8 50:50 Sharemilkers: Operational Financial Analysis
8.1 Introduction
Operating profit per hectare for 50:50 sharemilkers (herd owning sharemilkers) decreased by 37 percent to $1,104 per hectare in 2022-23. In terms of the revenue composition the lower payout received in 2022-23 was partially offset by the increase in milksolids production per hectare (from 1,227 kg in 2021-22 to 1,239 in 2022-23). Operating expenses per kilogram of milksolids increased by 4 percent to $3.76. The average cash available for living and growth decreased to $181,016 per farm, a decrease of $68,472 from 2021-22 (Table 13.5). With increased capital expenditure, drawings and debt, a cash surplus of $5,853 per farm was recorded in 2022-23 (Table 13.5).
Tables 13.1, 13.2, 13.3 and 13.4 in Chapter 13 show net cash income, cash farm working expenses and the adjustments made to calculate operating profit for the average New Zealand 50:50 sharemilker on a per farm, per cow, per hectare and per kilogram of milksolids sold basis.
8.2 Revenue
The milk payout received (including dividend payments) in 2022-23 decreased $0.40 (9 percent) from the previous season to $4.14 per kilogram of milksolids. Both, kilograms of milksolids sold per cow and per hectare increased from 2021-22 to 2022-23, by 10 and 12 kg MS, respectively (Table 13.5). The average milk sales (net of dairy levies) per farm of 752,157 kg was lower than in the previous season ($778,049). Milk revenue in 2022-23 accounted for 89 percent of gross farm revenue. Livestock revenue accounted for 5.6 percent of the total gross farm revenue per farm.
Figure 8.1 shows the variation in milksolids payout received by farmers in the 2022-23 season. These differences are driven by:
Differences in the percentage of milk payment received,
Variations in the milk composition (fat, protein, lactose, minerals),
Annual account balance dates,
Milk company supplied,
Different systems such as organics,
Penalties incurred, and,
Whether the sharemilker operated in the previous season.
The majority (62%) of farmers in this business type received a milksolids payout between $4.10 and $4.40.
Cash income from net livestock sales decreased by $0.05 to $0.26 per kilogram of milksolids in 2022-23 (Figure 8.2). Net livestock sales per cow decreased by $17 to $108, the lowest from the last 6 seasons.
Dairy gross farm revenue for a typical New Zealand sharemilker was $844,762 and was larger than the previous season by 2 percent ($865,070 in 2020-21). On a per hectare basis, gross farm revenue of $5,763 was lower (+7 percent) in 2022-23 compared to 2021-22.
Tables 13.1, 13.2, 13.3 and 13.4 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.
8.3 Expenditure
Feed and labour were the largest expenditure category 2022-23 (28.9 and 28.1 percent, respectively). Maintenance and animal health contributed 15.2 and 13.5 percent, respectively. Figure 8.3 shows the major 2021-22 expenditure categories for sharemilkers.
Changes in total farm expenditure for sharemilkers are primarily affected by the herd size and milksolids produced, since sharemilkers primarily pay animal related costs. Compared to the previous season, farm working expenses (FWE) per farm increased by 13 percent to $554,471. On a per kilogram of milksolids basis, FWE increased $0.19 to $3.05. After non-cash adjustments, operating expenses per kilogram of milksolids were $0.15 higher ($3.76) in 2022-23.
Table 8.1 shows the historical distribution (%) of dairy expenses in the last 10 seasons. Historically, labour expenses represented the highest proportion of operating expenses for 50:50 sharemilkers, but the proportion (%) of feed expenditure in the 2022-23 season (29%) was higher than labour expenses. This can be associated to the high feed costs and inflation during that season. The proportion of fertiliser expenses (5.4) also increased during the 2022-23 season and was the highest of the last 10 seasons.
| Season | Animal health expenditure (%) | Depreciation expenditure (%) | Feed expenditure (%) | Fertiliser expenditure (%) | Labour expenditure (%) | Maintenance expenditure (%) | Overheads expenditure (%) |
|---|---|---|---|---|---|---|---|
| 2013-14 | 13.8 | 5.2 | 26.3 | 5.0 | 28.0 | 17.1 | 4.6 |
| 2014-15 | 13.7 | 5.7 | 26.2 | 4.6 | 29.2 | 15.7 | 4.9 |
| 2015-16 | 13.2 | 5.9 | 23.9 | 4.8 | 31.1 | 16.1 | 5.0 |
| 2016-17 | 14.1 | 5.0 | 22.5 | 4.9 | 31.2 | 17.4 | 4.9 |
| 2017-18 | 13.8 | 5.4 | 25.0 | 4.5 | 30.8 | 16.0 | 4.5 |
| 2018-19 | 14.4 | 4.8 | 26.7 | 4.7 | 29.1 | 15.6 | 4.7 |
| 2019-20 | 14.1 | 4.9 | 26.8 | 5.1 | 29.0 | 15.7 | 4.4 |
| 2020-21 | 14.2 | 5.1 | 25.6 | 4.4 | 30.4 | 15.8 | 4.5 |
| 2021-22 | 14.2 | 4.5 | 27.8 | 4.8 | 29.3 | 15.1 | 4.3 |
| 2022-23 | 13.5 | 4.5 | 28.9 | 5.4 | 28.1 | 15.2 | 4.4 |
8.4 Profitability
Operating profit is a key indicator of dairy farm financial performance. This measure, expressed on a per hectare basis, is useful for comparing the profitability between farms. Operating profit incorporates adjustments to allow comparisons between farms but does not include interest, tax or rent payments. Tables 13.1, 13.2, 13.3 and 13.1 show the revenue and expenditure items included in operating profit. On average, operating profit per hectare in the 2022-23 season ($4,659) was the highest of the last 10 seasons.
Graph 8.4 shows the distribution of operating profit per hectare in the 2022-23 season. Fifty-five percent of 50:50 sharemilkers had operating profits between $1,000 and $1,500 per hectare, while 0.9 percent of farmers had operating profits over $3,000 per hectare. About 5.5 percent of farms recorded a negative operating profit in 2022-23 (Graph 8.4).
Graph 8.5 shows the distribution of operating profit ($/ha) in the last ten seasons. As for owner-operators, the distribution of operating profit for 50:50 sharemilkers has noticeable shifts across seasons, and it is clearly influenced by the milksolids payout received. 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 $773 (between $578 and $1,348).Ten percent of farms had an operating profit per hectare below $136.
Operating return on dairy assets measures the operating profit generated by the dairy assets employed at the start of the season. This measure excludes non-dairy activities and any change in capital value. Operating returns on dairy assets for sharemilkers are more volatile than owner-operators because sharemilkers’ dairy assets primarily consist of livestock. The average operating return on dairy assets for sharemilkers increased to 15.9 percent in 2022-23. Figure 8.6 shows the distribution of operating return on dairy assets by production systems. Grouping farm production systems into low (systems 1 and 2), medium (system 3), and high input (systems 4 and 5) show that the median operating return on dairy assets was similar for medium and high input farms (13.9 percent) but higher for low input systems (16.9 percent).
Business profit before tax is another measure of profitability that considers the cost of borrowing and other non-dairy activities, measuring the overall profitability of the business enterprise and not just the dairy farm operation (Table 8.2).
| Variable | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 |
|---|---|---|---|---|---|---|---|---|---|---|
| BUSINESS PROFIT ($): | ||||||||||
| Dairy operating profit | 182,709 | 65,599 | -53,678 | 91,877 | 98,570 | 117,177 | 151,293 | 180,220 | 246,175 | 161,879 |
| Plus labour adjustment | 68,733 | 77,508 | 73,553 | 72,041 | 80,608 | 80,071 | 82,559 | 91,240 | 100,776 | 102,774 |
| Plus owned support block adjustment | 685 | 1,245 | 695 | 508 | 251 | 299 | 479 | 611 | 1,010 | 860 |
| Plus net non-dairy profit | 2,052 | 2,671 | 2,203 | 2,387 | 2,758 | 2,615 | 1,209 | 5,284 | 844 | 2,636 |
| Plus net off-farm income | 3,989 | 3,817 | 4,546 | 2,281 | 4,071 | 5,230 | 10,975 | 8,513 | 12,921 | 12,018 |
| Less rent (excluding support block) | 3,401 | 5,154 | 1,407 | 1,047 | 2,320 | 827 | 1,220 | 438 | 214 | 43 |
| Less interest | 34,599 | 31,805 | 37,949 | 34,629 | 31,626 | 36,976 | 27,516 | 21,389 | 19,725 | 29,384 |
| Business profit before tax | 220,149 | 113,971 | -12,038 | 133,967 | 154,478 | 166,064 | 217,779 | 264,041 | 341,787 | 250,740 |
| Business profit before tax ($/total hectares) | 1,484 | 755 | -75 | 841 | 967 | 951 | 1,260 | 1,577 | 2,202 | 1,480 |
The average sharemilker in 2022-23 made a business profit before tax of $250,740 per farm, down $91,047 compared to the previous season. This business profit is equivalent to $1,480 per all effective hectares (effective dairy + effective dairy support block + effective non-dairy). Interest paid in 2022-23 ($29,384) was higher than in the previous three seasons due to the high Official Cash Rate associated with higher inflation, but it was still below the 10-year average of $30,560. Rent payments were lower than in the previous nine seasons.
8.5 Cash Flow
The cash operating surplus is the difference between net dairy cash income and farm working expenses. In 2022-23, the average cash operating surplus of 50:50 sharemilkers ($250,934) decreased by 27 percent compared to the previous season. On a per kilogram of milksolids basis, the $1.38 cash operating surplus was down $0.63 from last season. Once rent, interest and tax are paid, and net income from non-dairy farming activities and net off-farm income are added, the remaining value is discretionary cash. Total discretionary cash in 2022-23 was $168,587, equating to $0.93 per kilogram of milksolids (Table 13.5).
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 living and growth, which can be used for drawings, debt repayments and/or capital development and purchases. Cash available for living and business growth in 2022-23 was $181,016 per farm, down 27 percent from last season (Table 13.5).
In 2022-23, on a per kilogram of milksolids basis, net dairy cash income ($4.51) was higher than in the previous season ($4.95). After farm working expenses ($3.05) and interest, rent & tax ($0.53) were deducted, a discretionary cash of $0.93 was left per kilogram of milksolids in 2022-23 (Graph 8.7). Discretionary cash per kilogram of milksolids in the 2022-23 season was lower than the previous season, but higher than the 10-year average of ($0.86)
8.6 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. 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. Graph 8.8 shows the distribution of operating profit margins in the 2022-23 season. Seventy-two percent of 50:50 sharemilkers had an operating profit margin between 5 percent and 30 percent (Graph 8.8).