November 23, 2023

Better than Average

AUTHOR

Paul Duynhoven

When we talk about “averages” in various aspects of life, like income, lifespan, height, weight, or how much alcohol people drink, we’re using a simple way to summarise a lot of different data. These averages are helpful for big-picture planning and understanding, providing a general idea of a situation based on many individual cases.

In an agricultural context, averages have been significant to many farmers, impacting cash flow and profitability, interest rates, and Global Dairy Trade (GDT) Auctions. Overall creating a perfect storm in the dairy sector.

The averages that get airplay in the media are the average earnings of dairy farmers and how much additional income is predicted to flow into provincial New Zealand on the back of forecast increases in a dairy payout.

Unfortunately, averages reflect the industry and not individual farming businesses. The same goes for production metrics.

Production Metrics

For the 2021-22 dairy season, DairyNZ statistics reported the average per cow production was 386kg of milk solids (ms). Production is an important metric, and most farmers can easily give an accurate figure of their per-cow performance. But whether this statistic is ‘good’ or ‘bad’ for individual farms depends on their farming system.

For example, 386kg/ms per cow in a high input system could be substantially underperforming, whereas 386kg/ms per cow in a low input all grass system might be a fantastic result.

Relying on being about average or knowing that your production is above average may lead to a nasty shock later in the season with the impact of a lower payout starting to bite (utilising fixed milk price and other forms of hedging are ways to mitigate risk but these are big topics that are a rabbit hole of their own for another day).

Production Costs

The other side of the ledger is the production costs, and the averages make for a sobering reading.

DairyNZ statistics put farm cost inflation at 13% between 2021/22 and 2022/23 seasons, with an increase of 33% over the last three years. Beef & Lamb economists have reported the highest cost inflation rate in the sheep and beef sector in 40 years—an eye-watering 16.3% for the year to March 2023.

For dairy farmers, DairyNZ forecasts a fall in costs from $9.17 kg/ms to around $8.96 kg/ms for the 2023/24 season. When earnings are going to fall and input prices are going up, it’s impossible for this not to impact businesses.

What are the averages that count?

Costs are the means to get an outcome. Dairy farmers are food producers, producing quality protein and a range of products via processors that the world needs, and in New Zealand, we are some of the most efficient at doing it.

The most effective farms will produce the number of kg/ms at a basic financial level, result in the most significant economic surplus over their entire operation. Industry averages that measure efficiency can be benchmarked on profit per cow, per hectare, and profit per kg of milk solid. All these are useful benchmarks to track and try and improve on farm productivity.

If you are above average in these areas, your business should generate more significant surpluses when payouts are good to pay down debt. Ultimately, the most important numbers are your own. While we operate production systems that are exposed to volatility in climate conditions and global commodity markets, focussing on variables that can be controlled is essential.

Evidence shows high performing farmers plan, with farmers more likely to have goals, budget, and use benchmarking.

Here are five areas to consider when planning for the season to ensure success.

  1. Budget

Start with a realistic budget before the season begins. For example, use software that integrates well with your existing systems. Figured software can import data from the previous season as a starting point.

Utilising software provides farmers with options that give far more comprehensive information to make the best business decisions.

  1. Variance Reporting

Use variance reporting to identify areas deviating from the budget. Address these areas early to avoid long-term negative impacts.

  1. Re-forecasting

Regularly update forecasts during the season – this helps to get a current view of the season’s financial outlook and potential issues.

  1. Monitor Dairy Payout Change

A lot of software now has automatic updates for changes in dairy payout. Knowing how milk payout changes impact the season is important to ensure sufficient cash flow for all operating and other expenses. Sound information also makes it easier to deal with your banking and finance providers, find appropriate solutions to any challenges, and allow taxes (especially provisional taxes) to be paid correctly.

  1. Understand Your Business Numbers

Understanding your business’s financial aspects helps manage challenges and cash flow. For growing farm businesses, it validates your progress and identifies growth opportunities. Putting time and effort into thoroughly understanding your business finances is an investment that will definitely pay off.

Let's chat

We work with a number of farmers to assist with their budgets and help them better understand their finances. If you would like to chat with us, feel free to contact our Taranaki or Wairarapa teams.