UNDERSTANDING THE NUMBERS
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
Operating Profit per Hectare
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
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) / Equity
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
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.
Operating Profit Margin
Milksolids (KgMS) Production
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.
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.
- 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.
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.