5 Owner Operator: Operational Financial Analysis
5.1 Introduction
Dairy operating profit of $3,017 per hectare in 2022-23 was down 27 percent on the previous season. The milk payout received of $8.68 per kilogram of milksolids sold was down $0.51 (about 6 percent) on the average price received in 2021-22. Milksolids sold per cow increased by 5 kg, but milksolids sold per hectare decreased by 25kg in 2022-23. Net livestock income (sales minus purchases) per kilogram of milksolids sold decreased slightly, from $0.55 in 2021-22 to $0.51 in 2022-23. Gross farm revenue was $9.24 per kilogram of milksolids in 2022-23, $0.57 lower than the previous season. Farm working expenses (FWE) of $5.75 per kilogram of milksolids was significantly higher (+$0.43) than the last season. Compared to the previous season, operating expenses increased by $0.32 in 2022-23 to a record-high of $6.67 per kilogram of milksolids (third consecutive record-high in a row). The cash available for living and growth in 2022-23 was $301,982 per farm, 29% lower than the previous season.
5.2 Revenue
The milk payout received (including dividend payments) in 2022-23 decreased by $0.51 (about 6 percent) from the previous season to $8.68 per kilogram of milksolids sold. Milk sales per farm (net of dairy levies) decreased by $113,169 (about 7 percent) from last season to $1,570,293, the second highest of the last 10 seasons. Milk revenue in 2022-23 accounted for 94 percent of gross farm revenue. Net revenue from livestock sales decreased by $8,974 to $86,782 in 2022-23. Livestock revenue accounted for 5.5 percent of the total gross farm revenue per farm. Table 12.1 describes average revenue per farm, while revenue values normalised by cows and effective hectares can be found in tables 12.2 and 12.3 respectively.
During the 2022-23 season, the milksolids payout ($/kg MS) received by farmers varied between 7.5 and 10.5 (Graph 5.1). These differences are driven by:
Variations in the milk composition (fat, protein, lactose, minerals),
Transport distances,
Annual account balance dates,
Milk company supplied,
Different systems such as organics,
Penalties incurred,
Whether the farm operated in the previous season.
Ninety three percent of farms received a milksolids payout (milk price plus dividend) between $8.0 and $9.5 per kilogram of milksolids in 2022-23. The highest percentage was between $8.50 and $9.00, with 57 percent of farms receiving a milk payout in this range.
Cash income from net livestock sales ($/kg MS) decreased from $0.55 in 2021-22 to $0.51 in 2022-23 (-7 percent).
Dairy gross farm revenue on a typical New Zealand dairy farm was $1,571,170, 7 percent lower than the previous season ($1,694,953 in 2021-22). On a per hectare basis, gross farm revenue of $10,851 was 8 percent lower than the per hectare gross farm revenue in 2021-22 ($11,761). At $8.68 per kilogram of milksolids, gross farm revenue in 2022-23 was $0.57 (6%) below the previous season when measured on a per kilogram of milksolids sold basis.
Tables 12.1, 12.2, 12.3 and 12.4 in chapter 12 show net cash income, cash farm working expenses and the adjustments made to calculate operating profit for the average New Zealand owner-operator on a per farm, per cow, per hectare and per kilogram of milksolids sold basis, respectively.
5.3 Expenditure
Graph 5.3 shows the major 2022-23 expenditure categories. Feed continues to be the largest expenditure category at 30.3 percent in 2022-23 and has been the largest expense category since 2007-08. Labour was the second-highest operating expense for dairy farms at 19.0 percent of total operating expenditure. Maintenance and fertiliser contributed 18.7 and 10.4 percent, respectively.
Changes in the total farm expenditure are affected by the farm area, herd size and milksolids produced. Therefore, it is more appropriate to consider spending per cow, hectare, or kilogram of milksolids to measure the movement of expenses for individual items. Average farm working expenses (i.e. cash expenses) per kilogram of milksolids increased by $0.43 (+8%) to $5.75. This was the highest expenditure recorded in the last 10 seasons.
Dairy operating expenses per kilogram of milksolids were $6.67, $0.32 above the 2021-22 season. As with many of the trends over the season this was the highest level of operating expenses in the last decade with a larger change than typically observed. This was the second time that operating expenses per kilogram of milksolids exceeded $6.
Table 5.1 shows the distribution (%) of dairy expenses in the last 10 seasons. The proportion (%) of feed expenditure in the 2022-23 season (30.3%) was the highest of the last 10 seasons and was associated to the high feed costs and inflation during that season. The proportion of fertiliser expenses in the 2022-23 season (10.4 percent) was also the highest of the last 10 seasons.
Table 12.4 shows the changes in the categories of operating expenses per kilogram of milksolids. Many of these expenses have followed close to their long-term trend. Feed and fertiliser saw increases greater than the preceding years, driving up dairy operating expenses and therefore there is a large variation in operating expenses from 2021-22 to 2022-23.
5.4 Profitability
Operating profit is a key indicator of dairy farm financial performance. This measure, expressed on a per hectare basis, is beneficial for comparing the profitability between farms. Operating profit incorporates adjustments to allow comparisons between farms, but does not include interest, tax, rent payments or capital expenditure. Table 12.3 shows the revenue and expenditure items included in operating profit on a per hectare basis.
Graph 5.4 shows the distribution of 2022-23 operating profit per hectare. Operating profit per hectare was distributed around the mean ($3,017) per hectare, reflecting a wide range between farms. More than 87 percent of farmers had operating profits between $0 and $4,500 per hectare, while 10.5 percent of farmers had operating profits over $4,500 per hectare. In contrast to the 2021-22 season where no farmers had a negative operating profit per hectare, 1.9 percent of farmers recorded a negative operating profit in 2022-23 (Graph 5.4).
Graph 5.5 shows the distribution of operating profit ($/ha) in the last ten seasons. The distribution of operating profit has noticeable shifts across seasons, and it is clearly influenced by the milksolids payout received ($/kg milksolids sold), with a higher spread at high payouts and a narrower spread at lower payouts. In 2022-23, the range in operating profit ($/ha) was smaller than in the previous season, with 50% of farms (between the 25th and 75th percentile) having an operating profit per hectare spanning $1,919 (between $1,793 and $3,712), and 10% of farms having an operating profit per hectare below $889.
Table 5.2 and Table 5.3 show the average size and profitability of farms by quartile. Quartiles were constructed by ranking surveyed farms on operating profit per hectare across New Zealand. Top quartile farms average $4,575 operating profit per hectare, compared with $1,065 for the bottom quartile group. Each quartile group produced more milksolids per hectare compared with the quartile lower. Top quartile farmers produced approximately 45 percent more kilograms of milksolids per hectare than the bottom quartile farmers, with substantially lower farm working expenses per kilogram of milksolids (-25%).
There is minimal difference in gross farm revenue per kg MS across the quartiles. The differences in profit per kilogram of milksolids between the quartiles is mainly driven by significant differences in the groups operating expenses per kilogram of milksolids. Top farms are more efficient as demonstrated by their lower operating expenses per kilogram of milksolids. Operating expenses per kilogram of milksolids increased from the top quartile group to the bottom quartile group from $5.80 to $8.03, respectively.
In 2022-23, the operating return on dairy assets ranged from 2.5 percent in the bottom quartile to 7.8 percent in the top quartile, a range of 5.3 percentage points (Table 5.3). This range in operating return on dairy assets (difference between the top quartile and the bottom quartile) was slightly smaller than the one observed in 2021-22 (5.8 percent).
Measuring the cost efficiency of milksolids production (operating expenses/kg MS) relative to milksolids payout is more relevant than production or expenditure alone when focusing on how to achieve high profit margins. The last two rows in Table 5.4 denote the strength of the association between these variables. A value of 0 percent denotes no association, while a value of 100 percent denotes a perfect association. In the 2022-23 season, the relationship between dairy operating profit per hectare and kilograms of milksolids sold per hectare was lower (R2= 0.4) than in the previous 3 seasons (R2= 0.5). The relationship (R2) between dairy operating profit ($/ha) and operating expenses ($/kg MS) is moderate and had varied between 0.5 and 0.6 in the last 10 seasons.
Operating return on dairy assets is a measure of the operating profit generated by the dairy assets employed at the start of the season. This measure excludes non-dairy activities and any change in capital value. The average operating return on dairy assets was 5.4 percent in 2022-23. Grouping farm systems into low (systems 1 and 2), medium (system 3) and high input (systems 4 and 5) show that the median operating return on dairy assets was highest for medium input farms (5.6%, Graph 5.6). There was a significant difference in the variation of operating returns on dairy assets within the groups, with the highest range in the low input farms (-3.5% to 19.2%) and the lowest range in the high input farms (-0.1% to 10.9%).
Business profit before tax is another measure of profitability that considers the cost of borrowing and other non-dairy activities. This is the overall profitability of the business enterprise and not just the dairy farm operation (Table 5.5).
Note:
- Total hectares = Total effective hectares (effective dairy + effective dairy support block + effective non-dairy).
On average, total effective hectares (effective dairy + effective dairy support block + effective non-dairy) increased by three hectares from the previous season to 190 hectares. The average dairy farm in 2022-23 made a business profit before tax of $349,052. This business profit is equivalent to $1,834 per total effective hectare, $1,034 less than the previous year. The dairy operating profit per farm decreased by $161,238, to $436,843, compared to the previous season. Rent payments decreased by 11 percent (from $14,929 to $13,227). Interest payments per farm in 2022-23 ($217,165) were the highest of the last 10 seasons, and $67,270 (45%) higher than the previous season.
5.5 Cash Flow
The cash operating surplus is the difference between net dairy cash income and farm working expenses. In 2022-23 the cash operating surplus was $593,495, constituting a 23 percent decrease from 2021-22. On a per kilogram of milksolids basis, the cash operating surplus in 2022-23 was $3.49, down 22 percent from the previous season. Once rent, interest and tax are paid, and net income from non-dairy farming activities are added, the amount left is discretionary cash. Total discretionary cash in 2022-23 was $302,861, equating to $1.78 per kilogram of milksolids, 38% lower than the previous season (Table 12.5).
Many farm businesses include cash funds and off-farm income in their annual accounts. The cash available after including these activities and any change of funds deposited or withdrawn from the IRD Income Equalisation Scheme is the cash available for drawings, debt repayments and/or capital development and purchases. Cash available for living and business growth in 2022-23 was $301,982 per farm, lower than the previous 2 seasons.
On a per kilogram of milksolids basis, compared to the previous year, Interest, Rent & Tax increased by 17 percent (to $1.96), Farm working expenses increased by 8 percent (to $5.75) and Discretionary Cash decreased by 37 percent (to $1.78) in 2022-23 (Graph 5.7).
5.6 Operating Profit Margin
Operating profit margin is an indicator of dairy farm financial performance. This measurement is expressed as a percentage and describes the proportion of gross farm revenue converted to profit (Operating profit/Gross farm revenue). The ability of a farmer to convert a high proportion of their revenue to profit indicates that the farm is cost-efficient and better placed to deal with financial and production risks. The average operating profit margin in 2022-23 was 28 percent, down 7 percentage points from the 2021-22 season (35 percent). Graph 5.8 shows the distribution of operating profit margin in 2022-23. Ninety two percent of farms had an operating profit margin between 5 and 45 percent, with 3.4 percent of farms having an operating profit margin above 45 percent and 1.9 percent of farms having a negative operating profit margin.