UNDERSTANDING THE NUMBERS
Kep Performance Indicators
It is important to know how your physical and financial Key Performance Indicators (KPIs), and the benchmarks you are comparing with, are calculated.
Calculations for the DBOY competition are determined using an accrual basis, which means that the gross revenue is calculated on the milk produced in the season that is being analysed, times (multiplied by) the amount paid for the milk that was produced in that same season. It is important to note that this differs from the actual gross revenue that is received within the dairy farming enterprise, as income received in the season being analysed includes last year's deferred payments and a portion of the payments received for the season being analysed.
When measuring financial performance within a production season to determine business profitability, using non-accrual gross revenue is somewhat misleading when there is significant season to season variation in payout, and/or above normal variability in weather conditions, i.e. if the season prior to the production season being analysed had a higher payout it would bump up the gross revenue received in the production season being analysed. Because DBOY uses accrued revenue when calculating gross revenue, it provides a truer representation of the income generated in the season being analysed, so cost, production, and revenue, are more aligned.
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-farm.
Operating Profit per Hectare
Gross Revenue less Gross Expenses or Operating Surplus +/- adjustments divided by effective hectares. This excludes all financing expenses.
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 that are incurred during the production season being analysed, and 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. This includes all adjustments for expenses paid in the year being analysed that relate to production from the previous or coming year, such as prepaid fertiliser.
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 operating profit calculation includes an assigned lease fee on support blocks utilised in the business. This generates a profitability value which can be compared across all business types and production capability. To maximise ROC it is important not to 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 farm 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
ROE includes all assets that are owned outright, and excludes all leases and the financed portion of assets, providing a comparison to money invested in the back. ROE provides the most important indicator of net wealth growth.
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 to OE.kgMS provides the break-even point for the full business or the revenue required from milk and livestock profit (gross revenue per kgMS).
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
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 $0.25 for every dollar is available for paying interest, principal and tax). 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 achieving lower operating profit margins than low feed-input systems.
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.