Feed costs eat into dairy financials

Feed costs eat into dairy financials

Dairy
Western Dairy number cruncher Kirk Reynolds says the latest statistics from the Dairy Farm Monitor Project indicate high feed prices may mean some high-geared dairy farm operations are "at the crossroads" and may need to reassess their farming system.

Western Dairy number cruncher Kirk Reynolds says the latest statistics from the Dairy Farm Monitor Project indicate high feed prices may mean some high-geared dairy farm operations are "at the crossroads" and may need to reassess their farming system.

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Dairy farmers in WA received 1.2 cents a litre more on average for their milk last financial year, but paid out the equivalent of 4.9c/l more - mostly for stock feed - to achieve it.

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DAIRY farmers in WA received 1.2 cents a litre more on average for their milk last financial year, but paid out the equivalent of 4.9c/l more - mostly for stock feed - to achieve it.

"In a nutshell, for all the hard work, we can say we got an extra cent for milk and paid out 5c, so we went backwards by 4c/l," number cruncher Kirk Reynolds told last Thursday's Western Dairy Spring Forum at Busselton.

Mr Reynolds was running through the latest data set from the Dairy Farm Monitor Project (DFMP) which involved 27 WA dairy farms last financial year, the sixth year Western Dairy has recorded actual figures and with 14 of the farms providing data from the beginning.

Cost of feeding the herd - both purchased and home grown feed - plus labour cost comprised 70pc of the average farm's total cost of production (CoP), Mr Reynolds said, with grain and other bought-in feed the "big one" in terms of CoP increases.

Last financial year the average purchased feed cost per cow was $2072, up $110 on the previous financial year and $349 more per cow than in 2016-17, according to the DFMP statistics for WA.

"The cost of production had a more significant impact on earnings before interest and tax (EBIT) in the past financial year than (milk) price," Mr Reynolds pointed out.

DFMP statistics showed the average WA dairy farm last financial year bought in 40 per cent of its feed, with each cow consuming 2.4 tonnes of dry matter concentrate, including minerals, at an average cost of $542/t.

"Straightaway you can see we were spending $1300 on concentrates per cow," Mr Reynolds said.

"To my mind that 40pc imported feed is a red hot topic, we need to look at our farming systems and determine if they are right and matched to our farm-based resource."

Mr Reynolds said high-geared systems, which relied on purchased hay and grain to feed high producing herds run on small pasture platforms, were most susceptible to the impact of feed cost increases.

"I think some may be at the crossroads now and need to work out whether their system is the right one," he said.

"It's a lot different when grain is $360-$400 (a tonne) to when it's $250-$350t across a season.

"The average farmgate price paid for milk was 51.3c/l, but the average cost of production was 51.6c/l, so you can see margins were certainly tight."

While the two farms receiving best prices for their milk were the top financial performers in the DFMP for WA last financial year, some of the dairy farms not far behind achieved their financial performance with significantly lower prices for milk, reinforcing that good decisions in relation to feed last year were particularly important, Mr Reynolds said.

"It is up to the individual to understand their system and at what time of the season they are producing their milk and how that can affect the amount they are paid," he said.

"The harder you are pushing production the closer you are to losing money.

"This year costs continued to increase, so logic says that if we are farming profitably then production should decrease.

"That's just a reminder to processors, if they have markets or want markets for milk they have to be mindful of this and make their moves early in the piece."

DFMP statistics for the last financial year showed the average WA dairy farm had 497 cows and produced 7884 litres of milk and 566 kilograms of milk solids per cow.

It was operated by the equivalent of six full-time people who managed total assets worth $10.5m, of which 68pc was equity.

The average gross dairy farm income was $2,350,462 and 85pc of that was derived from milk production, the other 15pc was primarily from livestock trading.

Prices, including summer production incentives, paid to WA DFMP participants for their milk ranged from about 44c/l to about 62c/l, while CoP ranged from about 42c/l to about 68c/l.

Lactalis Australia - formerly known as Parmalat - which owns Harvey Fresh, paid both the lowest and highest base prices across an 11c spread.

Lion Dairy & Drinks paid the best average base price last financial year at 52.2c/l, followed by Lactalis at 49.2c/l and Brownes Dairy at 48.1c/l to DFMP participating farms.

The average dairy farm total income in 2018-19 was equivalent to 59.9c/l, 1.2c/l better than the previous year and only 0.1c/l behind 2015-16 which was the best in the six years of DFMP statistics.

Income sources other than milk generated the equivalent of 8c/l, similar to previous years and at 51.3c/l, the average milk price was 1.2c/l better than last year, but 0.9c/l behind 2015-16.

Variable input costs amounted to an average equivalent of 31.1c/l, the highest in the six years of DFMP statistics.

Cost of purchased feed jumped significantly from the equivalent of 16.2c/l the previous year to 18c/l last financial year.

The previous highest figure was 16.8c/l in 2015-16.

Cost of producing home-grown feed was also the most expensive in the past six years at the equivalent of 9.4c/l, 1.1c/l higher than the previous year and 0.6c/l more than the previous highest in 2016-17.

Overheads equivalent to 19.6c/l were also the highest in the six years of the DFMP, 1.2c/l higher than the previous year which was the previous highest.

Farm working expenses amounted to the equivalent of 44.4c/l, a 4.9c/l jump from the previous year - the previous highest cost year.

The average total cost of production for WA farms in the DFMP last financial year was 51.6c/l, a jump of 4.7c/l from the previous highest year of 2017-18.

As a consequence, average farm EBIT dropped 3.7c/l from the previous year - when the previous lowest returns were recorded - to just 7.3c/l.

This was exactly half of what the average dairy farm EBIT was in 2015-16 when an oversupply of milk created by a very good season and individual secret price arrangements led to Brownes and then Parmalat shedding dairy farm suppliers.

In 2014-15, the average dairy farm EBIT was 15.7c/l.

Despite the plunge in EBIT, WA dairy farmers achieved an average return on total assets (ROTA) of 3.2 per cent for 2018-19, with Tasmanian and South Australian dairy farmers achieving similar ROTAs.

In the two leading dairy States, Victorian and New South Wales farmers only achieved a ROTA of less than 1pc and Queensland farmers went sharply backwards to a negative 2.5pc.

The top 25pc of WA dairy farmers achieved a ROTA of 6.7pc last financial year, after having been as high as 12pc in 2016-17.

Average return on equity (RoE) was 4.6pc and the top 25 averaged 11pc.

Nine of the 27 WA farms suffered a negative RoE, but only one exceeded minus 5pc, while 18 achieved a positive RoE, with two bettering 20pc and one achieving 30pc.

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