitability point of view, the south had an average EBIT of $3.01 per kilo milk solids, and in the north it was $2.52 per kilo milk solids. So yeah, as I say, we always do see that difference, and over the last 12 years in general, the south has been a more profitable region than the north cohort of farms. And if we look at the long term average profit of those two regions, in the north, over that 12 year period, the average EBIT has been $0.97 per kilo milk solids, and for the south, it's been $1.79 per kilo milk solids. So some of our listeners might be familiar with some industry targets that have been set in recent years, so the target is $1.50 per kilo milk solids, you know, over a five year period for a sustainable and growing industry. So that's something to keep in mind, not every farm is going to achieve that, and every farm, when it actually comes down to it, will probably have its own target in itself, but as an industry that's an overall target. So I did actually look at the average for the north and the south over the last five years, and for the north, the average EBIT has been $1.39 over those five years, and for the south, it's been $2.01 so, you know, there's numerous factors that drive those numbers, but that's what it is. 

Jess Bell: Is that a state industry target or a national industry target, Sheena? 

Sheena Carter: That's a national industry target. 

Jess Bell: Yeah, great. So I guess it's probably pretty important that we context some of these numbers and what have been factors behind them. It's been a challenging year for a lot of New South Wales dairy farmers, we've had extraordinarily wet conditions across most of the state, some significant flooding in lots of areas, and then it was almost like someone's turn the tap off and we've turned back and headed back into a dry period towards the end of the year. Did this play a factor in farm performance? 

Sheena Carter:  Yes. Gosh, we really seem to have had a string of challenging years in New South Wales over the last five years, and I mean extreme, one extreme to the next, so, you know, a few years ago we were in the grip of 1 in 100 year drought, and we had some brief respite from that as that broke, but then, well, at least two years, depending where you are in the state, of horrendously wet conditions and the flooding and repeated flooding for some farmers. So unfortunately, again, we saw that happen in, well, quite a number of regions across the state, with the flooding and the wet, so it was very widespread, like the drought, it was widespread across the state. So with that came a disaster declaration for the local government areas that were impacted, and disaster declaration by the government triggers grants that helps people deal with these circumstances. So we had a Special Disaster Grant, and there was also provision of freight rebates for fodder, because farmers had to replace home grown feed with purchased feed in many instances because they simply couldn't get on to paddocks to graze them or to sow them or, you know, to make hay or silage. So, that has been really challenging, again, second year in a row. So in terms of what that looks like on-farm, on average across the group, obviously, reduced amount of pasture and feed conserved off the milking area. So directly grazed feed was down an estimated 0.4 of a tonne of dry matter per hectare, and there was only a marginal increase of about 0.1 tonne of dry matter per hectare in the amount of conserved feed harvested, so it meant that the estimation on the amount of feed removed from the milking area was actually marginally lower than what we saw in the drought year. So droughts and floods, you know, have equal impact, clearly, on farm feed availability. So yeah, with the loss of the home grown feed, that has resulted in more purchased feed, and in the north we saw, on average, farms purchasing an extra 0.2 tonne of dry matter per cow, and in the south, it was an extra 0.4 tonne of dry matter per cow. So, you know, that's significant once you multiply it across a whole herd. The other thing is, that's the feed side of it, but then with the floods comes damage on farm, unfortunately, and that is infrastructure damage to things like laneways and fences, irrigation equipment, all sorts of things, and that comes at a cost to farmers to, you know, to fix that and make the farm functional again, hence the support of the grants that were made available. But we also tend to see increases in herd costs, obviously the cows are impacted here as well, and to a large degree in many instances, where we have lameness, mastitis, all those sorts of herd health issues, which obviously impact production, reproduction, all those sorts of things. So we saw an increase in herd costs in the north, sorry, in the south, more so than in the north, but we have to remember that the north had been significantly affected by flood in the previous year, so their herd costs were already... We'd seen a large increase in that year as well, so we didn't see a dip in their herd costs this year, so they're still obviously, you know, dealing with those issues in their costs. And towards the end of the financial year, as you mentioned, it did start to dry out, crazily, particularly this was quite significant in the far north coast region of the state, where, by the end of the year they were, well, they were effectively drought affected, and we saw that starting to transpire in the far south coast and also parts of the Hunter as well. So it really was a year of extremes for New South Wales dairy farmers, which I wouldn't say they get used to, but they certainly are experiencing quite frequently. 

Jess Bell: Yeah, saying it's been a challenging few years doesn't seem to do it justice, just how challenging the last few years have been. In saying that, talk us through how the industry has had such big challenges, you know, even in the last five years, but then we've seen the strongest performance in Dairy Farm Monitor in its 12 years of history. So what what are the drivers behind that? Why have we seen that number? 

Sheena Carter: Yeah, so it's interesting. So as I explained, when we're talking about profit we're using earnings before interest and tax. So just as a bit of background, earnings before interest and tax, we look at gross farm income, which is obviously our milk income, but also includes livestock trading profit, any feed and water sales, and other farm related income. From that gross farm income we subtract operating costs, so variable costs and overhead costs related to the production of milk. 

So if we start with the income part of the equation, our gross farm income was 21% higher this year compared to the previous year, and this was really due to strong milk prices. So currently we're seeing very high milk prices from processes, pretty much as a result of declining milk production and they're trying to increase supply, and this isn't just a New South Wales issue, this is a national issue. So, for our Farm Monitor farms, it transpired that the average milk price for the year was up 25% on the previous year, so that's an average for the group of $11.43 per kilo milk solids. Now, within New South Wales we do have differences in pricing depending on whether you're in the north of the state or south of the state, and that differential is about a dollar a kilo milk solids, and that's pretty consistent across the years. So it really was that strong milk price that enabled this position, we have had an increase in costs, but it's the strong milk price notably. We also had a decline in livestock trading profit in general, I guess, you know, partly driven by the softening of the cattle market in that 12 month period, particularly the back end of the financial year. And less feed and water sales, which isn't surprising when farmers were struggling to have enough to use themselves, let alone sell any additional feed. 

So, we've mentioned grants and I'd like to come back to them because they are not considered part of farm income, so it isn't the grants that have increased gross farm income. You know, grants aren't money generated by using resources on the farm, so we need to be clear, they're not captured in the higher gross farm income. They're certainly accounted for, and we do this by netting them off the relevant cost that they were spent on. So for example, if a farm had really bad laneway damage and they'd have to fix them, they would have what would appear to be in an abnormally high repair and maintenance cost, but we use the funds that they use from the grants – we net that off that repairs and maintenance cost because it's, you know, it's an abnormal situation. And so that's standard methodology within Dairy Farm Monitor, and we also see it in things like the fuel rebate – so dairy farmers, primary producers, they're eligible for the fuel rebate – the fuel rebate gets netted off the cost of their fuel and oil. 

Jess Bell: So if we stay on the theme of costs, the other half of the equation, and they clearly impact farm performance, what are some of the notable features in terms of farm costs this year? 

Sheena Carter: So the operating costs, our variable and overhead costs – our variable costs are our herd costs, shed costs, and feed costs, and within feed costs we include inventory change, which I won't go into in any detail, but that's factored in as well. Within our overhead costs, we've got things like rates, insurance, motor vehicle expenses, paid labour costs – so they're cash overhead costs. Then we have non-cash overhead costs, and they are things like depreciation and imputed labour. So depreciation is, obviously, it's not a cost that you see come out of your bank account, but it's for equipment, plant equipment, that ultimately over time you are going to end up replacing, and that's the cost of that across that year to your business. Imputed labour is... Generally farmers will, if they're not drawing a salary out of the business, they take drawings out of the business to pay for their time. So every farmer takes out different amounts of drawings, so we need to standardise that so we can compare labour fairly, and imputed labour is what we're referring to here. It's that owner-operator labour that doesn't draw a salary out of the business, like a technical salary. So if we look at those costs combined, variable and overhead costs, total operating costs were up 14% across the state. Again, there's differences between the north and south, and some of this is related to the conditions and environment that they operate in, there's lots of factors that drive it, but that's one of them. So the total operating costs were $1.73 per kilo milk solids higher in the north than in the south. But the biggest cost increase that we saw, and it was consistent in the north and south, was the purchased feed and agistment cost this year. It was up 25% across the state because of the factors we've already mentioned with the conditions. So yeah, and by consistent I mean in the north it was up 28%, and in the south it was 22%, so obviously having to purchase in more feed. But another factor I think at play here is that relationship between strong milk prices and feed prices, so our milk price to feed price ratio. When we've got a higher milk price relative to feed price, there's an opportunity to make a margin with the purchase of additional supplementary feed, so you know, concentrates, hay or silage. So even at the moment, we do still have relatively high purchased feed costs, but with the strong milk price, there is still a margin in purchasing that. However, we need to be mindful as an industry, particularly more so the pasture based dairy farms, we need to be careful that we don't inadvertently set ourselves up in a system to be reliant on large quantities of imported feed because, you know, inevitably, milk prices will soften, that always happens with any commodity, or we'll get even higher feed prices, and so that margin will disappear, so we just need to be careful there I think. 

Jess Bell: Yeah, certainly. And what about home grown feed costs, less of it on average, but what was the comparison in cost of home grown feed versus purchased in feed? 

Sheena Carter: Yeah, again, still an increase in the cost of home grown feed. There was an 8% increase on average across the group, a larger increase in the south than in the north, but it's due to a number of factors. We did see an increase in the amount of fertiliser used this year compared to the previous year, and when I say compared to the previous year, you've got to remember the 2021-22 year, A, we had extremely wet conditions, so not as much fertiliser was able to be put on. The other thing many people will recall, was the extraordinarily high fertiliser prices at the time, you know, in excess of $1,500 a tonne for things like urea. So this year, we still had wet conditions, but there were opportunities later in the year for people to put fertiliser on and we did see fertiliser prices starting to soften. So there's been a slight increase in fertiliser cost. Farms were able to irrigate a bit more than they did in the previous year as well. So we've seen an increase in some of the irrigation costs on farms, more fuel and oil costs, and then just some general inflationary costs with hay and silage making. So our hay and silage making is really around, you know, things like our wrap and our twine and things like that. So just general inflationary costs being experienced with those inputs as well. 

Jess Bell: So what does it look like if we investigate overhead costs then? 

Sheena Carter: Yeah, overhead costs is interesting. So we've got to remember that we're talking cash costs and non-cash costs when we're looking at earnings before interest and tax. On average our overheads increased by 7% across the group, and there were increases in most categories in overhead costs, but the most notable were the two non-cash costs, so depreciation and imputed labour. So overall there was a 13% increase in depreciation, but this was predominantly driven by a 25% increase with the north farms, and if we look at the data, it has largely been driven by an increase in plant and equipment purchases. So, you know, there's a number of things behind this, for example, we've seen a couple of the farms across the region installing feed pads as a way of dealing with the extreme conditions that they've faced over the last five years. You know, they can still feed cows on a feed pad even when the paddocks are sodden and keep production going as best they can, also, in hot conditions as well, feed pads are quite valuable in getting that feed intake into the cows. So we've got feed pads, with feed pads comes machinery. You've got to be able to store and mix and feed that ration out to the cows. So more machinery, more depreciation cost. 

There's a few other factors as well. I think, you know, the relatively strong cash position of some businesses, enabling them to buy more equipment, but also there was the instant tax asset write off that was available that might have incentivised a number of farmers to purchase equipment. And we also need to remember that in the last few years, following the impact of Covid, we have seen an increase in the cost of equipment due to those supply chain issues, and hand in hand with that, we've also seen an increase in the cost of second hand equipment. Often, it's been very difficult to even get new equipment into the country, so second hand equipment has certainly also increased, the cost of it, which is interesting. And the other part I mentioned was the imputed labour, so in the north it increased by 14%, and 9% in the south. So, as I mentioned, we apply a standard rate to owner-operator labour for a fair comparison. The imputed labour, what seems to have happened, more so in the north, is that the proportion of total labour – so we've got paid labour and imputed labour – the proportion of imputed labour seems to have increased this year, compared to the previous year, for various reasons, which, you know, is probably worth investigating, you know, sourcing labour is certainly a challenge, but anyway, that's what's transpired in the data set this year. So yeah, I think the year before, imputed labour was about 34% of total labour, and this year it was 40% of total labour in the north. Also, what has happened when we're looking at imputed labour, we review the standard hourly rate that we apply to imputed labour, and there was a slight increase to $36 from $34 the previous year in that hourly rate, so that will have had a slight impact on that imputed labour. 

Jess Bell: Sheena, you mentioned that increased spending on plant and equipment may have been a result of strong cash position for some businesses, I don't imagine that all purchases of machinery or all businesses were in that same position, so has there been an increase in liabilities and loans across farms? 

Sheena Carter: Ah, yes, we did see that this year. So plant and equipment loans increased by an average of 49% on the previous year. There was also an increase in long term liabilities as well, but obviously with loans we have debt servicing, and in Dairy Farm Monitor we report on financing costs, which are lease and interest costs, and these were up 35% on the previous year. So high interest rates will have accounted for some of this increase, but certainly the level of expenditure on plant and equipment, and other farm infrastructure, meant more loans and more interest to pay. So it's certainly a space to watch, I think, particularly when, you know, equipment loans or hire purchase loans, you know, you're locked in to, generally, a three year or a five year period in which you have to pay principal and interest, so we just need to be careful with those loans, because if things get tight, there isn't  much wriggle room with those, you know, you still have to pay that flat monthly rate, and it's a bit difficult to restructure the loan and say, you know, things are getting really tight, can we just pay interest only? That's not really how they work, so yeah, I think we need to keep an eye on that one. 

Jess Bell: It's been a big year and there's probably some figures in there that were reasonably non surprising and some figures that, yeah, there's been a bit of a shift from last financial year. Thank you for sharing all of that, Sheena, is there any final point you'd like to leave with us. 

Sheena Carter: Yeah I think, look, we need to be mindful that we are in an environment where we've got strong gross farm incomes at the moment, which is definitely a positive for the industry, and it's given people within the industry confidence, which hasn't been seen for a while. So confidence to do things like reinvest in the business or expand the business, whatever that might be, but I think we need to be mindful that things are cyclical. As I mentioned before, there will come a time when we see milk prices soften, and we've already seen that with livestock prices in the last, well, during that financial year, so I think it's difficult, but we need to be careful of cost creep within our business. So I can show you quite clearly data that shows as our income increases, and it doesn't matter whether it's a dairy business, or you, or I, sitting here talking, if your income starts to increase, generally your costs start to increase as well, so we need to be mindful that we can manage that effectively when things do soften in terms of income. 

So I think we also need to be, and I kind of touched on this as well, we need to be careful with our feeding system creep, and by that I mean we've got, you know, New South Wales is predominantly a pasture based industry, we do have more intensive zero grazing farms, and we do have a number of those in Farm Monitor, but with our pasture based farms, we need to just be careful that we don't get our stocking rate too high, because your farm can only produce so much pasture, or crop, or tonnes of dry matter, so unless you increase land area with those additional cows, or you're able to grow a feed that's going to yield more than what you're currently growing, you're going to need the additional feed to feed those cows, and this feed you have to store, you have to purchase, and you have to feed out, and this all adds to your cost of production. So that's fine when we've got, you know, strong incomes, but once our milk price to feed price ratio changes and things like that happen, those margins can quickly disappear, and all of a sudden we've got a system with some higher costs in it, so I think we need to keep an eye on that also. But for the moment it's wonderful to see positivity within the industry and things happening on farms that probably haven't happened for a while because of the good operating conditions, you know, probably I should caveat that with seasonal conditions with dry and drought, but as we have spoken about, farmers are dealing with that constantly. 

Jess Bell: Yeah, that's certainly right, Sheena, I'd like to say hopefully our New South Wales farmers can have a relatively normal season, but I'm not sure what normal is anymore. So I know what we've spoken about this morning is really just a snippet of what's captured in DFMP, so if our listeners would like to go somewhere else for more information, where do they go and who do they get in contact with? 

Sheena Carter: Yeah, I'll put a link in the show notes of this podcast that people can click on, so that provides you with access to the annual report, which sits through our website and Dairy Australia's website. We've also got, in New South Wales, an interactive way of presenting the data on a website, which is really good, so I'll put a link in for that as well, and people can have a look at it through that medium – it's much easier to look at than tables of figures. So yeah, I'd encourage people to have a look at that, reach out to me if they'd like to discuss further or receive a hard copy of reports, or whatever the case may be. And I should also mention we do look at greenhouse gas emissions within Dairy Farm Monitor, and I'll be doing a podcast early in the new year with another of our colleagues, Zita Ritchie, to look at that through the lens of Dairy Farm Monitor as well. Thank you very much for being host for this episode.

Jess Bell: Thanks for having me along, Sheena.

Sheena Carter: Thanks again to Jess for playing host this month. If you would like further details on the results for this year, please use the links provided to access the reports. You'll also find links to DairyBase and the Farm Business Snapshot in the notes, and please tune in next month to learn about greenhouse gas emissions through the lens of the New South Wales Farm Monitor farms for the 2023 year. Thanks again for listening to this month's podcast, produced by the New South Wales DPI Dairy Business Advisory Unit. This series is brought to you with funding and support from the Hunter Local Land Services. 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 Facebook and Twitter feed, and view or subscribe to our DPI dairy newsletter, using the links provided.