The Financial Implications of the Downturn
The below average seasonal conditions of the last three years and the drop in farm gate prices have reduced the profitability of dairy farming. This impact has lead to depressed cow prices and an absence of property buyers for dairy farms. This lack of demand will in time have a downward influence on land values.
These price falls will reduce the capital value of farms and so return on revalued capital will increase. This will only apply to farmers who purchased land or cows at these prices or who entered farming many years ago at lower prices. For farms with significant debt, this is not the case. They will need to utilise much of this profit to meet loan and lease commitments.
In the past two years, few farms in the district have shown a return better than 10% on capital especially once depreciation and operator allowance have been considered. Although some farmers may have produced surplus cash especially where they have high equity, many will find it difficult to put aside funds for further development and upgrading of facilities.
The farms that survive in the future will have maintained their farm development and will be very efficiently managed. They will be the farms with modern dairies, upgraded pastures and good soil fertility. Their herds will be young with reasonable calving patterns and low cell counts. These farms will already be well on the way to this position. Farms that have not had capital upgrade and are operating on a minimal input system may well be providing an adequate income for the owners at present.
Given the likely outlook for milk prices, these farms will be less likely to remain viable in the long term, especially if there is any debt associated with them. This type of farm has been a significant part of the Australian Dairy Industry for decades. Many will survive, however, downturns such as this one will see more of these farms disappear.
Is there room for trimming areas of expenditure without affecting production?
Capital Expenditure:
Farmers with a serious cash flow crisis will need to review their capital expenditure
budgets for this year. There are very few capital items which have an immediate
impact on the amount of milk in the vat. It is amazing how well dairy farmers can
improvise when times are tough.<BR>
Labour:
On large farms, labour input can be reduced by endeavouring to maintain a simple
farming system. Every farm has inefficiencies in their work practice, some being
extreme whilst others have little fat to trim. In the next ten years these farms will
become even more efficient. Today's benchmark figure of one person per 200 cows
will most likely be surpassed.
The Herd:
Cow losses can be a major area of wastage on some farms. Enough well grown
heifers entering the herd each year, a substantial milk quality program and excellent
feed management will reduce animal health losses and improve efficiency of feed
conversion to milk.
Pastures:
Although the cost of keeping pastures growing is a significant part of a dairy farm
budget, it is important not to ignore the importance of this area in tough times. The
ability to produce pastures and convert them to milk is the key generator of profit on
Victorian dairy farms. Pasture renovation, maintenance fertiliser applications, efficient
use of nitrogen, summer and winter crops as well as efficient grazing management are
the keys to profits. Most purchased feeds cost over $150 per tonne on a dry matter
basis. Pastures and crops can be grown on the farm for well below this figure. The
variable cost of pastures which includes fertiliser, renovation costs, weed and pest
controls and upkeep of water, tracks and fencing is between $30 and $100 per tonne.
The ability to grow and utilise this feed source depends on stocking rate, seasonal
conditions and pasture management skills. To calculate the overhead cost of pastures,
the value of land itself could be assessed at the current interest rate of 7.5%. At
$2,000 per acre of unimproved grazing land this equates to an overhead cost of $400
per hectare. Contrasting pasture utilisation rates of 4 tonnes versus 8 tonnes per
hectare gives an overhead cost of pastures varying between $100 and $50 per
tonne.
The more profitable farms will keep pasture utilisation high so that cost of feed per tonne of pasture grown will be low.
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