DAIRYING in Western Australia will continue to provide farmers who have solid supply contracts with good returns despite possibility of “squeezed margins” from milk prices remaining flat.
But to remain profitable when producing more milk is no longer an option, farmers need to learn from the “top 25 per cent” about “farming for profitability, not production”.
They also need to “constantly re-assess, re-evaluate and re-adjust” how they operate, according to Western Dairy’s agribusiness team leader Kirk Reynolds.
These were the clear messages conveyed by Mr Reynolds at last month’s Dairy Innovation Day and based on analysis of financial and farm data compiled over the past three financial years under the Dairy Farm Monitor project.
Each State is now involved in Dairy Australia’s data collection project, aiming to “improving business understanding” and to provide farmers with information enabling them to “cut through the emotion and look at the facts”, Mr Reynolds said.
In WA a cross-section of 28 farms from Waroona to Denmark provided operating data in 2015-16.
“Those 28 participating farms produce 30 per cent of the (State’s) milk volume, so it’s a fair chunk (of the local industry),” he said.
The average price farmers received for their milk was 52.2 cents per litre, up 1.1c on the previous year and up 4.1c on 2013-14.
But there was a 37pc variation from the top milk price of 59.5c/l to the lowest, he said.
Mr Reynolds said the average cost of production went up the equivalent of 1.4c/l on the previous year - up only 0.6c/l on two years ago - to 45.3c/l, which had an impact on farm EBIT (earnings before interest and tax).
While the average EBIT was down 3.7pc to $617,059 in 2015-16, equivalent to 24pc of gross income, the top 25 per cent – seven farms – achieved an EBIT of 34pc, mainly through tight cost controls.
Mr Reynolds said the average return on assets (ROA) remained “an enviable” 6.6pc with the top seven achieving an ROA of 11.4pc.
Net farm income averaged 18pc of gross income, but lower production costs coupled with 2pc lower interest, lease or finance payments, saw the top seven stretch net income to 30pc.
Allowing for seasonal variation, feed costs were the main difference in the cost of production (COP) increase, up on average the equivalent of 1.1c/l on the previous two years, to 25c/l.
While the price of concentrates and hay had added to COP, the quest for extra milk appeared to be the major cause, with each milker cow on the 28 farms consuming an extra 0.3 tonnes of purchased feed on average last financial year.
“The additional cost of that extra quantity of feed was not countered by higher milk price,” Mr Reynolds said.
“No use spending the money if it is not returning a dollar - if you are getting paid for the extra and it outweighs the extra cost of production, then it makes sense.
“You need to know where the money is going.
“It is a reminder to constantly check whether the extra milk and subsequent milk income is in fact leading to greater margins – farming for profitability, not production.”
Mr Reynolds said while a dry 2015 spring may have been a factor in extra concentrates purchased, “good managers will have calculated margins and reassessed”.
“The best farmers know and understand how to drive the resources they have on their farm,” he said.
WA dairy farmers had responded to “strong market signals from milk processors” in 2015-16, Mr Reynolds said.
Mr Reynolds said increased stocking rates and greater production per cow, in response to those signals, had led to an 11pc increase in milk production per hectare, on average 14,637l/ha.
The 28 participating farms produced an extra 6pc in average milk volume.
“Some businesses respond to milk price by cranking up production, great managers respond by assessing the situation and ensuring there is additional margin, otherwise you are milking for love,” he said.
Mr Reynolds said the statistics showed management of resources was key to profitable dairying, with no relationship between enterprise size and ROA or whether it was a dry land or irrigated farming system.
There was also little difference in stocking rates, between the average and top seven farms.
A significant difference though was the top seven had a larger proportion of their available area devoted to their milking platform and they did more with their support areas to ensure animal growth and condition was maintained or improved.
“They (top seven) produce 23pc more milk (9200l/ha compared to 7485l/ha average) per usable hectare even though they only produce 4pc more on their milking platform,” Mr Reynolds said.
“This means that they don’t ignore their support area and they manage it as well as their milking platform.
“The second key is they manage their pastures better and get more direct grazed feed into the diet of their cows
“Pasture, if you do it right, is always going to be a lower cost feed.”
Mr Reynolds said the top seven produced an extra tonne of dry matter feed from their pasture with their cows consuming 38pc of their diet from direct grazing compared to 33pc on average.
Efficient labour use was also a strong component of the top seven’s 18pc lower than average overhead costs, Mr Reynolds said.
That did not mean farmers and their families did more or all of the work to avoid paying wages, because their imputed labour costs were also lower than average, he said.
“It’s not about having someone working their butt off and not being paid anything, it’s about setting up the infrastructure properly and resource management for profitable dairy farming,” Mr Reynolds said.
