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Alternative options for marginally small farms

The economics of small dairy farms, even with moderate debt are really getting squeezed. This is particularly evident where there is an attempt to go into higher input farming. This may only include some maize silage and palm kernel but the economics just do not add up. Why?
A number of the fixed costs cannot be spread over more kilograms. The following costs will be the same regardless of size.
Drawings, say $40,000
Life insurance $5,000
Car replacement $5,000
Bank fees $1,000
Subscriptions $2,000
Accountancy $7,000

On a kg/ms basis these fixed costs equate to:
50,000kg $1.20 per kg/ms
60,000kg $1.00 per/kg/ms
85,000kg $0.75 per kg/ms
100,000kg $0.60 per kg/ms

This may all look simplistic but there are many costs that are constant regardless of production. We see farm running costs should be around that $1.90 to $2.20 per kilogram of production. In my experience, they are more like $2.50 to $3. This is really putting the squeeze on the profit.

Some farmers with low debt are borrowing annually to prop up the cash deficit.

So what are the issues?

Personal In this situation some of the personal issues that may appear are:
    • Becoming sick of milking.
    • Decisions being made on a day-to-day basis and consequently, very little forward planning being made.
    • The economy of scale of say, 60,000 kg/ms with higher input farming is no longer there and may be getting tighter annually.

What can you do if you are in this awkward position?

You can:
    • Sell off a spare house site or cottage to reduce your debt.
    • Sell a lifestyle block or a piece of useless land.

You can sell your shares and cows and go into alternative land use.

Let's look at how this might work.

Existing business 130 hectares
Farm say $1,400,000
Shares say $450,000
Cows and replacements $200,000
Plant $70,000
Total $1,940,000

You can then:
Sell dairy shares $450,000
Sell cows $200,000
Total $650,000

Now what can you do?

There are many options. Some farmers have gone into maize growing, some running dairy heifers and so on. It is really up to you to decide what suits you and your family the best. Outlined below is how the alternative option of running a dairy beef raising operation may look.

Dairy beef raising operation

This would involve buying the cows in June and selling them in-milk in October. In addition, you could grow maize, run grazers and sell hay. The figures might look something like this:

Mid June:

Purchase 80 calving cows @ $800/head $64,000
Purchase 260 calves at $140 $36,000
Gross Cost $100,000

October:

Sell 76 cows @ $1200/head $91,200
Sell 320 calves @ $380/head $121,600
Gross Income dairy beef $212,800
Gross profit for the dairy beef operation $112,000

Plus additional income:

Greenfeed maize 8 ha @ $750/ha $6,000
140 weaner calves grazed Oct-May @ $4/head x 30 weeks $16,500
20ha grass silage 500 bales $27,500
80 grazers June-June @ $6/head per week $24,000
Total $74,000
Gross profit $186,000

From this profit, you would need to service the following:
    • Fertilizer
    • Rates
    • Dairy beef operation veterinary costs
    • Insurance
    • Vehicle running
    • Tractor maintenance, etc.
I would expect your farm running costs might be as low as $86,000, which would give you a net taxable profit of $100,000. Even if you spent $100,000 running the business therefore making $86,000 profit, this may still be much more preferable to your current situation.

The worst-case scenario with this option as I see it is:
    • the dairy industry payout could drop and people wouldn't want you running their dairy grazers or,
    • the price for 100 kg beef calves drops, however the purchase price of calves would also drop.

Conversely, the advantages for this scenario are as follows:
    • Raising calves on whole milk so you would have no costs.
    • It substantially increases your flexibility and takes the constant pressure off your farm and pastures.
    • You are no longer dependant on Fonterra.
    • You are no longer required to meet the hygiene and standard requirements of Fonterra.
    • You have more of life, as the cows are sold in-milk on 20 October to other dairy farmers who are looking for cows at that time.
    • All the beef calves would be sold at this point as well.

Note: You would need to run clear input-output systems i.e. sell all the cows and calves before the end of October and run a simple operation using the land and your resources.

Summary

Smaller dairy farming operations are being savaged as a number of fixed costs cannot be reduced. This pressures the gross income and net profit.
You need to have very clean lines and stick to your business model. If you get lost on the way it could all get very difficult, however get it right and you may well find there is a great life after dairying.


 

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