Canterbury
Model Description
This model represents approximately 700 dairy farms throughout Canterbury and North Otago.
The model is representative of a sample of 20 farms, ranging from 300-1,500 milking cows. The surveyed farms have been selected to represent a similar geographic and size distribution to the statistical population.
Within the Canterbury area there is a mix of border-dyke and spray irrigated properties, with a wide range of grazing, feeding and stocking policies. The farms surveyed are all owner-operated and all supply Fonterra at its Clandeboye factory.
Table 1: The Model in Summary 2003/04
Effective area: |
192 ha |
Opening stock wintered: |
|
Milking cows |
140 hd | ||
Replacement heifers |
10 hd |
Table 2: Key Parameters
2000/01 |
2001/02 |
2002/03 |
2003/04 |
2004/05f | |
Effective area (ha) |
175 |
180 |
185 |
192 |
192 |
Cows wintered |
513 |
540 |
579 |
607 |
617 |
Cows milked at 15 December |
503 |
535 |
553 |
586 |
586 |
Stocking rate (cows/ha) |
2.9 |
3.0 |
3.0 |
3.1 |
3.1 |
Total milksolids (kg) |
175,000 |
187,500 |
210,000 |
225,000 |
231,470 |
Milksolids/ha |
1,000 |
1,041 |
1,135 |
1,172 |
1,206 |
KgMS/cow milked |
348 |
350 |
380 |
384 |
395 |
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 ($) |
937,500 |
1,090,900 |
881,100 |
961,030 |
953,153 |
Cash farm surplus ($) |
408,800 |
429,500 |
126,200 |
198,946 |
169,420 |
Net trading profit ($) |
405,000 |
397,900 |
104,000 |
180,116 |
143,470 |
Key Points
- Total production in the 2003/04 season at Clandeboye was 8.8% ahead of last year, with 2.3% of this growth coming from new conversions.
- Increased production and higher than expected advance payments have lifted gross farm revenue to $961,000, 9% up on the previous season.
- Farmers have been very successful in achieving the objective of keeping a tight rein on costs with cash farm expenditure remaining the same as last year.
- Gross farm revenue in the 2004/05 season is forecast to be similar to 2003/04.
- Water availability and Environment Canterbury's water allocation processes continue to be of significant concern to dairy farmers in Canterbury.
Physical Factors
The 2002/03 production season ended with early autumn rainfall creating adequate supplies of winter feed. Cows wintered well; the only difficult spell in an otherwise mild winter was a period of snow for approximately a week in early July.
Early spring soil temperatures were about average, resulting in normal spring pasture growth rates. In October/November soil temperatures were up to 1oC higher than last year, resulting in excellent spring pasture production with good early silage crops harvested. An intense period of hot dry weather from late December to late January resulted in exceptionally high evapotranspiration rates and very high day and night time temperatures. The period of high evapotranspiration put heavy demands on irrigation systems, many of which failed to cope with the increased water demand for pasture and crops. This was particularly noticeable on the border-dyke irrigated light soils that had long return periods between irrigations. Pasture growth declined rapidly and farmers were forced to feed large quantities of supplement to compensate for low pasture covers and to maintain cow intakes. Some farmers were forced to take action such as going onto once-a-day milking to conserve feed inputs and cow condition. Winter feed crops struggled to establish over this period.
Late January and early February rainfall brought relief from the dry conditions with spring-like pasture growth conditions occurring. Surpluses of feed were conserved, or feed was pushed ahead through extended grazing rounds. The additional supplements made during this period replaced the supplements that had been fed out during December and January.
Autumn conditions were cold and pasture growth was slower than normal. Soil temperatures were 1 oC below average throughout April but average in May, resulting in a strong finish to the season in terms of feed production. Many farmers milked through to the end of May with good feed covers at drying off. Cow condition at drying off is typical for this time of year.
Winter feed reserves for 2004 are adequate with no reported shortages. Supplementary feed prices are down approximately 10% on last year, a reflection of the good growing conditions experienced throughout the late summer and autumn. A number of farms are continuing to winter some cows at home on feed crops sown on their milking platforms, resulting in a small reduction in the demand for winter grazing for cows.
Daily milk collection at the Clandeboye factory peaked at 9.3 million litres, which was 8% up on the 2002/03 peak. However, the milk flow curve was unusual for Canterbury in that there was a rapid drop-off in daily production through December/January and then flat production throughout February before the normal end of season reduction in milk flow. Total season production was 8.8% ahead of last year at 1,712 million litres. It is estimated that 2.3% of this growth has come from new conversions with the remainder being growth of production on existing farms.
The impact of the hot dry period on individual farm production related to soil type, the irrigation system capacity and efficiency. Farms with irrigation systems that could not deal with the high water demand were hit hard in January, with up to a 13% drop in milk production compared with normal expectations.
Most community irrigation schemes with takes from mountain-fed rivers were not restricted during the dry spell, due to nor'westerly rains that kept river flow levels high. However, a number of surface and groundwater takes throughout Canterbury were placed on restriction as water levels in smaller streams, drains and shallow wells dropped.
Herd empty rates show a wide range of between 5% and 30%. High empty rates were created by a number of factors, including early removal of bulls from the herds, as well as the impact of the severe feed challenge on some farms over the December/January period.
Financial Factors
2003/04 Review
Revenue
The final payout for the 2002/03 season was $3.57/kgMS (net of industry levies). As the advance to the end of June 2003 was $3.30/kgMS, this left only $0.27 as payment through the winter months. This meant that winter cash flows were lower than in previous seasons with many farmers having to either borrow money to pay for increased share purchases, or increase their working capital requirements, or both. Advance payments to the end of June 2004 have been higher, at $3.72/kgMS. This is $0.32 above forecast and therefore revenue through the season has been higher than expected.
Milksolids production for the model farm, at 225,000 kgMS, is 2% up on that forecast for the season. This is an increase of 15,000 kg (7%) on last season's production. This is consistent for the type of farm that the model represents, which is at the point where it will only increase production through small farm improvements and efficiency gains, rather than large gains from development or additional cow numbers.
The combination of increased production and the higher advance payments have lifted gross farm revenue to $961,000. This is $77,000 (9%) up on forecast and $80,000 (9%) up on the previous season. This increase is despite a slight drop in livestock revenue as a result of lower returns for calves and cull animals due to the lower international beef markets.
Expenditure
Dairy farmers started the 2003/04 year with the intention of holding expenditure as much as possible in response to uncertainty over the payout for the year. This resolve was further strengthened during the season as a result of widely publicised predictions from the banking industry that the rapidly appreciating NZD/USD exchange rate could mean future dairy payouts will be as low as $2.50/kgMS. The drop in production during the hot dry spell further reinforced the requirement to keep expenditure in check. The final results show that farmers have been very successful in keeping a tight rein on costs, despite late season indications that the final payout would be above pre-season expectations.
Cash farm expenditure of $594,000 ($2.64/kgMS) is 4% up on the forecast figure but almost exactly the same as 2002/03 expenditure. The major increases have been in the big ticket items of feed and fertiliser costs which, between them, make up 43% of farm working expenditure. Feed costs have risen to $288/cow compared with a forecast $250/cow, as a result of the extra feed used during the dry spell and then the cost of replacing it during the subsequent favourable growth period. Fertiliser, at $151/cow, is slightly up on forecast, but is lower than last year.
All other farm working expenses are close to forecast figures. It is interesting to note that while total expenditure is almost the same as last year, expenditure per cow and per kilogram of milksolids ($1,014/cow and $2.64/kgMS) is lower than last year ($1,082/cow and $2.74/kgMS), as a result of increased cow numbers and increased production. This means holding expenditure has not compromised productivity, and efficiency gains have been made in costs per unit of production. All expenditure is at a level that would indicate that no deterioration in the farm infrastructure has occurred as a result of the control on expenditure.
Development expenditure of $34,000 has been held at forecast levels while capital purchases of $95,000 are down on the forecast of $127,000. Capital purchases reflect the share purchase requirement of the increased production and a replacement of a small piece of equipment, for example, a motorbike. This level of capital purchases could be considered to be unsustainable in that it is not at a sufficient level to maintain the capital assets of the business.
Net Result
The net trading profit of $180,000 for the model is significantly ahead of both forecast and the 2002/03 result ($102,000 and $104,000 respectively). This difference is almost entirely due to the higher revenue received. The disposable deficit of $53,000 is considerably less than the forecast deficit of $149,000. New borrowing required to fund the deficit has reduced from $148,000 in the forecast to $80,000. Effectively, the new borrowing is funding the share purchase requirement. Dairy farmers are now much more comfortable with funding the purchase of shares through new borrowing as they see no deterioration in their equity as a result. Banking industry sources confirm that the practice of borrowing to fund shares is now widespread in the industry.
The end result is a net cash change of $27,000, reflecting that working capital debt at closing is slightly below that at opening. This is considered a satisfactory result, especially as net equity has increased by approximately $200/ha on the previous year.
Canterbury Profitability Trends
2004/05 Forecast
Revenue
Gross farm revenue is forecast to be $953,000 in the 2004/05 season. This is similar to the revenue received in 2003/04. Production is expected to increase by 3% to 231,500 kgMS as a result of increased per cow performance. Farmers are budgeting on an advance payment of $3.37/kgMS to the end of June 2005. This is $0.35/kgMS down on the advance received in the previous season and will impact on cash flow during the early part of the season.
Livestock revenue is expected to lift slightly as a result of increased numbers for sale and a slight increase in beef returns. Dairy cow prices have held at the same level as last year, at approximately $750-$850/hd for MA cows and $650-$750/hd for in-calf heifers, with prices expected to increase by $50/hd in June.
Expenditure
Forecast cash farm expenditure, at $610,000 ($2.64/kgMS), is very similar to the 2003/04 season as farmers plan to hold expenditure at a sustainable level during low payout seasons. The only item expected to lift significantly is labour costs, at $0.47/kgMS, compared with $0.43/kgMS last season. This reflects recognition of the tight labour market in New Zealand, and the need to continue to offer staff increased remuneration to reward loyalty and improved skill levels.
Most expenditure items are forecast to be similar to last year's levels. Farmers realise that in some cases this may be unrealistic in that they reflect an intention to reduce activity in the expenditure category. For example, there is a general expectation that electricity charges will rise as energy costs increase, yet only a small increase in electricity spending has been forecast. Most spray irrigators are committed to ongoing energy expenditure and are not able to reduce usage unless it is a very wet season. The exception to this is those who have locked in electricity supply contracts for several years. Industry sources are predicting that fertiliser costs are likely to increase later in the year as a result of much higher international freight costs. A similar expenditure to last year would indicate an intention to reduce fertiliser input. Fuel costs are rising significantly as a result of the international oil markets reaching 20-year highs, but the forecast only includes a 7% increase in fuel costs. Farmers are confident that they have proven in the 2003/04 season that they can hold costs without compromising production, and expect to be able to continue to do so unless they are exposed to significant inflationary pressures in major expenditure items.
Farmers are also examining changes in management systems that can reduce costs. The most significant one is the economics of additional purchased feeds at a $3.50/kgMS payout. Options such as only using purchased supplement as a strategic tool and grazing more stock at home on feed crops grown as part of pasture renovation programmes are being considered.
Interest payments are forecast to rise by 3% to $155,000. However, the rise in milksolids production means that interest costs are $0.67/kgMS, which is the same as last year. The rise in interest costs is brought about by the increased borrowing to fund last year's share purchase and the expectation that there will be a need to increase working capital requirements as a result of low early season advances from Fonterra. The expected 0.5% increase in interest rates will have some impact on debt servicing costs, although banking industry sources believe that approximately 60% of dairy farm debt is on fixed interest agreements as a result of farmers taking advantage of low fixed interest options over the last 2 years.
Net Result
The net trading profit of $143,000 is 20% below last year. An increased tax requirement of $52,000 as a result of the previous season's profit, means that the net trading profit after tax is $91,000, and is only 55% of that achieved last season.
Farmers are planning on reducing drawings by 5%, development by 26% and capital expenditure to try to reduce the need for extra borrowing. Capital purchases are down as a result of the reduced requirement for dairy company share purchases. However, there is still a disposable deficit of $58,000 which will need to be financed by new borrowing. Of the $70,000 new borrowing, $30,000 is to finance share purchases and the remainder is working capital requirement.
The end result is a breakeven budget. During May and June there has been depreciation in the NZD/USD exchange rate and world commodity prices for dairy products have risen significantly. This has lifted payout predictions. Net equity continues to rise due to the increase in value of farm land and the ongoing growth in the value of the shareholding in Fonterra.
Issues and Trends
Contracts for the sale of livestock to China held up stock prices by offering up to $900 in March for in-calf Friesian heifers and $800 for yearling Friesian cattle with an August/September delivery. These high prices are the result of strong demand out of China. China's intention is to double their cow population of 3-4 million as quickly as possible. New Zealand is seen as having a window of opportunity of approximately 3-4 years for this trade while the US and Australia are not able to supply animals. Many farmers are looking to retain female calves for this trade. It is seen as an attractive option at a time when milksolids payouts are expected to be low.
Consultants report increased confidence in Fonterra amongst farmers. Some of the teething problems and issues that beset the company during start-up have been overcome. Improved communication and understanding of issues such as the share value, peak notes, exchange rate policy and the capital structure of the company have helped to settle the relationship between the company and its supplier shareholders. The biggest factor in this improved relationship has been better communication between the parties on the core issues that the industry faces together.
Water availability and Environment Canterbury's water allocation processes continue to be of significant concern to dairy farmers in Canterbury. Dairy farming in the region is highly dependent on reliable water supplies for its continued operation. Environment Canterbury announced in February that there were areas (red zones) where no further irrigation consents will be given without good data demonstrating that there is adequate ground water. A number of farms have been caught with recently developed wells and systems in place, but with no consent to extract the water. These schemes will have cost up to $3,000/ha with the likelihood of consents not being given. Particularly hard hit are those farms that faced up to 100% irrigation restrictions, or the water source drying up from surface takes and shallow wells, but are unable to get consent to extract water from a deep well because of their red zoning status. This has the potential to create significant financial losses for those farms.
Increasing electricity costs, both the energy and the supply component, are concerning all dairy farmers, but particularly spray irrigation farmers. These concerns are particularly important for those irrigating from deep aquifers.
Interest is developing in Canterbury with several suppliers planning to change to year round once-a-day milking. A recent field day for those changing to once-a-day milking attracted 10 farmers. Fonterra estimate that approximately 10,000 cows will be on once-a-day milking in Canterbury for the 2004/05 season. Reasons cited for the change include making dairy farm employment more attractive, reduced costs, overcoming capital constraints such as shed size and housing, to utilise potential milking areas further from the dairy, reducing herd wastage from lameness, and high empty cow rates.
There has been an increasing number of dairy farms on the market, with a few premium spray farms selling at up to $27,000/ha. The majority are priced around $21,000/ha plus dairy company shares. However, a large number are not selling. At current prices the gap between North Island and South Island land is not sufficient to attract North Island buyers. Many of the farms sold have been to existing South Island farmers. At the same time there has been reduced activity in the purchase of run-offs and dairy support properties as a result of lower payout predictions and high land prices continuing with competition from other land uses.
There were 12 new dairy conversions in the region in the 2003/04 season with a similar number expected in 2004/05. Some early applicants have pulled out as a result of the lower payout predictions.
It appears that the labour situation in Canterbury has stabilised, with a much lower rate of staff turnover this season. This has may be due to the fact that there are a small number of new entrants competing for the pool of available labour, and that employment practices in the industry have improved, making workers much happier to remain in the industry. This has been very pleasing as the industry has worked hard to improve conditions of employment over the past few years. However, limits on the availability of labour still have the potential to constrain industry expansion in the future.
Canterbury Budget
2003/04 |
2004/05f | ||||||
Whole farm |
per cow |
per kgMS |
Whole farm |
per cow |
per kgMS | ||
Revenue |
|||||||
Milksolids |
893,700 |
1,525 |
3.97 |
|
888,054 |
1,515 |
3.84 |
Cattle |
61,650 |
105 |
0.27 |
|
63,349 |
108 |
0.27 |
Other farm income |
10,500 |
18 |
0.05 |
|
5,500 |
9 |
0.02 |
Less: |
|
|
|
|
|
|
|
Cattle purchases |
4,820 |
8 |
0.02 |
|
3,750 |
6 |
0.02 |
Gross farm revenue |
961,030 |
1,640 |
4.27 |
|
953,153 |
1,627 |
4.12 |
Cash farm expenditure |
594,057 |
1,014 |
2.64 |
|
610,723 |
1,042 |
2.64 |
Interest |
150,527 |
257 |
0.67 |
|
155,510 |
265 |
0.67 |
Rent and/or leases |
17,500 |
30 |
0.08 |
|
17,500 |
30 |
0.08 |
Cash farm surplus |
198,946 |
339 |
0.88 |
|
169,420 |
289 |
0.73 |
Stock value adjustment |
8,170 |
14 |
0.04 |
|
0 |
0 |
0.00 |
Minus depreciation |
27,000 |
46 |
0.12 |
|
25,950 |
44 |
0.11 |
Net trading profit |
180,116 |
307 |
0.80 |
|
143,470 |
245 |
0.62 |
Taxation |
15,397 |
26 |
0.07 |
|
52,388 |
89 |
0.23 |
Net trading profit after tax |
164,719 |
281 |
0.73 |
|
91,082 |
155 |
0.39 |
Allocation of Funds |
|
|
|
|
|
|
|
Add back depreciation |
27,000 |
46 |
0.12 |
|
25,950 |
44 |
0.11 |
Reverse stock value adjustment |
-8,170 |
-14 |
-0.04 |
|
0 |
0 |
0.00 |
Drawings |
66,000 |
113 |
0.29 |
|
63,000 |
108 |
0.27 |
Principal repayments |
40,876 |
70 |
0.18 |
|
44,146 |
75 |
0.19 |
Development |
34,300 |
59 |
0.15 |
|
25,000 |
43 |
0.11 |
Capital purchases |
95,000 |
162 |
0.42 |
|
42,850 |
73 |
0.19 |
Disposable surplus/deficit |
-52,627 |
-90 |
-0.23 |
|
-57,965 |
-99 |
-0.25 |
Other Cash Sources |
|
|
|
|
|
|
|
New borrowing |
80,000 |
137 |
0.36 |
|
70,000 |
119 |
0.30 |
Off-farm income |
0 |
0 |
0.00 |
|
0 |
0 |
0.00 |
Other cash income |
0 |
0 |
0.00 |
|
0 |
0 |
0.00 |
Net cash change |
27,373 |
47 |
0.12 |
|
12,035 |
21 |
0.05 |
Assets and Liabilities |
|
|
|
|
|
|
|
Farm, forest & building (opening) |
3,200,000 |
5,461 |
14.22 |
|
3,894,750 |
6,646 |
16.83 |
Plant and machinery (opening) |
180,000 |
307 |
0.80 |
|
173,000 |
295 |
0.75 |
Stock valuation (opening) |
567,879 |
969 |
2.52 |
|
576,049 |
983 |
2.49 |
Dairy company shares |
1,144,500 |
1,953 |
5.09 |
|
1,280,250 |
2,185 |
5.53 |
Total farm capital |
5,092,379 |
8,690 |
22.63 |
|
5,924,049 |
10,109 |
25.59 |
Total debt opening |
1,897,500 |
3,238 |
8.43 |
|
1,936,624 |
3,305 |
8.37 |
Equity (assets-liabilities) |
3,194,879 |
5,452 |
14.20 |
|
3,987,425 |
6,804 |
17.23 |
2003/04 |
2004/05f | ||||||
Whole farm |
per cow |
per kgMS |
Whole farm |
per cow |
per kgMS | ||
Farm Working Expenses |
|||||||
Permanent wages |
96,750 |
165 |
0.43 |
|
108,790 |
186 |
0.47 |
Casual wages |
3,630 |
6 |
0.02 |
|
4,102 |
7 |
0.02 |
ACC |
3,068 |
5 |
0.01 |
|
3,031 |
5 |
0.01 |
Animal health |
35,800 |
61 |
0.16 |
|
34,720 |
59 |
0.15 |
Breeding |
15,750 |
27 |
0.07 |
|
16,200 |
28 |
0.07 |
Dairy shed expenses |
11,200 |
19 |
0.05 |
|
11,575 |
20 |
0.05 |
Electricity |
36,000 |
61 |
0.16 |
|
37,035 |
63 |
0.16 |
Feed (hay and silage) |
63,900 |
109 |
0.28 |
|
51,703 |
88 |
0.22 |
Feed (feed crops) |
0 |
0 |
0.00 |
|
0 |
0 |
0.00 |
Feed (grazing) |
86,045 |
147 |
0.38 |
|
86,728 |
148 |
0.37 |
Feed (other) |
19,000 |
32 |
0.08 |
|
27,542 |
47 |
0.12 |
Fertiliser |
85,500 |
146 |
0.38 |
|
84,970 |
145 |
0.37 |
Lime |
3,000 |
5 |
0.01 |
|
3,000 |
5 |
0.01 |
Freight (not elsewhere deducted) |
4,200 |
7 |
0.02 |
|
4,835 |
8 |
0.02 |
Regrassing costs |
9,000 |
15 |
0.04 |
|
11,398 |
19 |
0.05 |
Weed and pest control |
4,200 |
7 |
0.02 |
|
5,356 |
9 |
0.02 |
Fuel |
10,900 |
19 |
0.05 |
|
11,720 |
20 |
0.05 |
Vehicle costs (excluding fuel) |
20,250 |
35 |
0.09 |
|
19,338 |
33 |
0.08 |
Repairs and maintenance |
40,500 |
69 |
0.18 |
|
39,819 |
68 |
0.17 |
Communication costs (phone and mail) |
3,940 |
7 |
0.02 |
|
4,278 |
7 |
0.02 |
Accountancy |
1,800 |
3 |
0.01 |
|
2,000 |
3 |
0.01 |
Legal and consultancy |
1,600 |
3 |
0.01 |
|
1,547 |
3 |
0.01 |
Other administration |
7,500 |
13 |
0.03 |
|
7,032 |
12 |
0.03 |
Water charges (irrigation) |
4,500 |
8 |
0.02 |
|
4,500 |
8 |
0.02 |
Rates |
9,650 |
16 |
0.04 |
|
9,845 |
17 |
0.04 |
Insurance |
6,700 |
11 |
0.03 |
|
6,700 |
11 |
0.03 |
Other expenditure |
9,673 |
17 |
0.04 |
|
12,960 |
22 |
0.06 |
Cash farm expenditure |
594,057 |
1,014 |
2.64 |
|
610,723 |
1,042 |
2.64 |
|
|
|
|
|
|
|
|
Calculated Ratios |
|
|
|
|
|
|
|
Economic farm surplus (or EBIT) |
273,143 |
466 |
1.21 |
|
241,480 |
412 |
1.04 |
Cash farm expenditure/GFR |
62% |
|
|
|
64% |
|
|
EFS/total farm capital |
5.4% |
|
|
|
4.1% |
|
|
EFS less interest and lease/equity |
3.3% |
|
|
|
1.7% |
|
|
Interest+rent+lease/GFR |
17.5% |
|
|
|
18.2% |
|
|
EFS/GFR |
28.4% |
|
|
|
25.3% |
|
|
|
Economic Farm Surplus (EFS) is calculated as follows: | |||||||
Contact for Enquiries
Farm Monitoring Programme Manager
Monitoring and Evaluation
MAF Policy
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0623
Fax: +64 4 894 0741
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