Waikato/Bay of Plenty

Model Description

This model is representative of seasonal supply dairy farms in the Waikato and Bay of Plenty (BoP) regions. It is based on an average property of 100 effective hectares (ha), wintering 267 cows and producing 85,400 kgMS. Some surplus bull calves are sold as 4-day-old calves for beef rearing, with the remaining surplus calves sold as bobbies. The replacement yearling heifers are grazed off the farm for 12 months. An owner-operator who milks the cows and employs a permanent (single) worker manages the farm. The all-up capital value of the business is $3 million, with an equity level of 74%.

Note - care should be taken in comparing figures in this report relative to previous reports as follows:

A review of the 2002/03 LIC statistics showed an increase in the size of the average Waikato/BoP dairy farm. Budget figures have been adjusted for 2002/03 to allow for this.
A recent survey of capital structure of farms in the Waikato/BoP indicates that the average farm is carrying significantly more debt than this model originally was. Accordingly, debt levels for the model have been increased, up to a point where liabilities equal 26% of total farm capital in 2002/03.

Table 1: The Model in Summary 2003/04

Effective area:	101 ha	Opening stock wintered:
		Milking cows	272 hd
		Replacement heifers	56 hd

Table 2: Key Parameters

	2000/01	2001/02	2002/03	2003/04	2004/05f
Effective area (ha)	85	94	100	101	102
Cows wintered	237	255	267	272	277
Cows milked at 15 December	230	248	257	262	266
Stocking rate (cows/ha)	2.80	2.70	2.6	2.6	2.6
Total milksolids (kg)	73,400	76,200	85,400	86,700	89,300
Milksolids/ha	863	810	854	858	875
KgMS/cow milked	319	307	332	331	336
MS advance to end June ($/kg)	4.40	4.70	3.30	3.72	3.37
MS deferred payment ($/kg)	0.50	0.60	0.60	0.27	0.48
Gross farm revenue ($)	382,205	450,404	357,020	369,900	366,722
Cash farm surplus ($)	162,555	190,004	75,655	109,460	100,161
Net trading profit ($)	157,055	180,188	61,019	92,532	84,495

Key Points

A variable climatic year making it difficult to manage pastures well.
A good year financially, resulting from a higher milksolids payout.
On-farm spending has been maintained and generally farms are in good shape physically and financially.
Farmers are budgeting for a loss in 2004/05, while hoping for an increase in payout.

Physical Factors

Most farms went into the 2003 winter with good pasture covers and generally good cow condition. Subsequently, the start to the spring was very good, with early production racing ahead of 2002. The spring then turned cool and dry, and pasture growth slowed appreciably. A lot of supplementary feed was fed out and nitrogen applied, resulting in a boost to milk production through that period. The cold weather also had a negative influence on the level of supplements made, with very little silage made through September and October. Many farmers harvested a late surplus in November through into January, although much of this silage was of poorer quality. Very little hay was made, resulting in a current shortage.

The cold spring weather also had a negative influence on mating performance. The percentage of empty cows on farms varied widely from 2%-25%, but was generally 4-5% up on previous seasons. The average empty rate was around 10-12%. This empty rate was also influenced by the fact that many farmers are reducing the incidence of inductions and the use of CIDRs, and are also maintaining a tight mating period, using AI and bulls for only 9 or 10 weeks.

The summer was generally wet and cloudy, with record rainfall occurring over February, followed by two very dry months through March and April, as shown in Table 3. The high rainfall in February resulted in isolated areas of flooding, mostly along the banks of some major rivers, and also flooding of some maize crops. The high summer rainfall also resulted in above average pasture growth rates and milk production for almost all areas of the Waikato and Bay of Plenty.

Table 3: Rainfall Recorded (mm)

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Season
Ruakura:
Mean	82	67	87	93	100	118	128	114	101	92	93	92	1,166
2002	94	22	102	40	83	119	112	87	76	71	79	108	993
2003	103	45	129	41	88	150	72	45	160	72	121	142	1,168
2004	77	220	17	24
Te Puke:
Mean	100	101	156	142	114	176	175	158	136	141	116	132	1,646
2002	110	70	61	168	73	164	131	117	118	57	44	66	1,178
2003	190	89	209	97	135	181	76	109	167	203	73	98	1,629
2004	84	320	9	191

Source: NIWA

The very dry late summer period resulted in a sharp decline in pasture growth rates, pasture covers, and subsequently milk production. For those farmers who operate with minimal use of supplements, this resulted in a dry-off date 10-20 days earlier than usual.

There was a lot of maize grown for silage throughout the region in the last year. Through the summer, growers were having problems selling maize silage, but then demand increased dramatically during April and May. Earlier prices were down around 13 c/kgDM/ha, whereas by the end of the season it was up to 23 c/kgDM/ha in the paddock. Generally, while there are fewer farmers using maize silage, those that do are tending to use greater amounts. Overall, maize silage yields tended to be down due to poor grain fill, and the quality of silage is also tending to be down on last year.

Good rain from early/mid-May onwards, coupled with warm temperatures, saw a significant lift in pasture growth rates and pasture covers. Many farmers also boosted growth rates with the use of nitrogen fertiliser. At the start of the 2004 winter, most farms now have good pasture covers of around 2,000-2,200 kgM/ha, with pasture quality also generally good, due to tight grazing over the autumn period. Cow condition is less than last year, with cows at condition score of 4.0-4.5, which is less than optimal. Most cows will not gain weight by calving time, so farmers are hoping for a relatively mild spring.

Overall, 2003/04 was a difficult year to manage pastures well. Total milk production for the region finished the year 1.5% ahead of 2002/03.

Animal health problems throughout the year were generally not significant. Facial eczema was not an issue, with spore counts very low for most of the season. The wet summer caused some additional lameness problems in herds, and farmers are spending money to improve farm races. The incidence of mastitis in dry cows appears to be well up in a number of herds, with some recording 20-30% of cows affected. There was also an increase in somatic cell count levels towards the end of the season. This is suspected to be due to farmers trying to maximise production in a relatively good payout year, and also the influence of more farmers shifting to once-a-day milking during the latter half of the season.

Financial Factors

2003/04 Review

Revenue

Gross farm revenue for the model increased by 3.6% over 2002/03, mostly due to a 4.5% increase in returns on milksolids. The lift in milksolids return was due to both an increase in production and a better payout compared with 2002/03. Returns for dairy cattle sales dropped 7%, mainly as a result of the poorer schedule throughout most of the season. Prices for bobby calves from surveyed farms averaged $30, whereas the cull cow price averaged $347. There was strong demand for pure Friesian heifers for the Chinese market, with high prices paid. This is not reflected in the model.

Farmers are generally happy with the likely milk payout, particularly given the predictions at the start of the season. The announced price for the season from Fonterra is $4.23/kgMS, although many farmers are still expecting a slightly higher payout than this.

Expenditure

At the start of the season farmers were expecting a lower payout and tightened their belts accordingly. Even though the resulting payout is above last season, farmers continued to keep a tight reign on expenditure, and total farm working expenditure has dropped by 8% compared with 2002/03. Nevertheless, spending on farms has been maintained at a full maintenance rate.

Wage costs increased, which has been a general trend over recent years. Animal health costs dropped by 11%, due to a number of factors. These included a general reduction in expenditure, particularly on inductions and the use of CIDRs. There were also relatively few animal health issues throughout the year. While animal health spending in 2003/04 averaged $61/cow, the range within the surveyed farms varied from $35/cow-$126/cow.

Expenditure on feed items has dropped, mainly due to less hay and silage being made throughout the year, and less being bought in on the average property. Expenditure on fertiliser was down only slightly (3%) on 2002/03. Similarly, expenditure on repairs and maintenance dropped slightly (4%). Expenditure on council rates lifted almost 10% and is a concern to many farmers, given the continual upward trend. Insurance costs have also risen by 10%.

Total farm working expenses for the model is $2.38/kgMS. For the surveyed farms, this ranged from $1.35/kgMS-$2.54/kgMS, nearly a 100% variation.

Total cost of interest dropped 5% compared with 2002/03, mainly due to slightly lower interest rates.

Net Result

Net trading profit after tax for the model was up 133% compared with 2002/03. However, after accounting for such items as drawings, principal repayments, development, and capital purchases, the model shows a $9,500 loss for the year. This is still a significant improvement over the loss recorded the previous year.

Although tax payments for the model are well down on 2002/03, for many farms tax payments were even lower, due to a lot of farmers shifting out of the Herd Scheme into the National Average Cost Scheme. With depreciating values for livestock, this has given them a significant tax loss. The key now is to judge when to change back to the Herd Scheme, in anticipation of a rise in stock values.

With off-farm income of $21,000, the model farm records a net cash change position of $11,500. This is a significant improvement over the -$37,000 figure recorded in 2002/03. Off-farm income is a significant item on many dairy farms, with 11 of the 20 surveyed farms having off-farm income.

At the end of the year, farmers are generally happy with the financial situation, although they are cautious about predictions of lower payouts for upcoming years.

Waikato/Bay of Plenty Profitability Trends

2004/05 Forecast

Revenue

Farmers were buoyed up in early June when Fonterra announced a lift in the milksolids payout for 2003/04 to $4.23, and an increase in the expected payout for 2004/05 to $3.85/kgMS. The full impact of both these increases in payout will be felt in the 2004/05 season, with the result that gross farm revenue for the year drops only 1% compared with 2003/04. Farmers had increased cow numbers by 2% and were also budgeting on an almost 3% lift in milk production.

Cattle income is very similar to 2003/04, although farmers are hoping for an improvement through the year.

Expenditure

Overall, farm working expenditure increases by 1.2%, although it is down on a per kilogram of milksolids basis. Big ticket items like wages and fertiliser expenditure have increased, offset to some degree by a drop in spending on repairs and maintenance. Increased expenditure is budgeted for a range of fixed costs, such as communication, accountancy, rates, and insurance. While farmers are expecting a reduction in payout, they are still budgeting for full maintenance spending on farm.

Interest costs rise on the expectation of an increase in interest rates in 2004/05. Total interest payments are relatively "comfortable" at 17% of gross farm income. Taxation payments are also likely to increase, with higher provisional payments following on from the higher income in 2003/04. However, these could be significantly reduced if provisional tax is re-assessed. Drawings are being held at the same level as 2003/04 and some expenditure is being budgeted for development and capital purchases.

Net Result

Net trading profit for the model is down 9% compared with 2003/04. The overall disposable deficit is $26,000 - a serious deterioration on the previous season. While this is largely offset by off-farm income, the model farm will operate at an overall cash loss for the 2004/05 year unless the payout increases. An extra 30 c/kgMS is required for the model to breakeven.

Most farms are in good physical and financial shape, so a loss of this magnitude will be carried relatively easily, most probably via an increase in seasonal finance. The problem arises if lower payouts continue for another year or two.

Issues and Trends

In spite of predictions of lower milk payouts, farmers have made relatively few changes to farming policies. Although some farmers who use moderate to low levels of supplement may have reduced the level of bought-in feed, most have continued with their existing policies. In the Central Plateau area a number of farmers have trended away from growing maize silage on their property due to poor yields, preferring to purchase maize from other districts.

The use of turnips as a summer feed crop has increased slightly as farmers gain more confidence in growing consistently high yielding crops, although this is not a widespread trend. The level of re-grassing is not significantly different to previous seasons.

There has been a surplus of grazing available for young stock for the 2004 winter. This has occurred due to a slight reduction in the number of replacement animals reared, plus a significant number of Friesian heifers sold to China. The cost of grazing typically ranges from $5.50-$6/hd per week.

Although the average farm size for this model is 100 ha, there is a wide variation throughout the region, typically from 40 ha up to 250 ha. Those farmers at the smaller end of the scale are increasingly facing issues such as effluent system upgrades, cowshed upgrades, or simply lack of scale to make ends meet.

There is a definite trend away from inducing cows, with many farmers opting out of this practice altogether. Additionally, the use of CIDRs to enhance mating performance is coming under scrutiny as farmers examine costs and benefits.

As environmental issues continue to gain media attention, there is a gradual but noticeable trend for farmers to consider the environmental impacts of their farming practices. In particular, the use of nitrogen is being carefully considered, with some farmers reducing the quantity of nitrogen applied in a single application.

The practice of once-a-day milking has now gained social acceptance and has lost the stigma that it once had. It is estimated that up to 20% of farmers would now go to once-a-day milking from summer onwards (e.g., January-May). However, to milk once-a-day for the entire season requires a fundamental readjustment of farming policy, and only a few farmers have taken this step at this stage. A number of other farmers are watching their progress carefully and are considering this for the future.

Land values continue to remain very strong, despite a reduction in milk payout compared with previous seasons. High quality properties in desirable locations are now frequently selling in excess of $30/kgMS (including shares). There are plenty of people with the money for purchase, but they are generally demanding good quality farms.

The issue of dairy company shares and peak notes, which caused major concern in the past, appears to have settled down. This may be due to the fact that for most farmers, production is at a similar level to last season, thus negating any requirements to purchase shares or peak notes.

Although the total number of 50/50 sharemilking positions does not appear to have changed markedly, there is a noticeable reduction in the number of 50/50 sharemilking positions that are freely available for prospective sharemilkers. This is due to several influences which include sharemilkers not moving on to farm ownership, sharemilkers taking on multiple 50/50 positions, and farm owners switching from sharemilkers to farm managers. There is growing concern about the continuing future of the 50/50 sharemilking agreement.

Cow prices fluctuated throughout the season. An average quality in-calf dairy cow was typically fetching $700-$900, with top quality cows fetching $1,000-$1,100. An export market has opened up for selling Friesian calves and heifers into China, which provided some strength to the young stock market.

After widespread discontent with Fonterra's peak notes system, which manages the cost of supplying extra processing capacity at peak milk supply periods, Fonterra had proposed a new system known as the Capacity Adjustment Proposal. Essentially, the peak notes system was a capital signal, while the Capacity Adjustment Proposal is a pricing signal. Although there was rigorous debate on the two options, the new proposal was not well understood by many farmers. The new system was rejected at a shareholder vote held in September 2003.

The increasing complexity of regulations is making it harder for farmers to understand and comply. This is across-the-board with legislation such as the RMA, HSNO, ACC, OSH, and now the new Holidays Act and impending changes to the employment law.

In spite of lower payout forecasts, most farmers remain optimistic about the future of their industry. Increased payment predictions for the 2004/05 season have certainly added to their optimism.