Gippsland - How Now Gippy Cow
January 2011 Edition
What Is A Reasonable Commercial Milk Price This Year?
A strong dairy industry is one that continues to at least maintain current levels of investment in it plus encourages investment in additional assets (e.g. buying the block next door or extra cows).The level of investment is obviously determined by profitability relative to the value of the assets invested compared to alternative investment options. Recent declines in farm numbers interstate is a worrying reflection of this process.
A major contributor to profitability is milk price, so it is critical that everyone involved in the dairy industry, especially processors, are aware of the “zone” of reasonable milk price. It’s not really good enough to say “It’s never high enough” or “You can’t do anything about it so why talk about it”.
Competition for milk in Gippsland is and will continue to be fierce, and now the range of end product usage is enormous. Production costs vary between farms and between seasons but that should not be an excuse to avoid estimating a reasonable milk price for a well managed Gippsland dairy farm business (the milk price will never be high enough for a poorly managed business.) This is not a calculation of a “budget break even” milk price; this calculation is about a milk price to justify the assets and the effort.
The term “cost of production” for any business should include the following:
- The cash costs (farm working expenses) involved in production. In dairy farming this includes herd, shed, feed, and overheads including paid labour, but not debt servicing or personals. Last year, on the average Gippsland dairy farm of 270 cows, this figure was around $3.05 per kg milk solids or 22.70 cents per standard litre (4.15%Butterfat F/3.3% Protein). Unfortunately this is the figure that is too often quoted as “cost of production” which is simply not correct and gives a completely false impression to non-dairy farmers.
- The cost of replacing capital. Depreciation accounts for another $0.25 per kg milk solids or 1.87 cents per standard litre.
- A value for the dairy farming family’s labour - another $1.00 per kilogram of milk solids or 7.5 cents per litre. On a large farm this figure would be smaller but the cash costs would be higher due to the higher proportion of paid labour.
- The value of retaining the assets in dairying or the return required to justify investment in this type of asset. Corporate investors in agriculture generally seek 5% return annually plus capital growth. The level of investment in a typical 270 cow dairy business in Gippsland is around $2.8 million which equates to $10,500 per cow or $19 per kg milk solids. A 5% return is another $0.94 (7 cents per standard litre) per kg milk solids to the cost of production.
A reasonable milk price is when all of the above can be achieved on a well managed Gippsland dairy farm. Based on this method, let’s now calculate a reasonable 2010/2011 dairy business milk price:
- Cash costs are likely to be 10 - 15% higher due to higher grain and other input prices. In addition, most people kept repairs and maintenance to absolute minimum last year due to the very low opening price. Farm working expenses might be $3.40 per kg milk solids or 25 cents per standard litre.
- Depreciation and owner operator labour will remain similar at $1.25 per kg milk solids or 9.3 cents per standard litre.
- A return of 5% remains similar at $0.94 per kg milk solids(7 cents per standard litre)
Taking all of the above into account, the grand total becomes $5.59 per kilogram solids as necessary farm income (41.6 cents per standard litre). Livestock sales account for about $0.22 per kg milk solids (1.6 cents per standard litre). This leaves $5.37 per kg milk solids (40 cents per litre) that can be regarded as a reasonable basis for a commercial milk price this year, given a decent season. On average, last year’s milk price was $4.30 per kg milk solids or 32 cents per litre.
Summary
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Total “reasonable income” required = $5.59/kg milk solids (41.6 c/L) Made up of:
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Costs of production that need to be covered:
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It is correct that individual dairy farmers cannot dictate milk price but it is equally correct that too often true cost of production is underestimated.
The Dairy Industry Farm Monitor conducted by DPI and funded by DPI and Dairy Australia indicated that the better managed Gippsland dairy farms last year achieved 2.6% - 5% return on assets after all costs( “lean” cash and non-cash) had been covered. Let’s hope this year that figure is above 5% - that’s what stimulates the dairy industry and its future.
(The source of data for the above is the DPI Farm Monitor and ONFARM Consulting client data).
For further information contact GippsDairy on 0356243900.
