Dairy Industry Farm Monitor Project

Chapter heading Dairy Industry Farm Monitor Project
Annual Report 2009/10
Dairy Industry Farm Monitor Project | Annual Report 2009/10

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Acknowledgments
The cooperation, patience and goodwill of the farmers who willingly supplied their farm information, either for the first time or forth consecutive year, is gratefully acknowledged. The diligent work of the DPI Dairy extension team who gathered the final performance data deserve particular thanks, especially Michele Ryan, David Shambrook, Natalie Nelson, Nathan Shannon, Tom Farran and Phil Shannon who continued to be actively involved in the report through to its publication. Thank you to DPI Tatura for supplying the information on the Energetics method for calculating feed consumption. Thank you to Tony Cuzner for creating the map used in this publication. This report has been produced in conjunction with Dairy Australia. Further information regarding the Dairy Industry Farm Monitor Project may be obtained from: Daniel Gilmour Department of Primary Industries, Victoria PO Box 3100 Bendigo DC, Victoria, 3554 Telephone: [phone] Facsimile: 03 5448 4982 [e-mail] Michele Ryan Department of Primary Industries, Victoria 78 Henna Street Warrnambool, Victoria, 3280 Telephone: [phone] Facsimile: 03 5561 9988 [e-mail] Claire Swann Department of Primary Industries, Victoria PO Box 3100 Bendigo DC, Victoria, 3554 Telephone: [phone] Facsimile: 03 5448 4982 [e-mail] David Shambrook Department of Primary Industries, Victoria 12 Peart Street Leongatha, Victoria, 3953 Telephone: [phone] Facsimile: 03 5662 9999 [e-mail] To find out the latest information on the project visit the project website at www.dpi.vic.gov.au/dairyfarmmonitor If you would like to receive this information/publication in an accessible format (such as large print or audio) please call the Customer Service Centre on 136 186, TTY 1800 122 969, or email [e-mail].
Published by the Department of Primary Industries in conjunction with Dairy Australia, July 2010 © The State of Victoria 2010. This publication is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968. Authorised by the Department of Primary Industries 1 Spring Street, Melbourne 3000. ISSN 1835-9922

Disclaimer
This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without flaws of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liabilities for any error, loss or other consequence which may arise from you relying on any information in this publication.

Contents
I. II. Part One Executive summary Farm monitor method Statewide overview Whole farm analysis Physical measures Part Two North Whole farm analysis Feed consumption and fertiliser Part Three South West Whole farm analysis Feed consumption and fertiliser Part Four Gippsland Whole farm analysis Feed consumption and fertiliser Part Five Business confidence survey Expectations, issues and owner/ operator time and holidays Part Six Greenhouse 5 7 11 13 18 21 23 28 31 33 38 41 43 48 51 52 55 Appendices Appendix A North summary tables Appendix B South West summary tables Appendix C Gippsland summary tables Appendix D Statewide summary tables Appendix E Glossary of terms and list of abbreviations 59 60 66 72 78 81

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List of figures
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5 Figure 6: Figure 7: Figure 9: Dairy Industry Farm Monitor Project method Distribution of participant farms across Victoria 2009/10 monthly rainfall Average farm financial performance per hectare Average earnings before interest and tax per kilogram of milk solids sold Distribution of farms by return on assets Distribution of farms by return on equity Estimated tonnes of home grown feed produced per hectare

List of tables
Table 1: Farm physical data – State overview Table 2: Farm financial performance per hectare - Statewide Table 3: Risk ratios – Statewide Table 4: Farm physical data – North Table 5: Cost of production – North Table 6: Farm physical data – South West Table 7: Cost of production – South West Table 8: Farm physical data – Gippsland Table 9: Cost of production – Gippsland Table 10: Owner/operator time on farm and on holidays

Figure 8: Sources of whole farm metabolisable energy Figure 10: Nutrient application per hectare Figure 11: Monthly distribution of milk production Figure 12: Monthly distribution of calves born Figure 13: 2009/10 annual rainfall and long term average rainfall – North Figure 14: Gross farm income per hectare – North Figure 15: Milk solids produced per hectare – North Figure 16: Whole farm variable and overhead costs per hectare – North Figure 17: Break-even price required per kilogram of milk solids sold – North Figure 18: Whole farm earnings before interest and tax per hectare – North Figure 19: Return on assets – North Figure 20: Return on equity – North Figure 21: Sources of whole farm metabolisable energy – North Figure 22: Estimated tonnes of home grown feed produced per hectare – North Figure 23: Nutrient application per hectare – North Figure 24: 2009/10 annual rainfall and long term average rainfall – South West Figure 25: Gross farm income per hectare – South West Figure 26: Milk solids sold per hectare – South West Figure 27: Whole farm variable and overhead costs per hectare – South West Figure 28: Break-even price required per kilogram of milk solids sold – South West Figure 29: Whole farm earnings before interest and tax per hectare – South West Figure 30: Return on assets – South West Figure 31: Return on equity – South West Figure 32: Sources of whole farm metabolisable energy – South West Figure 33: Estimated tonnes of home grown feed produced per hectare – South West Figure 34: Nutrient application per hectare – South West Figure 35: 2009/10 annual rainfall and long term average rainfall – Gippsland Figure 36: Gross farm income per hectare – Gippsland Figure 37: Milk solids sold per hectare – Gippsland Figure 38: Whole farm variable and overhead costs per hectare – Gippsland Figure 39: Break-even price required per kilogram of milk solids sold – Gippsland Figure 40: Whole farm earnings before interest and tax per hectare – Gippsland Figure 41: Return on assets – Gippsland Figure 42: Return on equity – Gippsland Figure 43: Sources of whole farm metabolisable energy – Gippsland Figure 44: Estimated tonnes of home grown feed produced per hectare – Gippsland Figure 45: Nutrient application per hectare – Gippsland Figure 46: Expected change to farm business returns in 2010/11 Figure 47: Producer expectations of prices and production of milk in 2010/11 Figure 48: Producer expectations of prices and production of fodder in 2010/11 Figure 49: Producer expectations of costs for the dairy industry in 2010/11 Figure 50: Major issues for the individual business – 12 month outlook Figure 51: Major issues for the individual business – 5 year outlook Figure 52: Greenhouse gas emissions per tonne of milk solids sold (CO2 equivalent)

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Notes on the presentation of data in this report
This section of the report provides notes and explanations behind some of the calculations used and the reason for the data presented in the way that it is. It briefly discusses the different parts of the report and also lists the number of participant farms from the three dairying regions.
This section is not to be confused with II. Farm Monitor Method which discusses the methodology for the farm data analysis. This report is presented in the following parts; • • • • • • • • • Executive Summary Farm Monitor Method Statewide overview North region overview South West region overview Gippsland region overview Business confidence survey Greenhouse report Appendices The appendices include detailed data tables, a list of abbreviations and a glossary of terms. Milk production data is presented in kilograms of milk solids as farms are paid according to milk solids. The report will focus on measures on a per hectare basis, with occasional referral to measure on a per kilogram of milk solids sold or per cow basis. The appendix tables contain the majority of financial information in a per kilogram of milk solids basis. This is done to give a broader range of information and to ensure that data is presented in the format relevant to the discussion. The methodology used is a combination of that used in the South West Farm Monitor Project, Taking Stock and various other referenced sources. Attention should be paid to methodology when directly comparing figures from this report with those generated via other means. More detail on the methodology is provided in Part II. Percentage differences are calculated as [(new value – original value)/original value]. For example ‘costs went from $80/ha to $120/ha, a 50% increase’; [{(120-80)/80} x (100/1)] = [(40/80) x 100] = 0.5 x 100 = 50%, unless otherwise stated. Top 25% consists of 6 farms from each of North, South West and Gippsland regions and 18 farms on a statewide basis. The 18 farms in the statewide top 25% are taken by considering all 71 as the one sample and not from combining the top farms from each region. Discussion on ‘last year’ refers to the 2008/09 Dairy Industry Farm Monitor Project report. It must be noted that not all of the participants from the 2008/09 report are in the 2009/10 report and that there are also new participants in this year’s dataset, which have not been in previous years. It is important to keep this in mind when comparing datasets between years. Farms that were included in last years sample are noted at the start of each regional chapter. Please note that text around explanations of terms will be repeated within the different chapters.

The report presents visual descriptions of the data for the 2009/10 year. Data is presented for individual farms, regional averages and regional top 25% of farms ranked on earnings before interest and tax per hectare. Reported averages are calculated as the mean. These averages should in no way be considered averages for the population of farms in that region given the small sample size and farms are not randomly selected. The top 25% of farms are presented as striped bars in the regional overview graphs. Earnings before interest and tax per hectare has been used as the determinate of the top producers due to the subjective nature of asset valuation resulting in return on assets being a less certain figure for identifying top performing farms. The Q1 - Q3 data range for key indicators is also presented in the tables to give an indication of the variation in the data. The Q1 value is the quartile 1 value. That is, the value of which one quarter (25%) of data in that range is less than. The Q3 value is the quartile 3 value. That is, the value of which one quarter (75%) of data in that range is greater than. This means that the middle 50% of data sits between the Q1-Q3 data range. Given the differences in variation in the regional data, caution is highly recommended when comparing one region to another. To reduce wordiness, this report will often refer to the group of participating farms in each region by their regional name; • The 22 participating farms in the Northern Victoria region are referred to as ‘the North’. • The 25 participating farms in the South Western Victoria region are referred to as ‘the South West’. • The 24 participating farms in the Gippsland region are referred to as ‘Gippsland’.

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What’s new in 2010!
The Dairy Industry Farm Monitor Report for 2009/10 includes a number of changes since last years’ report. The following highlights the most significant of those. • A new section has been added to the report titled ‘Farm Monitor Method’. This section explains how the financial figures in the project are calculated and helps put farm business economic terminology into context. • The value of imputed labour or imputed labour rate has been increased from $15/hr to $20/hr. This means that, when comparing imputed people costs to those in the 2008/09 report, the data will need to be converted. To do this multiply last year’s results by 1.33 or alternatively multiply this year’s results by 0.75. • Figures in the regional chapters have been extended to include the average data from the 2008/09 report where applicable. • Some terms have been updated in the appendix tables to enable greater consistency throughout the report. Specifically ‘Other income’ is now ‘All other income’ and ‘Total income’ is now ‘Gross farm income’. • Some minor adjustments have been made to the appendix tables. Care should be taken if comparing sets of data from one year to the next. Also, the glossary has been extended. Keep an eye on the project website for further reports and updates on the project, including the 2009/10 Dairy Industry Farm Monitor Project Feature Article. The feature article, to be released online on September 30, will examine the influence different calving patterns have on milk price received, cost of production and overall business profitability. Visit the project website at www.dpi.vic.gov.au/ dairyfarmmonitor

Keep an eye on the project website for further reports and updates on the project, including the 2009/10 Dairy Industry Farm Monitor Project Feature Article at www.dpi.vic.gov.au/ dairyfarmmonitor

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I. Executive Summary
Publication title

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Executive summary
This is the fourth year of the Dairy Industry Farm Monitor Project in Victoria. The project aims to provide the Victorian dairy industry with valuable farm level data relating to profitability and productivity performance of dairy farm businesses in Victoria.
Data was collected from 71 farms across three regions of Victoria; Northern Victoria, South West Victoria and Gippsland. Participants have been selected with the objective of representing a distribution of farm sizes, herd sizes and geographical locations within each region. The results published in this report should not be taken to represent population averages as the participant farms were not selected via random population sampling. 2009/10 started slowly with opening prices low compared to the previous two years as milk companies reflected nervously on the 2008/09 global financial crisis, during which time global dairy commodity prices fell significantly forcing a reduction in farm gate milk prices. As the year progressed however confidence in the industry slowly returned and milk companies announced several step-ups which saw the milk price finish in the range of $4.20/kg MS to $4.50/kg MS for most farms in this study. In addition to the increase in milk prices, more competitive grain and input prices as well as favourable seasonal conditions and irrigation allocations across Victoria enabled farmers to increase production relative to inputs and decrease their overall cost of production. Despite the improved milk prices and climatic conditions and perceived recovery of general market conditions in the latter part of the year, this did not translate to an immediate return to profitability for dairy farmers. Instead the flow on effect of the 2008/09 season, which included the milk price step down and high input prices as well as the lingering drought, meant that many farms continued to struggle financially in 2009/10. Average profitability across the participant farms was $0.65 per kilogram of milk solids sold or $507 per hectare. This is a reduction of 37% and 36% respectively on levels recorded in the 2008/09 Dairy Industry Farm Monitor Project Report and a fall of 71% and 65% from the record highs recorded in 2007/08. Similarly the return on assets across the state fell from 3.8% to 2.2% year on year. Regionally in Victoria, the majority of farms in the South West and Gippsland remained profitable with over 80% of participant farms in these regions recording positive earnings before interest and tax, while in the North this figure was closer to 66%. The impact of the volatility experienced over the past two seasons is highlighted by the fact that of the 71 farms participating in the survey, over 50% recorded a negative return to equity during 2009/10. This means that in net terms they are worth less now than a year ago. This indicates that the interest and lease costs associated with accessing additional capital have exceeded the returns generated by this capital. Hardest hit in this area was the North where over 70% of participant farms made a negative return on equity. Highlighted in this year’s business confidence survey was the positive outlook for the dairy industry with farmers almost universally expecting an improvement in farm business returns for 2010/11. This, coupled with the expected increase in both milk price and production, as well as the stability of feed prices has seen farmers the most optimistic facing the coming year since the inception of the Dairy Industry Farm Monitor Project. Similar to last year, milk price and climate and water availability are the greatest challenges participant farms see themselves facing over the next 12 months. Over the longer term, succession planning is the biggest issue facing farmers while climate and water availability remains a major concern to be addressed. A greenhouse gas emission audit was conducted using the Australian National Greenhouse Gas Inventory method. The average level of greenhouse gases emitted remained relatively stable at 10.2 tonnes per tonne of milk solids produced compared to previous year’s emission of 10.4 in 2008/09, 10.8 in 2007/08 and 10.3 in 2006/07.

Average profitability across the participant farms was $0.65 per kilogram of milk solids sold or $507 per hectare.

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II. Farm monitor method

Farm monitor method
In this section of the report the method by which figures in the Dairy Industry Farm Monitor Project (DIFMP) are calculated, and what they mean, are explained.
The method employed to generate the profitability and productivity data in this report was adapted from The Farming Game (Malcolm et al. 2005) and is consistent with the approach used in previous DIFMP reports. Readers should be aware that different benchmarking programs often use different methods and terms for farm financial reporting. Allocation of items such as lease costs, overhead costs or imputed people costs against the farm enterprises is consistent with farm economic theory, but is not always done well. Standard dollar values for things such as stock and feed on hand and imputed labour rates may also vary. For this reason, the results from different benchmarking programs should be regarded with care. FIGURE 1: DAIRY INDUSTRY FARM MONITOR PROJECT METHOD
Total assets as at 1 July Equity Financial performance for the year Price Per Unit X Gross Farm Income Variable Costs Gross Margin Cash Overhead Costs Non Cash Overhead Costs Imputed people and deprectiation costs EBIT or Operating Profit (Earnings Before Interest and Tax) Interest & Lease Costs Net Farm Income Consumption above operators allowance Quantity (Units) Debt

Figure 1 demonstrates how all of the different farm business components come together and are calculated. The diagram shows profitability measures as certain costs are deducted from total income. It also discusses capital and growth. Growth is increase in wealth or equity. It is achieved by investing in assets which generate income greater than the costs of production and interest on debt. These assets can be owned with equity (one’s own capital) and debt (borrowed capital), as shown in Figure 1 above. In order for the assets to generate income they need to be farmed and managed, which involves incurring costs. The amount of growth depends on the relationship between income, operating costs and interest costs.

Gross farm income
The dairy farming business generates a total farm income which can be income from milk cash income (net) or non-cash changes in inventory of livestock or stocks of other output such as feed produced and conserved. Milk is the main source of income and is calculated by multiplying price received per unit by the number of units; for example, dollars per kilogram milk solids multiplied by kilograms of milk solids. Subtracting certain costs from total income gives different measures of performance.

Variable costs
Variable costs are costs that are specific to an enterprise, such as herd, shed and feed costs, and vary directly in relation to the size of the enterprise. Subtracting variable costs from total income, only for the dairy enterprise, gives a gross margin. Gross margins are a common method for comparing between similar enterprises and are commonly used in broad acre cropping and livestock enterprises. Enterprise gross margins are not generally referred to in economic analysis of dairy farming businesses because the dairying is usually a single enterprise business.

Growth in Equity

Total assets as at 30 June Equity Debt + Growth

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Overhead costs
Overhead costs are costs that are not directly related to the output of an activity as they are expenses incurred through the general operating of the business, and do not vary directly as output varies. The DIFMP separates overheads into cash overheads and non cash overheads, to distinguish cash flows of the business from measures of profit in which all costs, both cash and non-cash, must be counted. Cash overheads are those fixed costs such as permanent labour, rates, insurances, administration, for which a cash payment must be made. Non cash overheads include costs that are not actual cash expenditure; for example the depreciation on a piece of equipment. Imputed costs of the owner-operator and family labour not paid a market wage are also treated as non cash overheads that must be costed and deducted from income if a realistic estimate of costs, profit and the return on the capital of the business is to be obtained. The owner-operator is paid the equivalent of a market wage for running a business of this type, even though they may not draw this amount fully as cash wages.

Net farm income
Net farm income is EBIT minus the financing costs of interest and lease costs and is the return to the farmers own capital. Interest and lease costs are costs of borrowed money or leased land. Net farm income after income tax represents growth in equity (once adjustment is made for any consumption out of cash flow that exceeds operator’s allowance). Growth adds to starting equity either by direct reinvestment or the repayment of debt.

Return on assets and return on equity
Two commonly used economic indicators of whole farm performance are Return on Assets (RoA) and Return on Equity (RoE). They measure the return to their respective asset bases of total asset and own asset. Return on Assets (RoA) indicates the overall earning of the total farm assets, irrespective of capital structure of the business. It is EBIT or operating profit expressed as a percentage of the total amount assets managed in the farm business, including the value of leased assets. EBIT or Operating Profit expressed as a return on total assets is the return from farming. There is also a further return to the asset from any increase in the value of the assets over the year, such as land value. If land value goes up 5% over the year, this is added to the return from farming to give total return to the investment. This return to total assets can be compared with the performance of alternative investments with similar risk in the economy. In Figure 1 total assets are visually represented by debt and equity. The debt:equity ratio, or equity % of total capital varies depending on the detail of individual farm business and the situation of the owners, including their attitude towards risk. Return on Equity (RoE) measures the owner’s rate of return on their own capital investment in the business. It is net profit expressed as a percentage of total equity (one’s own capital). The DIFMP reports RoE with and without capital appreciation. This is to distinguish between productivity gains (RoE without capital appreciation) and capital gains (RoE with capital appreciation).

Earnings Before Interest and Tax
Earnings Before Interest and Tax (EBIT) or Operating Profit is calculated by subtracting overhead costs from the total farm gross margin. This is the return to all the assets (own and debt and leased assets) used in the business, and indicates how well all the farm resources under the control of the manager are being used, ie efficiency of the business. Assets are also referred to as capital. In the DIFMP, EBIT is the final financial measure used to gauge the profitability of a farming business as it ignores how the operation is financed, enabling comparison of whole farm performance to be made between different farming businesses.

In the DIFMP, EBIT is the final financial measure used to gauge the profitability of a farming business.
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Part One: Statewide Overview

Part One: Statewide Overview
Dairy Dairy Industry Farm Monitor Project | Annual Results 2009/10 Industry Farm Monitor Project | Summary of Report

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Part One: Statewide Overview

Statewide Overview
This section of the report compares the average performance, in a range of physical and financial indicators for all participant farms across Victoria, with the averages from the North, South West and Gippsland regions reported.
The approximate location of the participating farms is shown in Figure 2. FIGURE 2: DISTRIBUTION OF PARTICIPANT FARMS ACROSS VICTORIA

Town/Cities
MILDURA

North Dairy Farm Monitor Project Site South West Dairy Farm Monitor Project Site Gippsland Dairy Farm Monitor Project Site

SWAN HILL

ECHUCA

COBRAM WANGARATTA WODONGA

HORSHAM

SHEPPARTON BENDIGO

BALLARAT

HAMILTON GEELONG PORTLAND COLAC

MELBOURNE

BAIRNSDALE

TRARALGON
LEONGATHA

WARRNAMBOOL

40

20

0

40

80

120

160

200 km

2009/10 Seasonal conditions
The average rainfall across the farms in each region was above the long term averages. The North received 556mm over the year, approximately 107% of the long term average for these farms of 519mm. Farms in the South West received on average 849mm, or 104% of their long term average rainfall of 816mm. Gippsland received an average of 894mm, which is equivalent to 103% of their long term average rainfall of 871mm. Figure 3 shows the rainfall pattern during the year and the wide variation that occurred. The regional chapters provide more detail on the 2009/10 seasonal conditions.

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Part One: Statewide Overview

FIGURE 3: 2009/10 MONTHLY RAINFALL
160 140 Rainfall (mm/month) 120 100 80 60 40 20 0 Jul Aug Sep Oct North Nov Dec South West Jan Feb Mar Gippsland Apr May Jun

Whole farm analysis
On average, farms in the South West ran the largest herds over the largest area. Gippsland had a much smaller average useable area compared to the other two regions at 172 hectares, but a higher average stocking rate of 1.7 cows per hectare. Cows in the North had the highest average milk production across the year on both a per cow and per hectare basis at 515 kg MS and 806 kg MS respectively.
Total water use per hectare was similar between the North and South West in part driven by the return of higher allocations in the northern irrigation region. The two main systems, the Murray and the Goulburn, closed at 100% and 71% allocation of high reliability water shares respectively for the year. The Macalister Irrigation District in Gippsland also recorded a 100% allocation of high reliability water shares for the year in addition to a 45% allocation of low reliability water shares. Table 1 suggests that double the amount of water was used for irrigation per hectare farms in the North compared to farms in Gippsland during 2009/10. TABLE 1: FARM PHYSICAL DATA – STATE OVERVIEW
FARM PHYSICAL PARAMETERS Number of farms in sample Herd size (max no. milker for at least 3 months) Annual rainfall 09/10 Water used (irrigation + rainfall) (mm/ha) Total useable area (hectares) Stocking rate (milking cows per useable hectares) Milk sold (kg MS /cow) Milk sold (kg MS /ha) Milk price received ($/kg MS) People productivity (milking cows / FTE) People productivity (kg MS / FTE) STATEWIDE 71 307 773 903 232 1.5 496 752 $4.46 94 46,620 NORTH 22 282 556 811 216 1.6 515 806 $4.46 92 46,880 SOUTH WEST 25 366 849 868 302 1.3 503 665 $4.55 96 48,392 GIPPSLAND 24 268 894 1,022 172 1.7 472 792 $4.38 95 44,537

Average people productivity was similar between the regions. Table 1 presents the average of some farm characteristics for each region. Further details can be found in Appendix Tables 2 for each region.

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Part One: Statewide Overview

Gross farm income
Figure 4 provides a visual representation of the average farm financial performance. The blue colours represent income per hectare added vertically to give gross income. From gross income, we can subtract the green variable costs, to give the grey gross margin values. From the gross margin, we subtract the red/orange overhead costs to give us the yellow earnings before interest and tax. The legend for Figure 4 and the values for category can be found in Table 2. Gross farm income includes all farm income, whether that is income from milk sales, an increase in inventories of stock or feed or cash income from livestock trading. Income from sources such as farm owned shares, interest from bank accounts and rebates or grants is included in other income. The variation in gross farm income per hectare between the regions closely reflects the milk solids production per hectare of the three regions. While Figure 4 shows just how much milk income dominates gross income, other sources are still important to the farm business. In the North, income from sources other than milk totalled $587 per hectare, which is almost four times greater than the average earnings before interest and tax of $153 per hectare.

FIGURE 4: AVERAGE FARM FINANCIAL PERFORMANCE PER HECTARE
$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Income Variable costs & Gross margin Overhead costs & EBIT Income Variable costs & Gross margin Overhead costs & EBIT Income Variable costs & Gross margin Overhead costs & EBIT Income Variable costs & Gross margin Overhead costs & EBIT

Statewide

North

South West

Gippsland

See Table 2 for the legend on Figure 4.

In the North, income from sources other than milk totalled $587 per hectare, which is almost four times greater than the average earnings before interest and tax of $153 per hectare.
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Part One: Statewide Overview

Variable costs
Variable costs are costs directly associated with production. Examples include animal health, contract services, supplementary feeding, agistment and pasture costs. Figure 4 shows the large cost of purchased feed and agistment (seen as dark green), particularly in the North. Home grown feed was the other major variable cost. The cost of feed accounted for around 84% of total variable costs in all regions, although it was slightly higher in the North. See Appendix Tables 6 for a breakdown of variable costs as a percentage of total costs in each region. The gross margin is equal to gross income minus total variable costs. While commonly used to compare enterprises that can use a similar capital structure like sheep or beef, it can be a useful measure in dairy to analyse changes on farm that don’t require capital investment. The statewide average gross margin was $1,862/ha, down 7% from 2,007/ha, last year and 24% from $2,457/ha recorded in 2007/08.

Overhead costs
Overhead costs or fixed costs are relatively unresponsive to small changes in the scale of operation of a business. Examples include depreciation, administration, repairs and maintenance, and the cost of people’s time. Imputed people cost is an estimate of the cost of the time spent in the business by people with a share in the business such as the owner, the owner’s family or a sharefarmer that owns assets in the business. The imputed people cost is calculated as the greater of $400 per cow less paid labour (the method used in Taking Stock) or $20 per hour of imputed people time. This is an increase from $15 per hour which has been the hourly rate in all previous editions of the Dairy Industry Farm Monitor Project. Table 2 shows that participants in the North had a higher average imputed people and lower average employed people costs per hectare than those in the other two regions suggesting that owner/operators in that region perform the majority of tasks on their farms. The South West incurred lower total overhead costs per hectare than the other two regions, thanks mainly to lower imputed people and repairs and maintenance costs. Conversely on a per kilogram of milk solids basis (see Appendix Tables 5), the South West had the highest overhead costs suggesting that their lower per hectare costs are due predominantly to their larger farm sizes.

TABLE 2: AVERAGE FARM FINANCIAL PERFORMANCE PER HECTARE - STATEWIDE
FARM INCOME AND COST CATEGORY INCOME Feed inventory gain Other farm income Livestock trading Milk income (net) TOTAL INCOME VARIABLE COSTS Livestock trading loss Shed cost Herd cost Home grown feed cost Purchased feed, inventory loss and agistment TOTAL VARIABLE COSTS GROSS MARGIN per hectare OVERHEAD COSTS Other overheads Repairs and maintenance Depreciation Employed people Imputed people cost TOTAL OVERHEAD COSTS EARNINGS BEFORE INTEREST AND TAX per hectare $507 $153 $622 $713 $177 $187 $152 $248 $591 $1,355 $197 $205 $158 $210 $683 $1,453 $153 $179 $143 $251 $498 $1,223 $183 $178 $157 $280 $603 $1,401 $1,862 $1,606 $1,846 $2,114 $4 $117 $162 $625 $1,102 $2,010 $12 $119 $187 $672 $1,589 $2,578 $1 $105 $132 $557 $839 $1,634 $0 $128 $170 $652 $930 $1,879 $84 $144 $284 $3,358 $3,872 $123 $196 $268 $3,596 $4,184 $62 $86 $296 $3,036 $3,480 $73 $156 $288 $3,475 $3,994 STATEWIDE NORTH SOUTH WEST GIPPSLAND

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Earnings Before Interest and Tax
Earnings before interest and tax (EBIT) is the gross income, less variable costs and overhead costs including imputed costs. As this figure excludes tax and interest and lease costs, it can be used to analyse the operational efficiency of the whole farm business. Average EBIT is positive in all three dairying region, when expressed as per kilogram of milk solids (Figure 5) and as per hectare (Table 2). Similar to 2008/09, EBIT per hectare has again declined from levels recorded in the previous year with reductions in EBIT per hectare of 66%, 31% and 38% recorded for the North, the South West and Gippsland respectively. Further compounding this reduction in EBIT is the fact that interest and lease charges, yet to be accounted for still need to be paid, further reducing net farm income. Figures 18, 29 and 40 in the regional chapters provide a visual representation of the reduction in EBIT between the samples this year and last. FIGURE 5: AVERAGE EARNINGS BEFORE INTEREST & TAX PER KILOGRAM OF MILK SOLIDS SOLD
$1.00 $0.90 $0.80 EBIT ($/kg of MS)

Return on assets and on equity
The return on assets is the earnings before interest and tax expressed as a percentage of total farm assets and hence is an indicator of the earning power of total assets, irrespective of capital structure. Similarly, it can be considered as an indicator of the overall efficiency of use of the resources that are involved in this production system and not elsewhere in the economy. Return on assets is sometimes referred to return on capital. The average return on assets for participants across the state was 2.2%, with a range from -7.6% to 8.8% and a median of 2.4% (Figure 6 and Appendix Tables 1). The effect of a lower average than the median means more farms sit towards the lower end of the range dragging the average lower. Fifty seven of the 71 participant farms had a positive return on assets, while 14 farms returned a negative EBIT and thus return on assets in this economic analysis. FIGURE 6: DISTRIBUTION OF FARMS BY RETURN ON ASSETS
50 45 40 Number of farms 35 30 25 20 15 10

$0.70 $0.60 $0.91 $0.50 $0.65 $0.40 $0.30 $0.20 $0.20 $0.10 $0.00 Statewide $0.80

5 0 South West Gippsland -10% - -5% -5% - 0% 0 - 5% 5% - 10%

North

Return on equity is the net farm income (earnings before interest and tax less interest and lease charges) expressed as a percentage of owner equity. Items not accounted for in net farm income are loan principle repayments and tax. Return on equity is a measure of the owner’s rate of return on their investment. The average return on equity for the 71 farms during 2009/10 was -0.3%. Figure 7 shows that 36 of all 71 participants, over half, had a negative return on equity in this analysis. Of these farms that recorded a negative return on equity, 32 lost between 0% and 10% equity while 4 lost more than 10% of their equity during the year. Of the farms that recorded a positive return on asset, 31 recorded returns on equity of between 0% and 10%, while only 4 farms recorded returns on equity of greater than 10%.

16

Farm Services division

Part One: Statewide Overview

Further discussion of return on assets and return on equity occur overleaf in the risk section and later in the regional chapters. Appendix Tables 1 present all the return on assets and return on equity for the individual farms. FIGURE 7: DISTRIBUTION OF FARMS BY RETURN ON EQUITY
30 Number of farms 25 20 15 10 5 0 0 - 5% 5% - 10% 10% - 15% -15%