7 Southland Dairy
The Southland dairy farm
The Southland dairy model relates to owner operators who supply milk to the Fonterra factory at Edendale.
This model has increased significantly in size, stocking rate, and production over several years. In 1995 the average farm size was 130 hectares. In 2000/01 it was 182 hectares, made up of a 152 hectare milking platform and a 30 hectare leased run-off. The model has been increased in size from the 2001/02 season to a 162 hectare milking platform and a purchased 30 hectare run-off.
Table 7.1: Southland dairy model summary, 2005/06
| Effective area | 162 ha |
| Opening stock wintered | 563 hd |
| Milking cows | 455 hd |
| Replacement heifers | 102 hd |
| Other cattle | 6 hd |
Table 7.2: Key Parameters of the Southland Dairy Model
| 2002/03 | 2003/04 | 2004/05r | 2005/06 | 2006/07f | |
|---|---|---|---|---|---|
| Effective area (ha) | 162 | 162 | 162 | 162 | 162 |
| Cows wintered | 455 | 455 | 455 | 455 | 472 |
| Cows milked at 15 December | 435 | 440 | 432 | 435 | 445 |
| Stocking rate (cows/ha) | 2.64 | 2.68 | 2.70 | 2.69 | 2.75 |
| Total milksolids (kg) | 152 250 | 160 125 | 152 120 | 168 830 | 171 100 |
| Milksolids/ha | 940 | 988 | 939 | 1 042 | 1 056 |
| kgMS/cow milked | 350 | 364 | 352 | 388 | 384 |
| MS advance to end June ($/kg) | 3.30 | 3.72 | 3.95 | 3.60 | 3.65 |
| MS deferred payment ($/kg) | 0.60 | 0.27 | 0.45 | 0.64 | 0.47 |
| Gross farm revenue ($) | 651 574 | 683 062 | 709 095 | 743 344 | 746 238 |
| Net trading profit ($) | 43 493 | 93 170 | 101 287 | 142 475 | 111 795 |
| Disposable surplus/deficit ($) | – 109 302 | 27 120 | 6 045 | 30 137 | – 5 856 |
Symbol
f Forecast
Key points
- The production of milksolids increased significantly from the 2004/05 season to the 2005/06 season. It is expected to increase again in 2006/07.
- Dairy livestock prices and Fonterra share price increased over the season.
- Although total pasture production was below average, good utilisation and timely growth improved milksolids yields.
- Land prices increased and there is continued interest in dairy conversions.
Physical factors
Although pasture growth in the July to September period was down 35 percent on the long-term average, good covers and exceptional utilisation of feed saw milksolids production increase from the 2004/05 spring/summer.
Rainfall in the early spring was well below average. September rainfall was 40 percent and 22 percent below the long-term average in Invercargill and Gore respectively.
Grass growth for October to December was also below average, based on pasture growth rates recorded at Woodlands. A wet spell in late December 2005 (129 millimetres of rainfall, 35 percent above average) was ideal for the drier areas, especially central and northern Southland.
January/February 2006 grass growth was “average”, but from late February to early April it was 36 percent lower than the average with some very cool/wet periods, especially early March. March and April rainfall was 26 percent and 36 percent below average, allowing very good utilisation of fed-out supplements on pasture due to poor grass growth in late March/April.
Pasture covers lifted for April 2006 to 2400 kilograms of dry matter per hectare, allowing 30- to 35-day rounds. Nitrogen applied in March gave significant responses of 15 to 18 kilograms of dry matter per hectare for every 1 kilogram of nitrogen applied, while pasture covers in June 2006 were 1850 kilograms of dry matter per hectare.
Less than average grass growth, and the inability of cows to peak above 2 kilograms of milksolids per cow per day from early October 2005, highlighted that animal performance was being compromised. This included pregnancy rates, which surprised many at 12.5 percent empty with the bulls out on average to the end of February 2006.
Artificial breeding continued for four days longer than average to increase in-calf heifer replacement numbers.
Cow condition scores dropped to 4.4 through late December/early January, with the younger cows generally 3.9 to 4.2 condition score, which initiated selective once-a-day milking in late February/March. This increased progressively to late April with 25 percent of herds on once-a-day milking.
By 19 May 2006, 45 percent of herds had dried off. The average cow condition score on 1 June was 4.8.
Milk production averaged 11 percent ahead of the previous season. This was also 6 to 8 percent ahead of the long-term average. Cows averaged 388 kilograms of milksolids per cow at a stocking rate of almost 2.7 cows per hectare.
The cool and wet conditions through November to January encouraged weed infestation in brassica feed crops. The high rainfall in late December/early January washed out some cultivated paddocks, with flooding common close to rivers.
Brassicas grew well through March to May to achieve the long-term average yield of 9 and 11 tonnes of dry matter per hectare of kale and swedes respectively. Aphid damage in April was reported in 20 percent of swede crops, but only 15 percent required treatment.
Grass purchased for silage averaged 10.5 cents per kilogram of dry matter. Little whole crop cereal silage was grown for sale, due to good supplementary feed supplies carried forward from last season.
The normally drier areas, an east/west line from Gore to Wreys Bush, had rainfall at critical times to support the best milk production in the last 10 years.
Nitrogen use increased to 150 kilograms of nitrogen per hectare, up 30 kilograms of nitrogen per hectare on 2004/05 due to the poor growth throughout the main growing periods of the season. Further increase in use was not seen due to the forage stocks carried forward from the previous season.
Some straw, which would normally be baled and sold, was burnt on the stubble because prices were flat at $100 to $110 per tonne.
Crushed cereal grain was $308 per tonne landed on-farm, and was often replaced by Palm kernel landed on-farm for $280 per tonne. The Palm kernel price fell further to $250 in May 2006. Overall, the use of grain and by-products was similar to previous years. However, less concentrated feeds were used during the “normal” targeted mating period, as most herds had good cow condition scores (4.7) at the start of mating.
Two-year-old baleage was still in plentiful supply in May/June 2006, selling at $25 per bale.
Winter milking increased with the better genetic quality of empty cows milked through to next season (2006/07).
The incidence of bloat increased significantly compared to the average, contributing an additional 0.7 percent of deaths in the season. Stock losses across the province averaged 3.5 percent.
The trimming of cows’ hooves by specialist contractors increased due to large herd sizes and pressure of time on staff to treat cows. There was a significant fall in the number of lame cows in 2005/06.
Financial position of the farm
Review of 2005/06
Revenue
Gross farm revenue increased 4.8 percent to $743,344 ($1,709 per cow). This resulted from an 11 percent increase in milksolids production, but less payout within the season ($4.24 per kilogram of milksolids).
Calf sales and cull cow prices were slightly better than the 2004/05 season at $41 per head and $340 per head respectively. There was a marked increase in the value of cows during the season.
Milksolids revenue made up 95 percent of gross farm revenue. Other farm income was $3,548 and was made up of rebates, pool payments, etc.
Expenditure
Cash farm expenditure was $2.66 per kilogram of milksolids or 60 percent of gross farm revenue. This was a decrease of 8 percent or 23 cents per kilogram of milksolids on the previous season, mainly due to the increase in total milksolids production. Total cash farm expenditure increased by $10,000 to $449,400, or $1,033 per cow.
This was a pleasing result considering the increases in fuel, electricity, and standing charges that occurred during the year. The full extent of fuel increases may not show through until the 2006/07 season.
Farmers initially planned to spend $440,600, so managed to get close to their target expenditure. Feed ($299 per cow) is always a major expenditure item. This year slightly less was spent due to the lower cost of purchasing feed and slightly less supplement requiring conserving due to the season. There was also carry-over feed from the previous season.
Labour costs ($75,255) on average remained similar to 2004/05, with a small decrease in casual staff. Farmers realise the importance of good staff to the success of their business.
Animal health ($62 per cow) was less than the previous season when many herds experienced severe problems with cows going lame.
Fertiliser and lime ($60,390) is consistently the third largest expenditure item on Southland dairy farms. Nutrient budgeting is lessening the amounts of fertiliser used on effluent areas.
Development and capital expenditure continued at similar levels to the previous season. There were no additional Fonterra shares to purchase in 2005/06.
The model did not repay any principal and has not done so for several years.
Interest payments increased due to a proportion of the term loan moving to a higher interest rate. Interest accounted for 20 percent of gross farm revenue.
Net result
The model showed a cash farm surplus of $332 per cow, an increase of 14 percent over the previous season. This was due to increased milksolids production per cow and per hectare, while cash farm expenditure stayed at similar levels.
After adjustments for depreciation and change in value of livestock, the net trading profit was $142,475. This profit was available for taxation, development, and capital purchases.
The net cash change was a $30,137 surplus.
Forecasts for 2006/07
Revenue
The Fonterra advance to the end of the 2006/07 season is expected to be $3.65 per kilogram of milksolids, with a final payout of $4.05 per kilogram of milksolids. The deferred payment from the 2005/06 season was $0.47 per kilogram of milksolids.
Production is expected to increase to 171,100 kilograms of milksolids, but revenue from milksolids will stay similar at $703,865 due to the lower payout. Farmers are optimistic that the payout will be higher than the $4.07 per kilogram of milksolids budgeted.
Stock sales are expected to increase due to more calves for sale at a similar price to the 2005/06 season.
Gross farm revenue for 2006/07 is budgeted at $746,238 ($1,677 per cow).
Expenditure
Cash farm expenditure is budgeted to increase by 1 percent. This is despite an increase in cows wintered, cows milked, and more milksolids production.
Although concerned about rising fuel costs, farmers did not factor in the increase in fuel costs and the flow-on effects on other farm inputs into their 2006/07 expectations. Fuel is expected to increase by $500.
Decreases in farm working expenditure are expected in the areas of animal health ($57 per cow), vehicle costs (excluding fuel), and general repairs and maintenance.
Farm working expenditure, as a percentage of gross farm revenue, will increase to 61 percent, 1 percent higher than in the 2005/06 season.
Farmers still plan on some development in 2006/07 ($4,000), but at much lower levels than previous years.
Capital expenditure on plant is budgeted to stay the same as 2005/06 at $30,000.
Due to increasing milksolids production, more Fonterra shares need to be purchased. Fonterra is making a transition to a new capital structure with the removal of Peak Notes and supply redemption rights. After these adjustments the share requirements show an additional $11,712 will be spent on shareholding.
Net result
The model predicts a cash farm surplus of $139,453. After adjustments for depreciation and change in livestock values, the net trading profit is expected to be $111,795. This is a 22 percent decrease on the 2005/06 season.
After taxation, drawings, principal, development and capital purchases are paid, the model expects a disposable deficit of -$5,856.
The capital purchases shown in the budget include the cost of further Fonterra Fair Value shares, the cost of which is offset somewhat by a refund on Peak Notes, from Fonterra’s capital restructuring.
Figure 7.1: Southland dairy profitability trends
Symbol
f Forecast
Issues and trends
Farmers are concerned about the influence rising fuel prices will have on all farm costs. Expenditure that is expected to be especially affected is feed, transporting stock and general freight charges, contractor charges for cultivation, harvesting feed, and the increased cost of plastic covers for baleage and pit silage.
Nitrogen usage has been economic on a cents per kilogram of dry matter basis compared to other feeds. The likely price increases due to exchange rate and oil prices will see more targeted use in 2006/07. The benefits of the fertiliser company nutrient budgeting and planning have assisted in ensuring efficient use of nutrients on the dairy farm, with particular savings on effluent areas.
Dairy farmers continue to expand the area that effluent is applied to, in order to maximise the nutrient benefits across more of their farm.
Farmers are increasingly recognising the soil conditioning properties of lime and this resulted in increased lime sales to dairy farms.
There is a trend to hold some carry-over cows, and for dairy farmers to rear their own bulls for mating.
Grazing prices for cows and young stock are expected to soften with other pastoral industries not performing as well as two years ago.
The installation of automation devices (for example automatic cluster removers and drafting systems) is continuing.
Land prices stayed steady throughout the season with keen interest from North Island farmers. Bare land suitable for conversion was costing $18,000 to $21,000 per hectare. There will be 22 new farms converted to dairy in the south for next season.
A small number of dairy farmers leased land from sheep/beef/deer farm neighbours to milk on at $750 to $865 per hectare.
In the drier parts of northern Southland resource consent applications for water for irrigation continued.
Acquiring skilled and truly experienced labour is still a problem. Typically, salaries paid are as follows:
- Junior, less than two years’ experience $22,000–$28,000
- Intermediate, two plus years $28,000–$38,000
- Herd Manager $35,000–$55,000
- Farm Manager $50,000–$80,000
Sharemilkers are in short supply with a large number deciding to sell out with the high stock prices, and the difficulties in borrowing money to either expand or even start. There is a disparity between bank cow values and the actual market rate, affecting sharemilkers’ equity calculations. This has meant some farm owners were forced into buying cows and putting on lower-order sharemilkers or farm managers.
Table 7.3: Southland Dairy Budget
| 2005/06 | 2006/07f | ||||||
|---|---|---|---|---|---|---|---|
| Whole farm | Per cow | Per kgms | Whole farm | Per cow | Per kgms | ||
| ($) | ($) | ($) | ($) | ($) | ($) | ||
| Revenue | |||||||
| Milksolids | 705 145 | 1 621 | 4.18 | 703 865 | 1 582 | 4.11 | |
| Cattle | 36 851 | 85 | 0.22 | 42 428 | 95 | 0.25 | |
| Other farm income | 3 548 | 8 | 0.02 | 1 951 | 4 | 0.01 | |
| Less | |||||||
| Cattle purchases | 2 200 | 5 | 0.01 | 2 006 | 5 | 0.01 | |
| Gross farm revenue | 743 344 | 1 709 | 4.40 | 746 238 | 1 677 | 4.36 | |
| Cash farm expenditure | 449 428 | 1 033 | 2.66 | 453 803 | 1 020 | 2.65 | |
| Interest | 149 486 | 344 | 0.89 | 152 982 | 344 | 0.89 | |
| Rent and/or leases | 0 | 0 | 0.00 | 0 | 0 | 0.00 | |
| Cash farm surplus | 144 429 | 332 | 0.86 | 139 453 | 313 | 0.82 | |
| Stock value adjustment | 27 185 | 62 | 0.16 | 1 611 | 4 | 0.01 | |
| Minus depreciation | 29 139 | 67 | 0.17 | 29 269 | 66 | 0.17 | |
| Net trading profit | 142 475 | 328 | 0.84 | 111 795 | 251 | 0.65 | |
| Taxation | 21 413 | 49 | 0.13 | 44 096 | 99 | 0.26 | |
| Net trading profit after tax | 121 062 | 278 | 0.72 | 67 699 | 152 | 0.40 | |
| Allocation of Funds | |||||||
| Add back depreciation | 29 139 | 67 | 0.17 | 29 269 | 66 | 0.17 | |
| Reverse stock value adjustment | – 27 185 | – 62 | – 0.16 | – 1 611 | – 4 | – 0.01 | |
| Drawings | 56 000 | 129 | 0.33 | 55 500 | 125 | 0.32 | |
| Principal repayments | 0 | 0 | 0.00 | 0 | 0 | 0.00 | |
| Development | 6 879 | 16 | 0.04 | 4 000 | 9 | 0.02 | |
| Capital purchases | 30 000 | 69 | 0.18 | 41 712 | 94 | 0.24 | |
| Disposable surplus/deficit | 30 137 | 69 | 0.18 | – 5 856 | – 13 | – 0.03 | |
| Other Cash Sources | |||||||
| New borrowing | 0 | 0 | 0.00 | 0 | 0 | 0.00 | |
| 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 | 30 137 | 69 | 0.18 | – 5 856 | – 13 | – 0.03 | |
| Assets and Liabilities | |||||||
| Farm, forest and building (opening)* | 3 159 000 | 7 262 | 18.71 | 3 397 000 | 7 634 | 19.85 | |
| Plant and machinery (opening) | 194 263 | 447 | 1.15 | 195 124 | 438 | 1.14 | |
| Stock valuation (opening) | 589 165 | 1 354 | 3.49 | 616 350 | 1 385 | 3.60 | |
| Dairy company shares | 1 030 250 | 2 368 | 6.10 | 1 131 161 | 2 542 | 6.61 | |
| Total farm capital | 4 972 678 | 11 431 | 29.45 | 5 339 635 | 11 999 | 31.21 | |
| Total debt opening | 1 828 078 | 4 202 | 10.83 | 1 822 078 | 4 095 | 10.65 | |
| Equity | 3 144 600 | 7 229 | 18.63 | 3 517 557 | 7 905 | 20.56 |
Symbol
f Forecast
* Includes 30 ha dairy run-off block
Table 7.4: Southland Dairy Expenditure
| 2005/06 | 2006/07f | ||||||
|---|---|---|---|---|---|---|---|
| Whole farm | Per cow | Per kgMS | Whole farm | Per cow | Per kgMS | ||
| ($) | ($) | ($) | ($) | ($) | ($) | ||
| Farm Working Expenses | |||||||
| Permanent wages | 69 600 | 160 | 0.41 | 70 900 | 159 | 0.41 | |
| Casual wages | 5 655 | 13 | 0.03 | 5 600 | 13 | 0.41 | |
| ACC | 5 104 | 12 | 0.03 | 6 458 | 15 | 0.04 | |
| Animal health | 27 013 | 62 | 0.16 | 25 365 | 57 | 0.15 | |
| Breeding | 12 615 | 59 | 0.07 | 13 350 | 30 | 0.08 | |
| Dairy shed expenses | 10 130 | 23 | 0.06 | 10 057 | 23 | 0.06 | |
| Electricity | 14 790 | 34 | 0.09 | 15 399 | 35 | 0.09 | |
| Feed (hay and silage) | 41 760 | 96 | 0.25 | 42 275 | 95 | 0.25 | |
| Feed (feed crops) | 17 400 | 40 | 0.10 | 17 800 | 40 | 0.10 | |
| Feed (grazing) | 54 810 | 126 | 0.32 | 55 625 | 125 | 0.33 | |
| Feed (other) | 16 095 | 37 | 0.10 | 15 575 | 35 | 0.09 | |
| Fertiliser | 56 510 | 130 | 0.33 | 59 285 | 133 | 0.35 | |
| Lime | 3 880 | 9 | 0.02 | 3 800 | 9 | 0.02 | |
| Freight (not elsewhere deducted) | 3 915 | 9 | 0.02 | 4 486 | 10 | 0.03 | |
| Re-grassing costs | 6 525 | 15 | 0.04 | 7 565 | 17 | 0.04 | |
| Weed and pest control | 2 610 | 6 | 0.02 | 4 486 | 10 | 0.03 | |
| Fuel | 13 873 | 32 | 0.08 | 14 400 | 32 | 0.08 | |
| Vehicle costs (excluding fuel) | 15 400 | 35 | 0.09 | 14 300 | 32 | 0.08 | |
| Repairs and maintenance | 30 885 | 71 | 0.18 | 27 900 | 63 | 0.16 | |
| Communication costs | 5 015 | 12 | 0.03 | 5 000 | 11 | 0.03 | |
| (phone and mail) | |||||||
| Accountancy | 4 271 | 10 | 0.03 | 4 270 | 10 | 0.02 | |
| Legal and consultancy | 3 500 | 8 | 0.02 | 3 500 | 8 | 0.02 | |
| Other administration | 5 168 | 12 | 0.03 | 5 712 | 13 | 0.03 | |
| Water charges (irrigation) | 0 | 0 | 0.00 | 0 | 0 | 0.00 | |
| Rates | 10 883 | 25 | 0.06 | 10 900 | 24 | 0.06 | |
| Insurance | 5 922 | 14 | 0.04 | 5 900 | 13 | 0.03 | |
| Other expenditure | 6 100 | 14 | 0.04 | 5 712 | 13 | 0.03 | |
| Cash farm expenditure | 449 428 | 1 033 | 2.66 | 453 803 | 1 020 | 2.65 | |
| Calculated Ratios | |||||||
| Economic farm surplus (EFS1) | 216 961 | 499 | 1.29 | 189 777 | 426 | 1.11 | |
| Cash farm expenditure/GFR2 | 60% | 61% | |||||
| EFS/total farm capital | 4.4% | 3.6% | |||||
| EFS less interest and lease/equity | 2.1% | 1.0% | |||||
| Interest+rent+lease/GFR | 20% | 21% | |||||
| EFS/GFR | 29% | 25% |
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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