4 Waikato/Bay of Plenty Dairy
The Waikato/Bay of Plenty dairy farm
This model is representative of seasonal supply dairy farms in the Waikato and Bay of Plenty regions. It is based on an average property of 107 effective hectares, wintering 305 cows and producing 95 000 kilograms of milksolids. Some surplus bull calves are sold as four-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 $4.0 million, with an equity level of 82 percent.
Table 4.1: Waikato/Bay of Plenty dairy model summary, 2005/06
| Effective area | 107 ha |
| Opening stock wintered | 368 hd |
| Milking cows | 310 hd |
| Replacement heifers | 58 hd |
Table 4.2: Key parameters of the Waikato/Bay of Plenty dairy model
| 2002/03 | 2003/04 | 2004/05r | 2005/06 | 2006/07f | |
|---|---|---|---|---|---|
| Effective area (ha) | 100 | 101 | 102 | 107 | 107 |
| Cows wintered | 267 | 272 | 290 | 310 | 310 |
| Cows milked at 15 December | 257 | 262 | 285 | 300 | 305 |
| Stocking rate (cows/ha) | 2.6 | 2.6 | 2.8 | 2.8 | 2.9 |
| Total milksolids (kg) | 85 400 | 86 700 | 89 000 | 94 800 | 96 200 |
| Milksolids/ha | 854 | 858 | 873 | 886 | 899 |
| kgMS/cow milked | 332 | 331 | 312 | 316 | 315 |
| MS advance to end June ($/kg) | 3.30 | 3.75 | 3.95 | 3.60 | 3.65 |
| MS deferred payment ($/kg) | 0.60 | 0.30 | 0.45 | 0.64 | 0.47 |
| Gross farm revenue ($) | 357 020 | 369 900 | 420 205 | 431 286 | 430 940 |
| Net trading profit ($) | 61 019 | 92 532 | 105 918 | 74 705 | 76 216 |
| Disposable surplus/deficit ($) | – 25 270 | – 5 713 | – 29 427 | – 30 743 | – 32 546 |
Note
2004/05 data adjusted to allow for farm amalgamations.
Symbol
r Revised
f Forecast
Key points
- A variable season climatically; good at the start and end, variable in the middle.
- The model finishes the year with a financial loss, a continuation of recent years.
- While income increased in 2005/06, largely due to the increased milksolids production, costs also continued to rise.
- The model is forecast to also make a loss in 2006/07, indicating the difficulty for the average farm to operate profitably on a $4.05 payout.
Physical factors
The winter of 2005 was generally favourable for farmers throughout the region, due to below-average rainfall through June, July and August, coupled with above-average soil temperatures. Good pasture growth and good pasture utilisation saw farmers start their calving period with good levels of pasture cover. Mid-late spring, particularly in October, saw significantly above-average rainfall in many areas. In spite of above-average soil temperatures throughout this time, the high rainfall and low sunshine levels resulted in poor levels of pasture growth, less supplement being made, and farmers having problems supplying sufficient feed to their animals through the mating period.
In contrast, November 2005 was particularly dry in many areas of both the Waikato and the Bay of Plenty. For farms on lighter soil types, this raised concerns about pasture cover levels heading into the summer, with some farmers even moving to once-a-day milking at this time.
This was then followed by above-average rainfall through December and January in nearly all areas. Pasture growth rates were well above average and subsequently many farmers harvested late crops for silage, although these were of lower quality. Rainfall through the Bay of Plenty continued at above-average levels through the summer, whereas the Waikato experienced a dry patch through February and March, causing a short-term feed deficit on a number of properties. This was then followed by well above-average rainfall through April and May, which combined with high soil temperatures and resulted in very high pasture growth rates throughout the region. This helped to extend the length of the lactation period for many farms, with many herds milking well into May 2006, which is a contrast to previous seasons.
In spite of the good pasture growth rates through the autumn, most of this extra pasture has been utilised to either extend lactation or improve cow condition. As a result, pasture cover levels going into winter 2006 were about average at around 2000 to 2500 kilograms dry matter per hectare. A cold period in early June has slowed pasture growth considerably, but farmers are going into the winter with stock in good condition and with plenty of supplementary feed on hand.
Milk production, which had soared rapidly ahead of last year at the beginning of the season, dropped off through the middle of the season, but then finished on a strong note as a result of the good autumn. Milk production over the Waikato and Bay of Plenty ended around 2.5 percent ahead of last season, although per farm production has increased more than this due to farm amalgamations.
The poor spring has seen an average empty rate of around 11 to 12 percent, slightly higher than last year, and a continuation of an upward trend. Mating problems will also result with a more drawn out calving in spring 2006. A higher number of controlled intravaginal progesterone-releasing devices (CDIRs) were used to try and increase cycling performance through the mating period. A relatively high empty rate may also be influenced by the fact that bulls were removed from the herd at an earlier date, often by Christmas, to reduce the number of late calving cows and possible inductions.
Selected areas of the Waikato had mild outbreaks of facial eczema this season, which put many zinc treatment programmes to the test. This is in contrast to previous years where facial eczema has not been a problem.
Table 4.3: Waikato/Bay of Plenty Rain Fall
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | (mm) | |
| Ruakura | |||||||||||||
| Mean | 83 | 79 | 81 | 97 | 110 | 124 | 123 | 112 | 97 | 101 | 94 | 89 | 1 189 |
| 2004 | 77 | 220 | 17 | 24 | 118 | 125 | 89 | 96 | 100 | 127 | 80 | 124 | 1 195 |
| 2005 | 45 | 48 | 50 | 31 | 193 | 72 | 138 | 70 | 122 | 159 | 59 | 153 | 1 138 |
| 2006 | 109 | 37 | 79 | 184 | 121 | 105 | |||||||
| Te Puke | |||||||||||||
| Mean | 118 | 88 | 136 | 134 | 99 | 148 | 166 | 183 | 137 | 166 | 138 | 126 | 1 732 |
| 2004 | 84 | 320 | 9 | 191 | 255 | 168 | 286 | 86 | 134 | 187 | 83 | 184 | 1 987 |
| 2005 | 35 | 84 | 157 | 22 | 405 | 125 | 174 | 91 | 62 | 313 | 63 | 165 | 1 696 |
| 2006 | 177 | 131 | 267 | 212 | 168 |
Source
NIWA.
Financial position of the farm
Review of 2005/06
Revenue
Average production levels at an on-farm level increased 6.5 percent due largely to farm amalgamations. This saw milk revenues increase by 1 percent compared to 2004/05, with the increase in production offsetting the lower payout. Cattle income lifted by 10 percent on the back of stronger stock prices. As a result, overall gross farm revenue lifted 2.5 percent in 2005/06 compared to 2004/05.
There has been a high demand for dairy cows over the 2005/06 season with typical purchase prices of $1,150 to $1,250, and up to $1,400 per head. This is at least $100 per head above the previous season. This is largely a result of the shortage of dairy stock, a consequence of the high incidence of empty cows, and the high number of heifers sold offshore in previous seasons. Prices again strengthened strongly towards the end of the season.
Expenditure
Total farm working expenses, on a per kilogram of milksolids basis, lifted 5 percent in 2005/06 compared to 2004/05. Significant lifts were recorded in wages (up 18 percent), animal health (up 16 percent), feed (up 10 percent), fertiliser (up 8 percent), repairs and maintenance (up 11 percent), fuel (up 12 percent), and rates (up 9 percent).
Spending on input items can be varied. For example, while the average spending on animal health was $66 per cow, the survey farms ranged from $25 through to $122 per cow. Similarly with fertiliser, while the average was $126 per cow, the surveyed farms varied from $77 through to $200 per cow. Fertiliser application on the model remains strong, with 112 kilograms nitrogen per hectare, 38 kilograms phosphorus per hectare, 69 kilograms potassium per hectare, 48 kilograms sulphur per hectare.
Total farm working expenses for the model are $2.78 per kilogram milksolids. For the surveyed farms, this ranged from $1.99 through to $3.34 per kilogram milksolids.
Interest costs for the model lifted by 6.5 percent, reflecting an increase in interest rates. Taxation lifted slightly due to better returns from the previous year. Many farmers have overpaid tax in 2005/06, with most not seeking to reassess tax prior to their last provisional tax payment. Drawings have also increased slightly, whereas development expenditure is down. Capital purchases increase slightly, mostly on the back of the need to increase Fonterra Fair Value shares due to the increased production. Principal repayments have dropped, due to poor cash income.
Net result
The net trading profit after tax for the model is down 54 percent compared with 2004/05. After accounting for drawings, development and capital purchases, the model shows a $30,743 loss for the year, which is slightly up on 2003/04. This disposable loss is partly offset by off-farm income, which is a significant feature on many dairy farms. The overall loss is a continuation of a trend for several years now, and will either be absorbed into term debt or carried through as a higher overdraft.
At the end of the year, farmers are again generally happy with the financial situation. Although they are cautious, due to predictions of a lower payout of $4.05 per kilogram of milksolids for the 2006/07 year, most are quietly confident that this payout will be increased throughout the year.
Forecasts for 2006/07
Revenue
Gross farm revenue in 2006/07 is projected to drop only slightly compared to the 2005/06 year, largely due to a 1 percent drop in milksolids returns. The surveyed farms were budgeting on a 1.5 percent increase in production, which does not quite offset the drop in payout.
Returns from cattle sales increased slightly, mostly due to an increase in the number of stock being carried.
Expenditure
Cash farm expenditure drops 1 percent in total terms, or 2 percent on a per kilogram of milksolids basis. Farmers were generally budgeting to hold expenditure as much as possible, although increases have been allowed for wages, fertiliser, fuel, and rates. Most of the increased spending on these items is more related to increased costs rather than increased volume.
Interest costs rise again, mostly due to a higher level overdraft being carried into the season. Taxation costs drop away significantly, due to the overpayment in the previous year.
Drawings increase slightly, as does development expenditure. Capital purchases see a significant increase, with the bulk of this being the cost of purchasing Fonterra Fair Value shares as a result of the increased production through the 2005/06 season.
Net result
The net trading profit after taxation for the model lifts by 76 percent, largely due to the significant reduction in taxation payments. This profit is quickly dissipated by drawings and development and capital purchases, so that the overall disposable deficit is –$32,546, a 26 percent increase on the previous year. This is again offset by off-farm income, and “other cash income”, which is the capital repayment due to the model via Fonterra’s capital restructuring, in essence the excess value of the Peak Notes.
Figure 4.1: Waikato/Bay of Plenty dairy profitability trends
Symbol
f Forecast
Issues and trends
In the past few years the use of turnips as a summer crop has increased in popularity, possibly due to the fact that requirements to achieve high crop yields are better understood and average yields are more constant. However, the level of cropping and re-grassing of pastures on most dairy farms is still relatively low. The trend of undersowing pastures with an annual ryegrass to boost winter/early spring growth appears to have declined in popularity. Many farmers have replaced this trend with a preference for direct drilling of permanent pasture species.
The importance of undertaking soil nutrient modelling and applying appropriate levels of fertiliser is slowly but surely gaining recognition. Many farmers now separately test paddocks that have received dairy shed effluent, and typically apply little or no fertiliser to these areas. Opinions on using nitrogen fertiliser in the farming system vary, and there is a still a wide range in the level of nitrogen fertiliser used on dairy farms. Farmers now have a better understanding of where nitrogen fertiliser is best used to maximum effect and to minimise any leaching effects. With increasing costs, the profitability of any fertiliser use is constantly being reviewed.
There is now a significant trend throughout the region towards using Palm kernel as a feed supplement. This is often used as a substitute for maize silage, while in other cases complementing maize silage. Many farmers bought Palm kernel this year in preference to maize silage, resulting in a surplus of maize silage available for dairy farmers to purchase this season. This helped keep the price similar to previous years, typically 20 cents per kilogram dry matter including transport and stacking. Towards the end of the season there were a number of maize crops, originally intended for silage, harvested for grain, although again this market was fully supplied. Prices for maize silage in some instances decreased rapidly toward the end of the season.
The industry levy collected by Dairy Insight is now attracting a high level of scrutiny by dairy farmers as it appears as a separate item on their accounts. In previous years it was simply subtracted from their gross milk payments. With the industry-level vote only one year away there is an awareness by industry bodies that the return on farmers’ levies needs to be visible. Within the model budget, the Dairy Insight levy is accounted for in the “other expenditure” item.
Some of the heat in the rural land market has dissipated. While prices are still at an historically high level, the number of farms being sold has been reduced and buyers are being more cautious. The typical range for most farms is $30 to $40 per kilogram milksolids ($25,000 to $45,000 per hectare), with top-quality land in the central Waikato still fetching up to $50,000 per hectare.
The trend towards once-a-day milking of dairy herds is gradually increasing. While there are only a limited number of farmers on once-a-day milking throughout the entire season, there are significant numbers of farmers who will utilise once-a-day milking in the later part of the season, especially after Christmas. For many, there are greatly enhanced lifestyle benefits with a relatively low impact on milk production.
Fonterra shareholders have voted to alter Fonterra’s capital share structure this season, essentially removing Peak Notes and increasing the overall value of the Fair Value share. This means that in the future the cost to Fonterra of processing milk in the peak of the season will be reflected back to farmers in the milk price, rather than through a capital cost. As many farmers in the Waikato and Bay of Plenty regions have a higher peak milk supply relative to other parts of the country, this will result in a subsequent capital payment back to these farmers as their Peak Notes are redistributed. In subsequent seasons these farmers will likely receive a lower than average milk payment as a reflection of their higher peak milk curve. Most farmers do not fully understand the share transition process. The potential impacts on sharemilkers, in particular, has an even lower level of understanding.
After the dairy industry restructuring process several years ago, the Waikato region is starting to see the impact of this. The Open Country Cheese Factory is set to start the 2006/07 season with over 100 milk suppliers, which is a significant increase on the previous season. Farmer opinion appears to be divided regarding the wider benefits to the industry of such competition. Some see this increased competition as being beneficial as it provides a stimulus for the other companies to lift payout and productivity levels. On the other hand, other farmers view this competition as potentially fragmenting the co-operative structure of the industry.
Anecdotally it would appear that 2005/06 was a particularly tough year for recruiting farm staff for the 2006/07 season. In particular, in contrast to previous seasons there have been fewer applicants for 50/50 sharemilking positions. This may be a reflection of the high cow prices, which make it more difficult for a prospective 50/50 sharemilker to purchase a herd.
The issue of dairy shed effluent disposal is a major one for most farmers, highlighted in the Waikato by recent helicopter flights. For many, the issue is about not having sufficient storage for their spray irrigation systems to hold effluent over wet periods during the late winter/early spring. The environmental strategy for the dairy industry has recently been published and significant moves on co-ordinating work in this area are likely. One issue facing the farming community is the limited availability of advice on nutrient budgeting and nutrient management plans.
Generally, farmers appear quite happy with Fonterra and the direction the industry is taking. They are pleased that any infighting within New Zealand appears to have dissipated, with the focus very much now on an overseas “push”. While there is concern at the relatively low payout, most farmers are relatively optimistic for the upcoming year.
Table 4.4: Waikato/Bay of Plenty Dairy Budget
| 2005/06 | 2006/07f | |||||
|---|---|---|---|---|---|---|
| Whole farm | Per cow | Per kgms | Whole farm | Per cow | Per kgms | |
| ($) | ($) | ($) | ($) | ($) | ($) | |
| Revenue | ||||||
| Milksolids | 398 240 | 1 327 | 4.20 | 395 686 | 1 297 | 4.11 |
| Cattle | 37 046 | 123 | 0.39 | 39 254 | 129 | 0.41 |
| Other farm income | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Less | ||||||
| Cattle purchases | 4 000 | 13 | 0.04 | 4 000 | 13 | 0.04 |
| Gross farm revenue | 431 286 | 1 438 | 4.55 | 430 940 | 1 413 | 4.48 |
| Cash farm expenditure | 263 096 | 877 | 2.78 | 261 369 | 857 | 2.72 |
| Interest | 61 825 | 206 | 0.65 | 63 025 | 207 | 0.66 |
| Rent and/or leases | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Cash farm surplus | 106 365 | 355 | 1.12 | 106 546 | 349 | 1.11 |
| Stock value adjustment | 0 | 0 | 0.00 | 2 161 | 7 | 0.02 |
| Minus depreciation | 31 660 | 106 | 0.33 | 32 492 | 107 | 0.34 |
| Net trading profit | 74 705 | 249 | 0.79 | 76 216 | 250 | 0.79 |
| Taxation | 32 680 | 109 | 0.34 | 2 221 | 7 | 0.02 |
| Net trading profit after tax | 42 025 | 140 | 0.44 | 73 995 | 243 | 0.77 |
| Allocation of funds | ||||||
| Add back depreciation | 31 660 | 106 | 0.33 | 32 492 | 107 | 0.34 |
| Reverse stock value adjustment | 0 | 0 | 0.00 | – 2 161 | – 7 | – 0.02 |
| Drawings | 60 000 | 200 | 0.63 | 64 050 | 210 | 0.67 |
| Principal repayments | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Development | 4 713 | 16 | 0.05 | 8 275 | 27 | 0.09 |
| Capital purchases | 39 715 | 132 | 0.42 | 64 547 | 212 | 0.67 |
| Disposable surplus/deficit | – 30 743 | – 102 | – 0.32 | – 32 546 | – 107 | – 0.34 |
| Other cash sources | ||||||
| New borrowing | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Off-farm income | 17 919 | 60 | 0.19 | 19 782 | 65 | 0.21 |
| Other cash income | 0 | 0 | 0.00 | 18 323 | 60 | 0.19 |
| Net cash change | – 12 824 | – 43 | – 0.14 | 5 560 | 18 | 0.06 |
| Assets and liabilities | ||||||
| Farm, forest and building (opening) | 2 924 000 | 9 747 | 30.84 | 3 500 000 | 11 475 | 36.38 |
| Plant and machinery (opening) | 113 565 | 379 | 1.20 | 121 548 | 399 | 1.26 |
| Stock valuation (opening) | 392 316 | 1 308 | 4.14 | 392 316 | 1 286 | 4.08 |
| Dairy company shares | 568 710 | 1 896 | 6.00 | 621 888 | 2 039 | 6.46 |
| Total farm capital | 3 998 591 | 13 329 | 42.18 | 4 635 752 | 15 199 | 48.19 |
| Total debt opening | 715 000 | 2 383 | 7.54 | 725 000 | 2 377 | 7.54 |
| Equity | 3 283 591 | 10 945 | 34.64 | 3 910 752 | 12 822 | 40.65 |
Symbol
f Forecast
Table 4.5: Waikato/Bay of Plenty Dairy Expenditure
| 2005/06 | 2006/07f | |||||
|---|---|---|---|---|---|---|
| Whole farm | Per cow | Per kgms | Whole farm | Per cow | Per kgms | |
| ($) | ($) | ($) | ($) | ($) | ($) | |
| Farm Working Expenses | ||||||
| Permanent wages | 47 400 | 158 | 0.50 | 49 062 | 161 | 0.51 |
| Casual wages | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| ACC | 5 937 | 20 | 0.06 | 5 502 | 18 | 0.06 |
| Animal health | 19 785 | 66 | 0.21 | 19 490 | 64 | 0.20 |
| Breeding | 8 895 | 30 | 0.09 | 8 915 | 29 | 0.09 |
| Dairy shed expenses | 5 253 | 18 | 0.06 | 5 103 | 17 | 0.05 |
| Electricity | 8 382 | 28 | 0.09 | 8 763 | 29 | 0.09 |
| Feed (hay and silage) | 22 155 | 74 | 0.23 | 19 750 | 65 | 0.21 |
| Feed (feed crops) | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Feed (grazing) | 22 880 | 76 | 0.24 | 22 728 | 75 | 0.24 |
| Feed (other) | 10 185 | 34 | 0.11 | 10 590 | 35 | 0.11 |
| Fertiliser | 37 892 | 126 | 0.40 | 38 781 | 127 | 0.40 |
| Lime | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Freight (not elsewhere deducted) | 2 250 | 8 | 0.02 | 2 260 | 7 | 0.02 |
| Re-grassing costs | 2 793 | 9 | 0.03 | 2 330 | 8 | 0.02 |
| Weed and pest control | 1 626 | 5 | 0.02 | 1 534 | 5 | 0.02 |
| Fuel | 8 190 | 27 | 0.09 | 9 150 | 30 | 0.10 |
| Vehicle costs (excluding fuel) | 8 211 | 27 | 0.09 | 7 018 | 23 | 0.07 |
| Repairs and maintenance | 16 089 | 54 | 0.17 | 14 847 | 49 | 0.15 |
| Communication costs | 2 958 | 10 | 0.03 | 2 968 | 10 | 0.03 |
| (phone and mail) | ||||||
| Accountancy | 3 573 | 12 | 0.04 | 3 526 | 12 | 0.04 |
| Legal and consultancy | 3 507 | 12 | 0.04 | 3 440 | 11 | 0.04 |
| Other administration | 1 086 | 4 | 0.01 | 1 394 | 5 | 0.01 |
| Water charges (irrigation) | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Rates | 8 772 | 29 | 0.09 | 9 025 | 30 | 0.09 |
| Insurance | 5 115 | 17 | 0.05 | 5 380 | 18 | 0.06 |
| Other expenditure | 10 162 | 34 | 0.11 | 9 813 | 32 | 0.10 |
| Cash farm expenditure | 263 096 | 877 | 2.78 | 261 369 | 857 | 2.72 |
| Calculated ratios | ||||||
| Economic farm surplus (EFS1) | 61 530 | 205 | 0.65 | 64 241 | 211 | 0.67 |
| Cash farm expenditure/GFR2 | 61% | 61% | ||||
| EFS/total farm capital | 1.5% | 1.4% | ||||
| EFS less interest and lease/equity | 0.0% | 0.0% | ||||
| Interest+rent+lease/GFR | 14.3% | 14.6% | ||||
| EFS/GFR | 14.3% | 14.9% |
Notes
1 EFS (or Earnings before interest and tax) is calculated as follows: gross
farm revenue plus change in livestock values less working expenses less
depreciation less wages of management (WOM). WOM are calculated as follows:
$38,000 allowance for labour input plus 1 percent of total capital as
managerial reward. An upper limit for WOM of $75,000 has been set.
2 Gross farm revenue.
Symbol
f Forecast
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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