The annual survey, done with DairyNZ support, is based on data collected in June from 25 farms in Waikato-Bay of Plenty and 20 in Southland.
This is the first year information has been collected from Southland.
The survey gathered information about the 2014-15 financial year and what farmers were budgeting for the 2015-16 season.
It was then collated into model budgets, based on the average farm for those regions, and tested in a meeting with industry representatives before being finally collated.
The survey gives a good indication of the breakeven payout required for the farming business. Breakeven is defined as meeting all farm working expenses (FWE), debt servicing, personal drawings, and depreciation. The results for 2014-15 and 2015-16 are shown in Table 1 and Table 2.
These two figures show very similar trends – a good profit in 2007-08 with the high payout, a loss in 2008-09 when the payout dropped, a moderate profit through to 2013-14 when it bounced up again, essentially a breakeven in 2014-15, and a large budgeted loss for 2015-16.
The “Farm Profit for Reinvestment” category is the funds available after farm working expenses, debt servicing, tax, and personal drawings, and which are available for principal debt reduction, capital expenditure, and development expenditure.
Farmers in Waikato-Bay of Plenty were budgeting on production being similar in 2015-16 to 2014-15 but Southland farmers were budgeting for a 2% increase despite the drop in payout and likelihood of reduced feed purchases.
They were hoping for a much better season climatically.
The profitability of the farms in 2015-16 could vary depending on a range of cost factors, including the level of debt being carried. The Waikato-Bay of Plenty model is carrying $19/kg MS of debt,
while the Southland model is carrying $21/kg MS.
Sensitivity analysis across levels of debt and farm working expenditure showed significantly differing outcomes.
In light of the drop in payout for 2015-16, capital, development and debt reduction were early casualties as farmers sought to reduce expenditure, and all the farmers were budgeting for reduced farm working expenditure as a way of reducing spending, and reducing the overall loss the farm business would run at. The key items they were planning to reduce were supplementary feed purchases, fertiliser, and repairs and maintenance.
The difficulty many farmers have is that many farm running costs are more fixed than discretionary.
There is also a significant range of farm working expenditure between farms, as can be illustrated from the monitored farms.
Supplementary feed, which includes off-farm grazing, is often the biggest expense, sitting at about 30% for Waikato-Bay of Plenty and up to 40% for Southland.
That makes it the obvious target for review in a low payout year, although there are a range of factors that need to be taken into account, including the production response to any supplementary feeding, and in particular, whether marginal profit from extra feed is greater than marginal cost.
The next largest expense is labour, sitting at 15-20% for both Waikato-Bay of Plenty and Southland. This tends to be a relatively fixed cost – while its proportion of farm working expenses can vary depending on production, it is relatively flat in dollar terms.
Fertiliser and repairs and maintenance make up 12-13% and 6-7% of farm working expenses respectively, and while these often can be reduced, they are a relatively small proportion of total farm working expenses.
Reductions in fertiliser particularly need to relate to inherent soil fertility, meaning reductions are more likely in Waikato-Bay of Plenty than Southland.
The survey reports can be found on the AgFirst website: www.agfirst.co.nz
