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Dairy Conversions

Introduction

There is potential in Tasmania to create new dairy farms by converting current grazing or cropping farms into dairy units.

Ideally a potential dairy conversion property will have the potential to milk 500 or more cows. It will be in either the traditional higher-rainfall areas, or in lower-rainfall areas with access to a plentiful supply of irrigation water at a reasonable cost.

The advantage of dairy conversions over existing farms is that there is more scope to have a fully functional farm with new infrastructure, situated in the right place. In addition to this, the scope to grow over time can be built-in up front, rather than hoping that adjoining properties come onto the market over time.

There is a substantial amount of land available in Tasmania that is suitable for conversion to dairying. Also, Tasmania is one of the few states, which has a government water development strategy in place and is encouraging farmers to develop water resources for agricultural purposes.

Subject to water management plans and maintenance of environmental flow requirements, it is possible to obtain new water rights for winter-take into storage. Alternatively it is possible to buy or lease existing water rights from other farmers or buy water from them directly.

Opportunities in the North West Dairy Region

King Island

There are large tracts of land suitable for conversion to dairying on King Island. There are variation in soil type and rainfall across the island that need to be considered when considering a dairy conversion. Drainage, soil fertility and the few pockets of salinity are potential issues.

There is only one milk company on the Island, which is King Island Dairies, owned by National Foods.

Far North West

There is reasonable scope for dairy conversions in the Far North West. There are some very big beef properties in the area that would prove suitable. The climate is ideal for dairying with good rainfall distribution and limited frosts.

This is considered the best dairying region in Tasmania and as a result it is already a well-developed dairy area. Conversions may need to include several adjoining properties. Much of the land in the district, but particularly on swamp ground requires drainage prior to dairying.

Central North West

This area has very limited scope for dairy conversions because of the small size of many of the properties and the competition for land from intensive horticulture on the better land, and trees on the more marginal land.

Opportunities in the Northern Dairy Region

Central North

There is a significant areas of land suitable for converting to dairy in the Central North. Large properties currently running extensive cropping and livestock are well suited to dairying. Rainfall in this region varies considerably and will need to be taken into account when selecting a potential dairy farm.

Many of the farms have large historical water rights. Irrigation requirements are also relatively high due to lower summer rainfall (in some areas) and high evapotranspiration rates. The Meander Dam is expected to be completed in 2007 and will have capacity to provide an additional 24,000 megalitres to properties along the Meander River.

North East

There are opportunities in the North East to purchase large areas suited for dairying with the aid of irrigation.

As well as the traditional dairy areas on the better-class clay loam soils there is also potential for large-scale dairy development on some of the sandy and sandy loam soils closer to the coast. While the soils are not as naturally productive winter temperatures are higher with very few frosts. In recent times many of these properties have installed irrigation (usually pivots) to grow crops such as potatoes and poppies.

Some of the sandy and sandy loam soils are not robust enough to withstand continuous cropping but are well suited to grazing and hence dairy farming. In some instances there may be the need to combine farms to get to commercially viable sizes, however there are many larger farms in the area.

Opportunities in the Southern Dairy Region

Derwent Valley

There are large properties along the Derwent River that have significant water rights and would be suitable for conversion to dairy. The area has some of the warmest summer temperatures in Tasmania and with the aid of irrigation and increased soil fertility would be capable of excellent pasture production.

Local sources suggest that some of the better land lies away from the river and therefore water may need to be pumped or transferred over some distance. There are also good alluvial soils along the river itself.

South of Hobart

There is very limited potential to convert land to dairy farming in the area South of Hobart.

Potential returns from dairy conversions

The tables below provide some indicative figures as a guide to investment.

There are a large number of variables to consider in undertaking a dairy conversion so potential investors wishing to go further consult widely. A list of useful industry contacts has been provided in "Contacts" section.

Assumptions

The financial models used to assess the financial viability of dairy conversions uses a number of assumptions that underlie the results shown.

The key factor in achieving a good result is the ability of the manager. The three key profit drivers in the Tasmanian dairy industry are:

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

The financial models assume that the management deployed within the system is above average and hence so too is farm performance. Significant capital expenditure is included in the models to provide a solid platform for good performance.

The model farm is assumed to be in a lower-rainfall area of the state and to have sufficient irrigation water to irrigate around 50 per cent of the total farm area.

The main assumptions are outlined in the table and explained below:

The lower per hectare price for the larger (1,000-cow) farm is due to better utilisation of the expensive dairy shed, fencing, laneway, and irrigation facilities.

The total capital investment indicated here is somewhat less than might be required to buy an equivalent currently operating dairy farm (see table below, and section on "buying a farm". In addition a fully set-up new dairy conversion farm should be "state of the art" and therefore perform better than an average farm.

However, it should also be borne in mind that a new dairy farm conversion might take several years to reach its potential. In order to give a better reflection of the longer-term situation, the calculations here assume that three years have passed since the conversion took place. Income may be less and costs higher in the earlier years.

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 on the average 300-cow farm by one tonne of dry matter per can increase profit by up to $30,000.

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

Labour Use

Labour is the second most significant cost in Tasmanian production systems after feed costs. 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. 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 to 100 cows per FTE but there are farms that exceed 150 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.

The models assume that all labour (including the owner/manager) is fully paid for.

Milk Price

Milk price is also a key driver of dairy profitability. The prices used in the examples are a reflection of the current average prices which are reasonably highand are expected to remain high, for at least the next few years.

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.

Dairy Conversion Return on Capital

The financial performance of the model conversion farms is summarised below. Details are provided in the attached pdf file.

For a 500-cow conversion the model suggests a 6.5 per cent return on capital before capital gain. For the 1,000-cow conversion the model shows an 11 per cent return.

Despite the recent escalation in land prices in Tasmania the assessment shows that there is still potential for good financial performance providing the farm is well set up and efficiently operated. In the longer term there may also be potential for capital gain.

The budget indicates some economies of scale associated with larger farms. This is mainly due to the fact that infrastructure such as irrigation, dairy shed, laneways and machinery are relatively less for the larger farm and so the total capital cost per hectare is reduced.

In addition to this there is also the ability to have greater labour efficiency. The 500 cow-farm is assumed to milk 120 cows per full-time labour equivalent (FTE) wheras the 1,000-cow farm is assumed to milk 150 cows per FTE. The costs and returns outlined above are intended as indicative examples only. All potential dairy conversions have individual circumstances and should be fully assessed on an individual basis.