A season to remember or forget

By John Mulvany

The following article was written by John Mulvany of OMJ Consulting for GippsDairy. It is relevant to other regions, particularly those in south-eastern Australia.

The last two seasons have been “testing” either due to the conditions or to milk price received and price volatility. Hopefully, by the time this article is being read the important, but distracting, supply and pricing discussions will be over, and people can focus on matters “within” their business.

Some will not look back on last year and just move on; others will do some sort of review. In a perfect (dream) world you might picture a discussion about cost of production and EBIT between two “review type” neighbours, but the reality is that this rarely occurs. So what exactly do people look at when they think about last year?

The question was asked at a Focus Farm Support Group meeting in July.  In answering, group members mentioned a range of physical and financial simple guides to help them assess their year. One comment was “If you feel your business is in the right position and you are making good daily decisions then you don’t have to do much review”.

But others in the group, not so confident about their situation, listed the following:

Were all the bills paid? This in itself would be a great effort especially if you were in the $4.50 group of milk price and you have debt. Considering the milk price received by Gippsland dairy farmers varied from $4.30 to $5.40 that alone is $165,000 difference that the lower group had to recoup in costs to be in the same position.

Did we reduce debt? This may sound such a basic question but considering the debt level and range of debt on many dairy farms to really assess this is not as simple as it used be - and yet it is so crucial for motivation.

If you paid the bills and reduced debt then the most important boxes have been ticked and most dairy farmers would see no reason to look further. Why calculate figures like farm working expenses, cost of production, and EBIT? Fair point. However, often questions such as “How do I compare with others?” or “How did I go compared to previous years?”will be asked. That’s when some calculations need to be done so that apples are compared with apples.

Cost of production is well worth analysing, or at least the major cost categories. Those on a dairy farm are purchased feed, fertiliser (especially nitrogen) and labour. There are some simple reviews you can do on these and in the case of feed and fertiliser the individuals who sell you these should be offering to review the value of what they sold you - that’s part of genuine advice.

Feed: Get a printout of tonnes of grain/pellets delivered to the farm in 2016/2017. Exclude the tonnes fed to young stock. Calculate accurately the tonnes fed per cow and compare that to production per cow; immediately you will get a feel for the “value” for money. The following table provides a guide as to what you’d expect for a 500 kg cow situation.

Table 1. Efficiency of Feeding

Production Per Cow

Feeding Level 

420 – 450 kg MS
450 – 520 kg MS
520 – 580 kg MS
580 – 620 kg MS

1 T concentrate
1.5 T concentrate
2.0 T concentrate
2.5 T concentrate

If you had reasonable seasonal conditions you definitely don’t want to be in the category of 500 kgMS feeding 2 tonne – even at a good stocking rate. 

Calculating your farm’s net production per cow or per hectare is even better, (convert the money spent on purchased feed to production and deduct this from the gross production). Many egos have been deflated at the end of this!

Fertiliser: Nearly all the fertiliser distributors can give a printout of kilograms of NPKS delivered to your farm in the year. In some cases, they can actually split it into turnout and milking area. In addition, some of these agronomists can assist you in calculating the pasture consumption. In exactly the same way you can get a guide as to how valuable the “spend” has been to your bottom line.

Table 2.  Good Pasture Consumption Figures at Range of Annual Rainfall and Applied Nitrogen Rates

 

Low Rainfall
(600 – 700 mm) 

Moderate Rainfall
(700 – 900 mm)

High rainfall
(900+ mm)

Annual Applied N         kg/ha

Urea Equivalent          kg/ha

Pasture Consumption T DM/ha 

160 kg

348 kg 

200 kg

435 kg

250+ kg

544 kg

10 

In a recent review of four highly profitable dairy farms with very good historical data,  in the years 1995-2000 they consumed 7.6tDM/ha and used 80 kgN/ha. In the years 2000-2015 they consumed 10.2tDM/Ha using 300 kgN/ha. The average increase is 2.6tDM/ha or 10 kg DM utilised, and perhaps 14 kg grown, per kilogram of nitrogen applied.

This has been an economic response. However unless you calculate pasture consumed relative t nitrogen applied you have no idea of the value of the “spend”. A concern is that there are many dairy farms applying high rates of nitrogen without appropriate pasture consumption.

Labour: Irrespective of whether you employ labour or not, it’s worth assessing the cost and efficiency, but there are plenty of factors that need to be considered when the figure is interpreted. The calculation is the total of paid labour (including super and workcover) plus the “value” of unpaid labour (use $72,800 per 50 hour person in the business e.g. $94,640 if you do 60 hours!)  Divide the total labour cost (paid and unpaid value) by the solids produced. If it’s close to $1.00 /kg MS then you are in a handy zone.

If the three cost and efficiency areas listed above get a tick, then you are a long way towards debt reduction and paying the bills...as long as overheads such as repairs and maintenance don’t blow out.

To do these calculations would take about an hour- no doubt there will be a rainy day in the next thirty - time well spent. The people who sell you the product can help you collect and process the information. If they can’t then they are selling and not advising- there is a big difference.

Another area worth looking at is EBIT, that is, true business profit. An EBIT of above $1.00/kg MS would be outstanding, and probably not possible in our lower milk price group.

A note of warning: The next level of analysis described above needs to be done with a clear understanding of what the figures mean and their limitations. For example, a cost of production of less than $4.75/kgMS in 2016/2017 would be regarded as a “cracker”, as long as you produced enough milk - it’s easy to have a low cost when you don’t produce much.

If you are interested in this type of analysis then it’s a perfect time to think about DairyBase, Australia’s agreed method of analysing your dairy business irrespective of your production system. Total mixed ration or total pasture based - it doesn’t matter.

Let’s hope spring delivers what we all want – it’s the Christmas of the dairy calendar!

-    Prepared by John Mulvany OMJ Consulting omj@dcsi.net.au on behalf of GippsDairy