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Buying A Dairy Farm

Buying an operating dairy farm is the way most people choose to enter the industry. From that point onwards there are several options for expansion:

• Increase output on the current farm
• Buy extra land
• Sell up and buy a larger or more productive farm

This section outlines indicative budgets for the purchase of a dairy farm business in Tasmania.

Farms for sale may range in size from around 150 cows to in excess of 1,000 cows. It is generally accepted that a minimum herd size of around 200-250 cows is required for a business to be fully viable at the present time. If past trends continue, this number may increase over time.

The farm costings below outline the income and costs associated with running a relatively efficient dairy farm at the present time. Depending on a range of factors, actual financial performance may be better or worse than the examples outlined. Prospective investors should consult widely before deciding on a specific farm. A list of useful industry contacts has been provided in the "Contacts" section.

Farm Description

Managerial ability is the key factor in determining financial performance. The model farms here assume that management ability is above average.

The main profit drivers for dairy farms in Tasmania are:

• Pasture utilisation (and stocking rate)
• Labour efficiency
• Milk price

Management has a major role in both pasture utilisation and labour efficiency. It can also affect milk price to some degree - through decisions on time of calving, milk company chosen, and by it's impact on milk quality.

Pasture utilisation is a key profit driver. This is generally reflected in the number of cows carried per hectare. The average stocking rate in the state is about 2.5 cows per hectare. The model farms assume a stocking rate of 3.3 cows per hectare. Managers unfamiliar with running a pasture based dairy production systems may not initially achieve these results.

The main assumptions are outlined in the following table and explained below.

Farm prices can vary considerably. The values included here are representative recent sales (2006) and assume a bare-land value of $10,000 per hectare for dryland area and $12,500 per hectare for irrigation area – overall average $10,750 per hectare.

There is some reduction in capital cost per hectare as farm size increases. The overall per hectare investment (total cost divided by total area) varies from $15,600 to $17,100 per hectare.

Pasture Utilisation:

Pasture utilisation is the most significant driver of profit in Tasmanian pasture-based dairy systems.

Typically the best results are achieved by paying close attention to the pasture supply and demand situation and making astute decisions about grazing management and supplementary feeding. Increasing pasture utilisation by one tonne of dry matter per hectare on an average 300-cow farm can increase profit by up to $30,000.

Training in grazing management is available primarily through the Department of Primary Industry, Water (DPIW), and assistance in on-farm implementation and monitoring is available from private consultants.

Labour Use:

Labour and feed costs are the most significant cost inputs. Within the model farms, full time equivalents (FTE’s) have been used to define labour requirement. This is the number of employees (including the manager) required to run the farm - based on a 38-hour week. The budgets assume that all labour (including the owner/manager) is fully paid for.

In most instances significant increases in disposable income can be achieved if owners or sharefarmers elect to take on a greater proportion of the work.

Labour use efficiency is generally measured as the number of cows milked per FTE. The average is around 80 cows per FTE but there are farms that exceed 100 cows per FTE. Generally as farm size increases there are labour efficiencies. These may continue to increase with herd sizes up to 1,200 cows.

Milk Price:

The milk prices used are expected final average prices for 2006-07 (not finalised at the time of this update). Milk prices are currently above the long-term average and are a reflection of current world market prices. Over a long period, the real (adjusted for inflation) milk price in Tasmania has been relatively stable - but there has been considerable year-to-year variation.

Farming systems that have a reasonable stocking rate and typically feed up to one tonne of grain or pellets per cow can generally respond well to annual milk price variations. Farms with a heavy dependence on grain feeding can have more trouble coping when milk prices are low and/or grain prices are high.

The assumed increase in milk price with an increase in herd size is a reflection of incentives based on total production (eg Fonterra). There may also be premiums paid where production increases over time.

Farm Profit

Indicative profit budgets are outlined below for four different farms described above.

Farm profit has been calculated as earnings before interest and tax (EBIT) and as a return on total capital invested.

Depending on the amount of borrowed capital there will be an interest cost to be deducted from the EBIT figure to arrive at a Net Profit estimate for a specific business. Also some operators may choose to pay themselves less than the commercial wages included in the EBIT calculation shown here.

Farm Summary

A comparison of the four farms is provided in the table below.

The assessment shows the potential for return on capital to increase with increasing farm size - due mainly to a relative reduction in capital outlay the cost of labour plus a slightly higher milk price.

The slight increase in capital investment per cow between the 250-cow and the 500-cow farms is mainly associated with a shift in the type of dairy from a herringbone to a rotary. The cost per hectare drops significantly after 500 cows with a similar dairy able to milk up to 1,000 cows.

Overall

Despite the recent escalation in land prices there is still the potential to achieve reasonable returns providing management performance is good.