May 2010 edition
Terms of Trade
Cameron Smith, Farmanco
Dairy farming is always a challenging business to be involved in and dairy farming in the Murray dairy regions has been particularly challenging since 2005/06, being the last season when significant irrigation allocations were received across the region.
At the start of the 2009/10 season, there was the perception that lower prices for purchased feeds would be the savior of dairy businesses across the region. Unfortunately the price of purchased feeds did not fall quickly enough and the increases in allocations did not come soon enough to offset the drop in farm income. The result has been dairy farm businesses playing catch up all season with the hope of being on an even footing going into the 2010/11 season.
Looking forward, the volume of irrigation water that has been allocated late in the 2009/10 season is likely to deliver two benefits.
- It has allowed many dairy farm businesses to start larger areas of pasture/crop than they have done in recent years and these areas have been irrigated earlier, in part due to rainfall events. The result is a number of farms grazing significant areas of pasture.
- A large proportion of this water is likely to be carried over into the 2010/11 season. Irrespective of seasonal conditions during the winter/spring period, this carried over water will allow for improved spring growth compared to the past couple of years.
Combine this with more reasonable prices for purchased feed for the 2010/11 season and ‘what does all this mean?’ The following table is my take on the actual terms of trade looking backwards for the ‘average’ dairy farm business in the Murray dairy region and a look forwards for next year, the 2010/11 season.
Table 1. Terms of trade for the average dairy farm business in the Murray Dairy Region on a $/kgMS basis.
|
|
01/02 |
02/03 |
03/04 |
04/05 |
05/06 |
06/07 |
07/08 |
08/09 |
10/11 |
|---|---|---|---|---|---|---|---|---|---|
|
Milk income1 |
$3.99 |
$3.66 |
$3.55 |
$4.24 |
$4.30 |
$4.19 |
$6.19 |
$5.34 |
$5.00 |
|
Other farm income |
$0.30 |
$0.46 |
$0.40 |
$0.51 |
$0.46 |
$0.90 |
$0.58 |
$0.85 |
$0.60 |
|
Total farm income |
$4.29 |
$4.12 |
$3.95 |
$4.75 |
$4.76 |
$5.09 |
$6.77 |
$6.19 |
$5.60 |
|
Herd costs |
$0.21 |
$0.18 |
$0.21 |
$0.25 |
$0.23 |
$0.22 |
$0.21 |
$0.22 |
$0.22 |
|
Shed costs |
$0.17 |
$0.19 |
$0.16 |
$0.16 |
$0.17 |
$0.15 |
$0.13 |
$0.15 |
$0.15 |
|
Feed costs2 |
$1.91 |
$2.52 |
$1.89 |
$1.92 |
$2.04 |
$3.28 |
$4.77 |
$3.90 |
$2.40 |
|
Overhead costs |
$0.34 |
$0.36 |
$0.42 |
$0.49 |
$0.52 |
$0.45 |
$0.50 |
$0.49 |
$0.49 |
|
Paid labour costs |
$0.33 |
$0.40 |
$0.34 |
$0.40 |
$0.41 |
$0.42 |
$0.38 |
$0.45 |
$0.45 |
|
Total production costs |
$2.96 |
$3.65 |
$3.02 |
$3.23 |
$3.37 |
$4.52 |
$5.98 |
$5.20 |
$3.71 |
|
Operating surplus3 |
$1.33 |
$0.47 |
$0.93 |
$1.52 |
$1.39 |
$0.57 |
$0.79 |
$0.99 |
$1.89 |
1 Indicative milk price given current market conditions.
2 Assumes annual rainfall and growing season rainfall at 80 per cent of long term average, irrigation allocations including carryover equivalent to 80 per cent in Victoria and purchased feed prices similar to current prices.
3Operating surplus is calculated as the funds remaining after the Production costs (Herd costs, Shed costs, Feed costs, Overhead costs and Paid labour costs) have been deducted from the Farm income (Milk income, Livestock income and Other farm income).
In short the upcoming season has the potential to be the best in the past decade!
