Cash Vs. Accural

It is important to know how your numbers, and the benchmarks you are comparing with, are calculated.

In Red Sky, figures are calculated using an accrual basis therefore Red Sky calculates its income based on the milk produced that season and the revenue generated from that milk. Within the farming enterprise, income received in the season also includes last year's deferred payments and only a portion of the current year payments. This is an issue when payout changes significantly, or seasonal effects occur, as the payments vary year on year, i.e. if last season had a higher payout it would bump up the income paid in the current season. Because Red Sky uses accrual, it provides a representation of the income generated in the season being analysed, so cost and production are aligned. Whereas in DairyBase, the default analysis is a cash basis, which means the cash received inside that season (current season payment plus deferred payment from the previous season paid in the current season).

Effective Milking Hectares

Effective Milking Hectares is the true area over which the milking cows graze. When young stock graze even briefly on farm, this grass they consume is no longer available for milking cows, hence the milking platform is effectively reduced. This makes the KPIs comparable between farms that graze heifers on farm and those who graze off.

Operating Profit per Hectare

Gross Revenue less Gross Expenses or Operating Surplus +/- adjustments divided by effective hectares. This excludes all financing expenses.
Gross Revenue
Gross Revenue calculated within Red Sky (RS) milk revenue calculated by milk price times total milk solids produced plus livestock profit and change in numbers and values on hand between the start and end of the season. It is in an accrual basis, so money earned.
Gross Operating Expenses
This is the total operating expenses adjusted for feed/supplements on hand at opening and closing of the season, imputed (unpaid) labour and management, depreciation and other expense adjustments. Gross Expenses does not include financing costs.

Return on Capital / Assets / Equity

Return on Capital (ROC)
Operating Profit / Total Assets FARMED

The most important measure of profitability is Return on Capital (ROC). This is calculated by dividing operating profit by the total value of all assets (both owned and leased). The lease costs associated with any leased assets are included in the operating profit calculation. This generates a profitability value which can be compared across all business types, and accounts for farms with a lower milk production capability against those with a high milk production capability. To maximise ROC it is important to not over capitalise as this in turn would require an increase in operating profit to achieve the same ROC. The capital includes; all land (milking and support), livestock, vehicles, plant and machinery, and dairy company shares and other farm related shares.

Return on Asset (ROA)

(Operating Profit - Lease Fees) / Total Assets OWNED

This is all assets owned by the business, meaning it includes all assets whether financed or owned out right and excludes all leases

Return on Equity (ROE)

(Operating Profit - Lease Fees - Interest) /
Is the most important indicator of net wealth growth. This is all assets that are owned outright, therefore excluding all leases and the financed portion of assets. Giving a comparable figure to if they were to put that money in the bank.

Expenses per Kilogram of Milksolids

Low expenses per kg milksolids are achieved by either reducing costs relative to the milksolids produced, or increasing milksolids while maintaining low costs (e.g. increasing kgMS/cow while maintaining costs). If gearing is high (e.g. high level of debt) then there should be a significant gap between cost of production and the milk pay-out to ensure there are sufficient funds for debt servicing and tax payments. Ensuring there is an adequate margin between expenses per kgMS + debt servicing and the milk price will influence the profitability of the business, which then allows for debt reduction and/or business expansion.

Farm Working Expenses per kgMS (FWE/kgMS)
Is all physically paid expenses (real cash payments). This gives an indication of cashflow, but is not a comparable figure between businesses. When adding financing cost will give the break-even point in terms of cashflow, indicating the revenue required from milk and livestock sales to ensure there is cash in the bank.

Operating Expenses per kgMS (OE/kgMS)
Is the FWE +/- non cash adjustments including depreciation and imputed labour. This indicates the overall expense of the business on a per kgMS basis. Adding financing costs, this provided the break-even point for the full business or the revenue required from milk and livestock profit.

Cost of Production of a kgMS (COP/kgMS)
Is the OE less non milk revenue to give the cost to produce the milk solids alone. Calculated from (Manufacturing Milk Sales - Operating Profit) / Total Milk Solids Sold OR Gross Operating Expenses less Non-Milk Revenue / Total Milk Solids. This gives an estimation of the net cost of producing one kilogram of milksolid. This is a key indicator of resilience, as having a low COP will enable a business to withstand fluctuations in milk pay-outs. The cost of production/kg milksolids plus financing is effectively the milksolids price the business requires to break even, as it combines both COP/kgMS and debt servicing costs.

Imputed Management-Dairy

Unpaid Management or Imputed Management (Adjustments to Operating Profit) this is calculated on a per cow basis where the minimum management wage is $50,000 per annum and this applies to any farm with less than 160 cows. There is also a maximum management wage of $120,200 and this applies to any farm with over 1300 cows. For farms between 160 and 600 cows an additional $80 per cow is added to the minimum $50,000, which as an example results in a 250 cow management salary of $57,200 and a 650 cow management salary of $87,700. For farms between 600 and 1300 cows an additional $50 per cow is added to the $85,200 600-cow salary, which as an example results in a 800 cow management salary of $95,200 and a 1000 cow management salary of $105,200.

Operating Profit Margin

This represents the percentage of gross revenue retained as profit for interest payments, principal repayments, tax and true 'profit' (e.g. a 25% margin would mean 25c for every dollar is considered profit). The higher the OPM the more secure and resilient the business is. OPM target levels should be relative to the farm system being operated, with high feed-input systems generally targeting lower operating profit margins than low feed-input systems.

Milksolids (KgMS) Production

Milk Production per Cow
This defines the level of efficiency being achieved from the milking herd. It is important to factor in the size of the cow, therefore measuring MS as a percentage of live weight is the most accurate and comparable efficiency measure. Milksolids per cow can be influenced by feed conversion efficiency and total feed consumed per cow. For that reason, ensuring the farms stocking rate is set to a level where the cows are able to consume a high level of home-grown feed per cow relative to the total amount of feed consumed will help to increase total feed consumed per cow while minimising the dependence on supplements.

Milk Production per Hectare
This is often limited by land capability, environmental landscape, and climatic conditions. Knowing the optimal stocking rate for will allow the farm to focus on increasing per cow efficiencies to optimise the production per hectare. Per hectare: these are divide by the 'Milking Hectare' this is the effective hectares less the calculated portion for grazed on cattle and any Maize or harvested crops grown on the farm.

Pasture Harvest

Pasture harvest is influenced and limited by land capability, climate, nutrient management, pasture management, stocking rate and supplement use. Any increase in pasture harvest has the effect of reducing the cost of pasture and hence the overall cost of production. It is important to know (calculate) your long term pasture harvest, and stock the farm accordingly. A fundamental misconception is that higher stocking rate equals a higher pasture harvest. However, research and experience does not support this theory and is only relevant in cases where farms are grossly understocked. Often increasing stocking rate can potentially lead to reduced pasture harvest and underfed cows, resulting in higher dependence on bought in feeds. This is the equivalent tonnage of 11.0MJ ME /kgDM pasture consumed per hectare. Any hay and silage conserved on the farm is included in the total pasture yield.
In Red Sky: this includes some unmeasured homegrown forages on the milking platform which are grazed by the cows. these can be split off when the crop harvest has been measured.
In DairyBase: this currently includes all crops grown on farm include those which are harvested such as Maize.

Feed Costs

The average cost of feed consumed is a weighted average and includes the cost of pasture, forage and concentrates. In almost any system, feed costs are one of the two highest costs within the business; the other being labour (imputed and paid). Feed costs are one area that has significant potential for improving the profitability of the business due to the scale of the expense relative to other costs. The cost of feed has three components:
  • Direct (or purchase) costs
  • Variable costs – includes a proportion of some farm working expenses that should be attributed to the particular feed type i.e. labour, repairs and maintenance, and vehicle expenses associated with producing the feed.
  • Capital costs – contains costs attributed to owning capital items required for feeding including the land for growing pasture, feed pads for forage, silage wagons, in-shed feeding systems, etc.
Average Costs of All Feed ($/ha) The average costs of all feeds is largely influenced by the cost of pasture, particularly the capital cost associated with land. Total feed costs can be reduced by achieving a high pasture harvest, along with the proactive and prudent purchasing of non home grown feeds.
Pasture & Green Feed Cost ($/ha) Pasture costs are influenced by pasture harvest, land value and overall level of capital investment as well as any direct pasture costs. Direct pasture costs include pasture maintenance and renovation, green feed crops, fertiliser, and hay and silage conservation on the dairy unit.
Conserved Forage Costs (per tDM) Conserved forages include all forages made into either silage or hay. The costs associated with conserved forages include the purchase cost of forages and/or those expenses associated with producing the conserved forages that are either grown on farm or on the support block that is either leased or owned. Having a larger proportion of home-grown feed in comparison to purchased conserved forage, as a percentage of the total amount of conserved feeds used within the farming system, whether grown on the home block or support block, reduces the average cost of forage and lowers the risks associated with market forces. The cost of home grown conserved forage is influenced by the variable and capital expenses, and the yield of the conserved forage.
Concentrate Costs (per tDM Consumed) Includes the average purchase price of the concentrate, and the variable expenses and capital costs attributed to the feeding of the concentrate. Concentrate costs can also be high if a small amount of high-valued feed is used relative to amount of other concentrates being fed.

Feed Consumed per Cow

Total Feed Consumed per Cow is the total of all feed consumed including supplementary and home-grown feeds, an includes some allowance for wastage during storage and feeding. Total feed consumed per cow on average provides an accurate assessment of the feed consumed by the cow for maintenance and milk production. The more feed a cow consumes the higher the proportion of feed that goes to milk production relative to maintenance, assuming no other factors are limiting such as feed conversion efficiency.

Stocking Rate

Stocking rates should not be compared between farms as all farms have different biophysical capabilities therefore the optimal stocking rate is unique to every farm. Optimum stocking rate is where the stocking rate is set at a level that feed sourced is used to fill seasonal feed gaps and does not increase COP/kgMS beyond the financial benefits e.g. if bought-in feeds are more expensive than the benefits gained from those feeds COP/kgMS increases. In this circumstance it is more prudent to have a lower stocking rate with higher levels of home-grown feed consumed per cow relative to the amount of purchased feeds. Therefore it may be optimal to aim for 4.5tDM home-grown feed consumed per cow. The exception to this rule is where there is readily available low-cost feeds, which allow a lower COP and higher stocking rates whilst feeding less home-grown feed per cow. Stocking rate is an important strategic decision which should be based on the historical pasture harvest averages of that farm, which in turn provides a buffer during periods of seasonal fluctuations in pasture growth rates. It is also important to monitor the farms environmental impact as a result of increasing stocking rate to ensure the enterprise is operating within regional council policy. Herd feed requirements almost always exceed total feed grown within a season (including feed which is cut and carried within the farm as a result of seasonal pasture growth variations). Any additional bought-in feed increases milk production but not always profit, as outsourced feeds are subject to market price fluctuations and may be more expensive relative to milk price and milk production response rates. If ideal herd size can be matched to the pasture production potential of the farm, it is likely that overall farm profitability and resilience will improve.