6 Owner Operator: Equity and Capital Financial Analysis
6.1 Introduction
This section considers owner-operator dairy farms’ equity and capital position, with additional information about trends over time.
Following significant reductions in capital expenditure and a moderate reduction in net debt, a cash surplus of $44,541 per farm was recorded in the 2022-23 season, a $41,998 increase from the one in 2021-22 season ($2,543). The 2022-23 cash surplus is significantly above the 10-year average of $10,654, but below the cash surplus generated in the 2016-17 ($66,272), 2019-20 ($57,909) and the 2020-21 ($59,112) seasons (Table 12.5). The operating return on dairy assets decreased from 7.6 percent in 2021-22 to 5.4 percent in 2022-23, and the total return on equity decreased from 11.5 percent in 2021-22 to 3.5 percent in 2022-23 (Table 12.7). Total liabilities as a percentage of total assets (debt to asset ratio) decreased to 44.4 percent at the end of the season, a steady decrease from the peak of 53.4 percent in 2018-19, and close to the levels of nine and ten years ago. Closing term liabilities per kilogram of milksolids decreased to $22.22, the second lowest of the last ten seasons.
6.2 Dairy Assets
Compared to the 2021-22 season, the number of dairy farms sold in 2022-23 decreased by 30 percent (60 farms) to 140. The REINZ average sales price per kilogram of milksolids and per hectare for the last 10 seasons is shown below in Table 6.1. Hectares are measured as total rather than effective area, which is generally used in this publication. The analysis only includes farms considered to be economic units. Raw data from REINZ prior to 2019-20 was weighted by the number of farms in each region, but from 2019-20 figures have not been weighted. The average dairy land price per kilogram of milksolids increased to $37 in 2022-23, $2 higher than in the previous two seasons, but similar to that of the 2019-20 season. However, this value is still below the peak of $44 observed in the 2014-15 season.
Note:
- Inflation-adjusted value (real dollar value) has been estimated using the Consumers Price Index for the end of the June quarter (Sourced from Statistics New Zealand)
6.3 Liabilities and Debt Servicing
Interest is the cash cost of borrowing funds, while rent is the cost of borrowing assets. Interest and rent per kilogram of milksolids decreased steadily in recent years, from $1.36 in 2014-15 and 2015-16 to $0.95 in 2021-22, but in 2022-23 it increased back to its 2014-15 and 2015-16 value ($1.36) (Table 6.2). Interest and rent represented 14.7 percent of gross farm revenue, 5 percentage points higher than in the previous season. This means that for every dollar of gross income earned $0.147 are required to pay interest and rent.
Compared to the 2021-22 season, debt to asset ratio decreased by 3 percentage points in 2022-23, to 44.4 percent (Table 12.6). Debt to asset ratio decreased for the fourth season in a row, from the peak of 53.4 percent in 2018-19 (Table 12.6). The debt to asset ratio in 2022-23 is the second lowest of the last ten seasons, just above that of the 2013-14 season ($41.9).
Graph 6.1 shows the debt to asset ratio distribution in 2022-23. More than eight percent of farms had a debt to asset ratio below 10 percent, about thirty-five percent of farms had a debt to asset ratio between 10 and 40 percent. Nine percent of the farms had a debt to asset ratio over 70 percent, with 0.4 percent sitting in the high-risk area of over 90 percent.
Over the last ten years, the average farm has increased its milksolids production by 12 percent, while total liabilities have increased by about 25 percent, from $3.2 million to $4.0 million per farm. Compared to the previous season, farmers decreased their term liabilities in 2022-23 by 7 percent (Table 12.6).
6.4 Liquidity
Given the reduction in net dairy cash income, a cash operating surplus of $593,495 was recorded in 2022-23, $178,194 lower compared to the previous season. Table 6.3 shows a breakdown of the changes in working capital, including the source and application of cash funds. The main contributor to total source of funds in 2022-23 was the cash operating surplus from the current season’s farming operation (Table 6.3). The change in working capital increased to $300,828 in 2022-23, $35,354 more than the previous season. This is mainly associated to the reduction in current liabilities (-$16,836).
Of the total cash available (total source of funds), 37 percent was spent on interest in 2022-23 (Table 6.3). Net capital transactions (development and purchases) were the second large cash expenditure area in 2022-23 (24 percent). Drawings from the dairy business for farm family living represented 20 percent of cash expenditure, while tax payments (17 percent) and rent (2 percent) make up the remainder of the cash spent.
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6.5 Returns
The return on dairy assets is discussed under farm profitability (Section 5.4). The total return on assets considers operating profit from both dairy and non-dairy farming operations, plus the change in the value of capital assets. The total return on assets in 2022-23 was 3.9 percent, 3.6 percentage points lower than the previous season. The 2022-23 total return on assets comprised 5.4 percent net return from all farming operations and -1.5 percent net return from capital (Graph 6.2).
For the past decade, the percentage of total return on assets has ranged between -4.1 and 9.6 percent, driven by changes in the value of land and buildings, dairy company share values, livestock values and profits (Table 12.6 and Table 12.7)
The percentage return on equity is the return on the owner’s funds, including capital changes after interest is paid (Table 12.7). The return on equity will be higher than the total return on assets when the latter is greater than the cost of debt and vice versa. In 2022-23 the total return on equity (3.5 percent) was lower than the total return on assets (3.9%), and 8 percentage points lower than in 2021-22.