Australian dairy

Australian dairy Financial performance of dairy farms, 2011–12 to 2013–14 Dale Ashton

Research by the Australian Bureau of Agricultural and Resource Economics and Sciences

Research report 14.17 December 2014

© Commonwealth of Australia 2014 Ownership of intellectual property rights Unless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Commonwealth of Australia (referred to as the Commonwealth). Creative Commons licence All material in this publication is licensed under a Creative Commons Attribution 3.0 Australia Licence, save for content supplied by third parties, logos and the Commonwealth Coat of Arms.

Creative Commons Attribution 3.0 Australia Licence is a standard form licence agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from creativecommons.org/licenses/by/3.0/au/deed.en. The full licence terms are available from creativecommons.org/licenses/by/3.0/au/legalcode. Cataloguing data Ashton, D 2014, Australian dairy: financial performance of dairy farms, 2011‒12 to 2013‒14, ABARES research report 14.17, December. CC BY 3.0. ISSN 1447-8358 ISBN 978-1-74323-222-4 ABARES project 43009 Internet Australian dairy: financial performance of dairy farms, 2011‒12 to 2013‒14 is available at agriculture.gov.au/abares. Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) Postal address GPO Box 1563 Canberra ACT 2601 Switchboard +61 2 6272 3933 Facsimile +61 2 6272 2001 Email [email protected] Web agriculture.gov.au/abares Inquiries about the licence and any use of this document should be sent to [email protected]. The Australian Government acting through the Department of Agriculture, represented by the Australian Bureau of Agricultural and Resource Economics and Sciences, has exercised due care and skill in preparing and compiling the information and data in this publication. Notwithstanding, the Department of Agriculture, ABARES, its employees and advisers disclaim all liability, including for negligence and for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon information or data in this publication to the maximum extent permitted by law. Acknowledgements ABARES relies on the voluntary cooperation of farmers participating in the annual Australian Dairy Industry Survey to provide data used for this report. Without their help, the survey would not be possible. ABARES farm survey staff collected most of the information presented in this report through on-farm interviews with farmers. This project was funded by the Department of Agriculture and Dairy Australia.

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Australian dairy: financial performance of dairy farms, 2011–12 to 2013–14 ABARES

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Contents Summary vi

1 Introduction 1

2 Changing industry characteristics 2

3 Financial performance 4

Farm cash income 4

Farm business profit 7

Off-farm income 8

Return on capital 9

4 Debt and investment 12

Farm debt and equity 12

Farm investment 16

5 Dairy technologies and management practices 18

Milking shed technologies 18

Feeding systems 20

Appendix A Selected estimates by region 24

Survey methods and definitions 32

Glossary 36

References 40

Tables Table 1 Financial performance estimates, Australian dairy farms, 2011–12

to 2013–14 5

Table 2 Dairy characteristics, by farm size, Australian dairy farms, 2012–13 20

Table 3 Feeding and pasture management, by farm size, Australian dairy farms, 2012–13 21

Table A1 Selected estimates, dairy farms, Northern NSW and Queensland 24

Table A2 Selected estimates, dairy farms, Northern Victoria and Riverina 25

Table A3 Selected estimates, dairy farms, Tasmania 26

Table A4 Selected estimates, dairy farms, Western Australia 27

Table A5 Selected estimates, dairy farms, South Australia 28

Table A6 Selected estimates, dairy farms, Gippsland 29


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Table A7 Selected estimates, dairy farms, Western Victoria 30

Table A8 Selected estimates, dairy farms, Southern and Central New South Wales 31

Figures Figure 1 Number of Australian dairy farms, by herd size, 1999–2000 to 2013–14 2

Figure 2 Milk production, by herd size, Australia, 1999–2000 to 2013–14 3

Figure 3 Cows milked, by herd size, Australia, 1999–2000 to 2013–14 3

Figure 4 Milk yield per cow, by herd size, Australia, 1999–2000 to 2013–14 3

Figure 5 Farm cash income, Australian dairy farms, 1988–89 to 2013–14 4

Figure 6 Milk receipts per litre, by herd size, Australia, 1999–2000 to 2013–14 5

Figure 7 Milk receipts per farm, by herd size, Australia, 1999–2000 to 2013–14 6

Figure 8 Farm cash income, by herd size, Australia, 1999–2000 to 2013–14 6

Figure 9 Percentage of dairy farms with negative farm business profit, 1999–2000 to 2013–14 7

Figure 10 Percentage of farms with negative farm business profit, by herd size, Australia, 1999–2000 to 2013–14 8

Figure 11 Off-farm income, Australian dairy farms, 1999–2000 to 2013–14 8

Figure 12 Return on capital, Australian dairy farms, 1999–2000 to 2013–14 9

Figure 13 Total farm capital, Australian dairy farms, 1999–2000 to 2013–14 10

Figure 14 Rate of return excluding capital appreciation, by herd size, Australia, 1999–2000 to 2013–14 10

Figure 15 Rate of return including capital appreciation, by herd size, Australia, 1999–2000 to 2013–14 11

Figure 16 Farm business debt, Australian dairy farms, 1999–2000 to 2013–14 13

Figure 17 Ratio of debt to receipts and milk produced, Australian dairy farms, 1999–2000 to 2013–14 13

Figure 18 Farm business debt, by herd size, Australia, 1999–2000 to 2013–14 14

Figure 19 Farm business equity ratio, Australian dairy farms, 1999–2000 to 2012‒13 14

Figure 20 Farm business equity, by herd size, Australia, 1999–2000 to 2012–13 15

Figure 21 Ratio of interest payments to total cash receipts, Australian dairy farms, 1999–2000 to 2013–14 15

Figure 22 Percentage of dairy farms making capital additions, Australia, 1999–2000 to 2012–13 16

Figure 23 Net capital additions, Australia, 1999–2000 to 2012–13 17

Figure 24 Net capital additions, by herd size, Australia, 1999–2000 to 2012–13 17

Figure 25 Percentage of dairy farms by type of milking shed, 1991–92 to 2012–13 19


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Figure 26 Percentage of dairy farms by type of milking shed, 1993–94 to 2012–13 19

Figure 27 Calving system, by farm size, 2012–13 22

Figure 28 Grains and concentrates fed per cow, 1991–92 to 2012–13 23

Maps Map 1 Australian dairy regions 1

Boxes Box 1 Common calving patterns 21


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Summary The results presented in this report cover trends in farm financial performance of Australian dairy farms up to and including the 2013–14 financial year. The report includes analysis of changes in farm financial performance, debt and equity. More detailed analysis by farm size (measured as the number of cows milked) highlights differences in farm physical and financial performance across the industry.

Farm performance in 2012–13 and 2013–14 In 2012–13 farm cash incomes declined for dairy farms in all states as a result of lower milk receipts. This reflected reductions in both farmgate milk prices and milk production, and increased cash costs, driven mainly by increased expenditure on fodder. At the national level, average farm cash income declined from $143 360 in 2011–12 to $44 200 in 2012–13.

In 2013–14 average farm cash incomes are estimated to have rebounded strongly with large increases in milk prices for dairy farmers in southern New South Wales, South Australia, Victoria and Tasmania, and smaller increases forecast for producers in other states and regions. As a consequence, average farm cash income of Australian dairy farms is estimated to have increased to $129 000 in 2013–14, around 29 per cent above the 10-year average to 2012–13.

Over the 10 years to 2013–14 the average rate of return to capital (excluding capital appreciation) for Australian dairy farms was 2.1 per cent. The average rate of return (excluding capital appreciation) declined in 2012–13 to an estimated 0.9 per cent as farm incomes fell, then increased to 3.1 per cent in 2013–14.

In 2012–13 average farm debt rose by around 9 per cent as a result of increased working capital debt that was largely used to purchase fodder because of dry seasonal conditions. Higher farm incomes and improved seasonal conditions in 2013–14 meant there was reduced need for working capital and many farmers reduced this component of their debt.

Performance by farm size Between 1999–2000 and 2013–14 the number of dairy farms in Australia fell by around 45 per cent. The number of smaller dairy farms (milking less than 200 cows a year) declined by around two-thirds and accounted for much of the decline in the total number of farms. The number of large farms (milking more than 350 cows) also fell, by around 12 per cent, while the number of medium farms (milking between 200 and 350 cows) fell initially but increased over the period as a number of small farms increased their herd sizes.

Over the past decade annual changes in farm cash income by herd size have been greater (in both percentage and absolute terms) for large farms than for small or medium dairy farms. However, large farms, and to a lesser extent medium farms, have been able to take advantage of periods of favourable milk prices and production conditions to record well-above average farm incomes in some years. Incomes of small farms have remained modest because of their lower capacity to increase milk production when seasonal conditions are favourable.

Similarly, changes in rates of return by herd size reflect the relative magnitudes of changes in farm incomes and profits. While returns excluding capital appreciation are generally lower for small farms in most years, returns are much more comparable across the size groups when capital appreciation is included. This reflects the proximity of many small dairy farms to larger


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urban centres or coastal regions, where there are generally higher land values than in other inland dairy regions.

Most of the increase in debt for dairy farms over the past decade, in aggregate and on average, was for large dairy farms. There were much smaller increases in average debt for smaller dairy farms and these farms had higher average farm equity than either medium or large farms. However, large farms made greater investments in new farm capital each year, largely funded by debt.

Dairy technologies and management practices Since 1991–92 ABARES has conducted a biennial survey of the use of technology and management practices on Australian dairy farms in conjunction with the annual Australian Dairy Industry Survey.

Overall, the results of the survey show that dairy farmers have responded to changing circumstances in the industry by adopting a range of new technologies and management practices. Although it is difficult to attribute the cause and effect of various changes, increasing farm size and more intensive dairy production over the past two decades are closely related to the adoption of many technologies.

Improved milking shed layouts have contributed to productivity growth on dairy farms by reducing the time taken for milking and, in turn, the quantity of labour required. There has been a general trend toward installing or improving milking sheds and equipment to improve labour use efficiency and to cater for large-scale milk production. The equipment used in milking sheds has moved increasingly toward automated technologies (such as automatic cup removers, automatic drafting, and automated cleaning). Some dairy farms are likely to have realised productivity improvements through economies of scale by expanding their herd size and replacing older, smaller milking sheds with ones of higher capacity. The ABARES dairy technology survey shows increases in the proportion of herringbone and rotary milking sheds, but fewer walkthrough sheds since the early 1990s.

Australian dairy farmers have also increasingly supplemented pasture-based production by feeding grains and concentrates to dairy cattle. The proportion of farmers using concentrates or grains increased from an estimated 81 per cent in 1991–92 to 92 per cent in 2012–13. In 2012–13 most dairy farmers indicated that the primary reason for feeding concentrates, grains and by-products was to increase milk production by achieving higher milk yield per cow. Other reasons for supplementary feeding included to fill shortfalls in pasture quality and quantity, or to assist in pasture management.

The proportion of farms purchasing hay or silage has fluctuated from year to year, partly reflecting changing seasonal conditions, pasture quality and quantity, and prices for hay or silage. For example, around 68 per cent of farms purchased hay or silage in the drought year of 2006–07, while 58 per cent of farms purchased hay or silage in 2012–13.


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1 Introduction The Australian dairy industry has changed markedly over the past two decades, largely driven by a range of factors that have affected farm profitability. There are now fewer dairy farms and milk production has fallen from the peak reached in 2001–02. These changes have resulted in a more efficient dairy industry and an increase in the average gross value of Australian dairy production at the farm level in real terms.

The dairy industry makes an important contribution to the Australian economy, accounting for around 8 per cent ($2.5 billion) of the gross value of agricultural production and $2.2 billion in export income (ABS 2013). In 2012–13 there were 6398 registered dairy farms across Australia (Dairy Australia 2014).

Since 1978–79 ABARES has conducted the annual Australian Dairy Industry Survey (ADIS) to monitor changes in the industry and provide government and industry stakeholders with comprehensive data that are used to analyse a range of industry issues.

The analysis presented in this report was funded by Dairy Australia and the Australian Government Department of Agriculture and covers trends in farm financial performance up to and including the 2013–14 financial year. The report includes analysis of changes in farm performance, debt and equity by farm size (measured as the number of cows milked) to highlight variations in performance across the industry. Survey results by region (Map 1) are presented in tables at Appendix A.

The report also includes results from a biennial survey that has been undertaken in conjunction with ADIS since 1991–92 to collect data on the use of technologies and management practices used on dairy farms. Information collected in this survey includes milking shed layouts and equipment, feeding regimes, fodder conservation, soil testing, herd health, and a range of farm management activities.

Map 1 Australian dairy regions

Source: Dairy Australia


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2 Changing industry characteristics Between 1999–2000 and 2013–14 the number of dairy farms in Australia fell by around 45 per cent. The number of small farms (milking less than 200 cows a year) declined by around two-thirds and accounted for much of the decline in the total number of farms. The number of large farms (milking more than 350 cows) also fell, by around 12 per cent, while the number of medium farms (milking between 200 and 350 cows) fell initially but increased toward the end of the period as a number of small farms increased the size of their herds (Figure 1).

Figure 1 Number of Australian dairy farms, by herd size, 1999–2000 to 2013–14

p Preliminary estimate. y Provisional estimate. Source: ABARES Australian Dairy Industry Survey; Dairy Australia

Total milk production declined for small and large farms between 1999–2000 and 2013–14 (by 49 per cent and 4 per cent, respectively) and rose by an estimated 30 per cent for medium farms. At the farm level, the average volume of milk produced by small farms increased by 44 per cent, while the averages for medium and large farms increased by 22 per cent and 9 per cent, respectively (Figure 2).

For small farms, the increase in average milk production was a result of more cows being milked (by 11 per cent) and higher average milk yields (by 30 per cent) (Figure 3 and Figure 4). Average cow numbers and milk yields also increased for medium farms over the period (by 4 per cent and 17 per cent, respectively).

Large farms had greater variation in the average number of cows milked each year (with an overall decline of 1 per cent from 1999–2000 to 2013–14), while average milk yields increased by 11 per cent.

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Figure 2 Milk production, by herd size, Australia, 1999–2000 to 2013–14

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p Preliminary estimate. y Provisional estimate. Source: ABARES Australian Dairy Industry Survey

Figure 3 Cows milked, by herd size, Australia, 1999–2000 to 2013–14

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Figure 4 Milk yield per cow, by herd size, Australia, 1999–2000 to 2013–14

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3 Financial performance Farm cash income Australian dairy farm incomes have fluctuated widely since 1999–2000 (Figure 5), reflecting changes in world prices for traded dairy products, the effects of varying seasonal conditions on milk production, and the cost of farm inputs. Farm cash income is a measure of the cash funds generated by a farm business for farm investment and personal consumption after paying all costs incurred in production, including interest payments, but excluding capital payments and payments to family workers.

Figure 5 Farm cash income, Australian dairy farms, 1988–89 to 2013–14

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In 2012–13 farm cash incomes decreased for dairy farms in all regions as a result of lower milk receipts. This reflected reductions in farmgate milk prices and milk production, and increased cash costs, driven mainly by increased expenditure on fodder. At the national level, average farm cash income declined from $143 360 in 2011–12 to $44 040 in 2012–13 (Table 1). An estimated 33 per cent of dairy farms recorded negative farm cash incomes in 2012–13.

In 2013–14 average farm cash incomes are estimated to have rebounded strongly, with large increases in milk prices for dairy farmers in southern New South Wales, South Australia, Victoria and Tasmania, and smaller increases for producers in other states and regions. As a consequence, average farm cash income of Australian dairy farms is estimated to have increased to $129 200 in 2013–14, around 29 per cent above the 10-year average to 2012–13. Incomes are estimated to have increased strongly in all dairy regions in 2013–14 except in the northern New South Wales and Queensland region, where incomes fell slightly because of higher expenditure on fodder because of dry seasonal conditions (see tables in Appendix A).

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Table 1 Financial performance estimates, Australian dairy farms, 2011–12 to 2013–14

Financial performance measure unit 2011–12 2012–13 2013–14p

Farm cash income $ 143 364 (10) 44 040 (27) 129 200 (11)

Farm business profit $ 64 956 (24) –33 570 (28) 48 000 (25)

Rate of return

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– including capital appreciation % 0.7 (147) 0.7 (88) na –

p Preliminary estimate. y Provisional estimate. na Not available. Note: Figures in parentheses are standard errors expressed as a percentage of the estimate. Source: ABARES Australian Dairy Industry Survey

Farm incomes by herd size Farmgate milk prices have varied considerably since 1999–2000 (Figure 6). Reflecting relative changes in the number of cows milked, milk production per cow and farmgate milk prices, total milk receipts per farm increased by 65 per cent for small farms from 1999–2000 to 2013–14 (in 2013–14 dollars), compared with 48 per cent and 44 per cent for medium and large farms, respectively (Figure 7).

Figure 6 Milk receipts per litre, by herd size, Australia, 1999–2000 to 2013–14

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Figure 7 Milk receipts per farm, by herd size, Australia, 1999–2000 to 2013–14

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Over the past decade annual changes in farm cash income by herd size have been greater (in both percentage and absolute terms) for large farms than for small or medium dairy farms (Figure 8). However, large farms, and to a lesser extent medium farms, have been able to take advantage of periods of favourable milk prices and production conditions to record well-above average farm incomes in some years. Incomes of small farms have remained modest because of their lower capacity to increase milk production when seasonal conditions are favourable.

Figure 8 Farm cash income, by herd size, Australia, 1999–2000 to 2013–14

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Farm business profit Farm business profit is a measure of longer term profitability that accounts for capital depreciation, payments to family workers, and changes in inventories of livestock, fodder and grain held on farm.

At the national level, non-cash allowances for depreciation and family labour have been relatively steady over the period from 1999–2000 to 2013–14, at an average of around $80 000 for each farm (in 2013–14 dollars). As a consequence, changes in farm business profit closely reflect changes in farm cash income.

Over the period since 1999–2000, the proportion of dairy farms recording negative farm business profits has fluctuated as farm incomes have changed (Figure 9). A higher proportion of small farms have had negative farm business profits in each year than medium or large farms (Figure 10), reflecting the lower incomes of small farms.

Negative farm business profit means a farm has not covered the costs of unpaid family labour or set aside funds to replace depreciating farm assets. While many farms record negative farm business profits from time to time as their incomes fluctuate, ongoing low or negative profits affect longer term farm viability because farms have reduced capacity to invest in newer and more efficient technologies. Even in years when farm incomes have been high, around one-third of dairy farms have recorded a farm business loss, with many of these being small farms.

Figure 9 Percentage of dairy farms with negative farm business profit, 1999–2000 to 2013–14

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Figure 10 Percentage of farms with negative farm business profit, by herd size, Australia, 1999–2000 to 2013–14

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Off-farm income To supplement farm incomes, and in some cases to help offset low farm profitability, many dairy farmers access some form of off-farm income each year, including wages and salaries, off-farm sharefarming, government assistance and non-farm investments. Over the three years to 2012‒13 around 80 per cent of dairy farmers had off-farm income. Across the entire industry, average off-farm income increased from around $12 000 in 1999–2000 to an estimated average of $27 000 in 2005–06, before declining slightly in subsequent years (Figure 11). When off-farm income is added to farm business profit, around 10 per cent fewer farms record negative profits in most years.

Figure 11 Off-farm income, Australian dairy farms, 1999–2000 to 2013–14

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Return on capital Measures of return on capital are important indicators of the economic performance of farm businesses and the incentives for farmers to continue investing in the industry. Over the period from 2000–01 to 2007–08 the average rate of return to total farm capital for dairy farms was relatively high when capital appreciation was included (Figure 12). During most of the 2000s strong demand for rural land resulted in land values rising in most regions, which increased the total capital value of dairy farms (Figure 13) and, consequently, rates of return including capital appreciation. These relatively strong rates of return including capital appreciation are likely to have encouraged some farmers to remain in the industry in anticipation of future capital gains, despite low or negative farm business profits. However, reported land values declined in a number of regions in 2008–09, resulting in substantially lower average rates of return to total farm capital including capital appreciation for dairy farms.

When capital appreciation is excluded, changes in rates of return to capital have been more modest. Over the 10 years to 2013–14 the average rate of return to capital (excluding capital appreciation) for Australian dairy farms was 2.1 per cent. In 2012–13 the average rate of return (excluding capital appreciation) declined to an estimated 0.9 per cent as farm incomes fell, but increased to 3.1 per cent in 2013–14.

Figure 12 Return on capital, Australian dairy farms, 1999–2000 to 2013–14

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Figure 13 Total farm capital, Australian dairy farms, 1999–2000 to 2013–14

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Changes in rates of return by herd size reflect the relative magnitudes of changes in farm incomes and profits for each group. While returns excluding capital appreciation are generally lower for small farms in most years (Figure 14), returns are much more comparable across the size groups when capital appreciation is included (Figure 15). This reflects the proximity of many smaller dairy farms to urban centres or coastal regions, where there are generally higher land values than in other inland dairy regions.

Figure 14 Rate of return excluding capital appreciation, by herd size, Australia, 1999–2000 to 2013–14

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Figure 15 Rate of return including capital appreciation, by herd size, Australia, 1999–2000 to 2013–14

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4 Debt and investment Farm debt and equity Funding to expand and improve family farms is usually limited to the profits generated by the farm business, funds available to the family, and the funds it can borrow from external sources. Debt is an important source of funds for farm investment and ongoing working capital as most dairy farms are family owned and operated with limited access to other funding sources.

In the early to mid 2000s, lower interest rates and increased lending contributed to the rise in land prices discussed in chapter 3. In turn, this raised farm equity (net wealth) and induced lenders to provide more finance to farmers. The resulting increase in borrowings continued in some regions until around 2009–10. In addition, some dairy farmers’ capacity to service debt was supported by interest subsidies that were provided to farmers in drought through the government’s exceptional circumstances arrangements.

Farm cash incomes of dairy farmers have been highly variable over the past decade. Mechanisms used by farm businesses to manage income variability include holding liquid financial assets (such as farm management deposits) and maintaining high farm equity to provide a reserve of credit (such as an overdraft) to manage income downturns. Maintaining a credit reserve avoids costs of liquidating farm assets to meet cash demands in times of adversity, such as drought, and then reacquiring those assets once the adversity has passed.

A lender’s willingness to provide loans is critical to farms maintaining credit reserves. Financial institutions lend to farm businesses based on the equity farmers have in their businesses and their capacity to service increased debt in the long term. Most businesses that institutional lenders allow to operate with an equity ratio of less than 70 per cent are large operations that mostly generate high farm cash incomes or have access to substantial off-farm assets or income.

Average dairy farm debt increased from $345 000 in 2000–01 to $747 000 in 2013–14 in real terms (Figure 16). Increased borrowing by individual farms for land purchases or new on-farm infrastructure and equipment contributed to the increase in average debt. Demand for ongoing working capital also rose with increases in average herd size and the mechanisation and intensification of dairy enterprises. In addition, the increase in average debt was partly a result of increases in average farm size as smaller farms left the industry. Because many of these farms had little or no debt, their exit raised the average for remaining farms.


13

Figure 16 Farm business debt, Australian dairy farms, 1999–2000 to 2013–14

average per farm


In 2012–13 average farm debt for the dairy industry rose by around 9 per cent as a result of increased working capital debt that was largely used to purchase fodder because of dry seasonal conditions. Higher farm incomes and improved seasonal conditions in 2013–14 meant a reduced need for working capital and many farmers reduced this component of their debt.

However, the changes in average debt over time have been modest relative to dairy farmers’ capacity to service debt by generating income. For example, while average debt more than doubled between 1999–2000 and 2013–14, average debt relative to milk production increased by 19 per cent (in real terms) and average debt relative to total farm cash receipts remained relatively steady over the period (Figure 17).

Figure 17 Ratio of debt to receipts and milk produced, Australian dairy farms, 1999–2000 to 2013–14

average per farm


2013–14 $’000

100

200

300

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800

900

index

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Ratio of debt per litre of milk produced

Ratio of debt to total cash receipts


14

Most of the increase in debt of dairy farms over the past decade, in aggregate and on average, was for large dairy farms (Figure 18). There were much smaller increases in average debt for small dairy farms over the period from 1999–2000 to 2013–14.

Figure 18 Farm business debt, by herd size, Australia, 1999–2000 to 2013–14

average per farm


Farm equity ratio is a measure of farmers’ exposure to debt. Financial institutions that lend to farm businesses take into account the equity farmers have in their business as well as the capacity of the business to service existing or increased debt. At the national level, the average equity ratio of dairy farms has remained relatively steady at around 80 per cent over the period from 1999–2000 to 2012–13 (Figure 19). Equity ratios are typically lower for larger farms because they are generally able to service larger debt (Figure 20).

Figure 19 Farm business equity ratio, Australian dairy farms, 1999–2000 to 2012‒13

average per farm

p Preliminary estimate. Source: ABARES Australian Dairy Industry Survey

2013–14 $’000

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15

Figure 20 Farm business equity, by herd size, Australia, 1999–2000 to 2012–13

average per farm


The capacity to service debt by making interest and principal repayments is an important part of farm viability. On average, around 9 per cent of dairy farm cash receipts were used to make interest payments over the 10 years to 2012–13. This proportion declined slightly over the period from 2009–10 to 2012–13 because of higher farm receipts and reduced interest rates (Figure 21).

Figure 21 Ratio of interest payments to total cash receipts, Australian dairy farms, 1999–2000 to 2013–14

average per farm


%102030405060708090

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16

Farm investment Investment in farm capital (in the form of land, fixed structures, livestock, plant and equipment) is important to all aspects of farm business management, including financial performance, production efficiency and farm productivity. Dairy farmers combine capital items with other farm inputs, such as labour, fertiliser and livestock, to produce milk and a range of other agricultural outputs.

New investments typically allow farmers to replace capital items that have deteriorated and/or outlived their useful life with newer items. Most investments—particularly those in land and fixed on-farm infrastructure—are usually made with longer term outcomes in mind and based on expected returns over the life of the investment.

Farmers are motivated to make new investments by factors affecting relative net returns from the alternative options available, expectations about future profitability, existing debt and debt servicing requirements, farm business liquidity and access to non-farm income.

Dairy farmers’ capacity to generate farm income is influenced by their past investments in land, farm infrastructure and plant and machinery. Only a relatively small proportion of farms buy land in any one year, but most producers make some annual investment in plant, vehicles, machinery and/or infrastructure. On average, around 60 per cent of dairy farms each year made additions to total capital over the 10 years to 2012–13 (Figure 22). Average farm capital investment increased over the period (Figure 23).

Figure 22 Percentage of dairy farms making capital additions, Australia, 1999–2000 to 2012–13

average per farm


%

10

20

30

40

50

60

70

80


17

Figure 23 Net capital additions, Australia, 1999–2000 to 2012–13

average per farm


Net capital investment for dairy farms peaked in 2008–09 as farm cash incomes were historically high. The government’s investment allowance also encouraged investment in plant, vehicles, machinery and farm infrastructure. Much of this new investment was by larger and better performing dairy farms (Figure 24).

Figure 24 Net capital additions, by herd size, Australia, 1999–2000 to 2012–13

average per farm


2013–14 $’00020406080

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18

5 Dairy technologies and management practices

Since the early 1990s new technologies and management practices have contributed to growth in dairy industry farm productivity. To monitor the rate of adoption, ABARES conducts a biennial survey of the use of technology and management practices on Australian dairy farms in conjunction with the annual Australian Dairy Industry Survey. By combining these surveys, data on the use of technology and management practices can be linked with data on farm physical and financial performance.

In the 2012–13 dairy technology survey, information was obtained from dairy farmers on milking shed layouts, shed equipment and management, feeding regimes, fodder conservation, soil testing, herd and farm management, participation in training courses and extension projects, and intended changes in farm management.

This chapter includes a summary of results from the most recent dairy technology survey, and compares these results with trends from the previous surveys.

Overall, the results of the survey show that dairy farmers have responded to changing circumstances in the industry by adopting a range of new technologies and management practices. Although it is difficult to attribute the cause and effect of various changes, increasing farm size and more intensive dairy production over the past two decades are closely related to the adoption of many technologies (Ashton et al. 2014).

Milking shed technologies In a recent ABARES study (Ashton et al. 2014) changes to milking shed technologies were identified as a key driver of past productivity growth on Australian dairy farms. According to data collected in the ABARES Australian Dairy Industry Survey, many farms upgraded milking equipment around the time of industry deregulation in 2000, possibly as a result of financial assistance provided by the Australian Government to help the industry adjust. Most changes to milking shed technology occurred within three years of deregulation (Harris 2005).

Improved milking shed layouts have contributed to productivity growth on dairy farms by reducing the time taken for milking and, in turn, the quantity of labour required (Ashton et al. 2014). Some dairy farms are likely to have realised productivity improvements through economies of scale by expanding their herd size and replacing older, smaller milking sheds with higher capacity ones.

Milking shed layout Since the early 1990s there has been a general trend toward installing or improving milking sheds and equipment to improve labour use efficiency and to cater for large-scale milk production. The ABARES dairy technology survey shows increases in the proportion of herringbone and rotary milking sheds since the early 1990s, but fewer walkthrough sheds (Figure 25).


19

Figure 25 Percentage of dairy farms by type of milking shed, 1991–92 to 2012–13

percentage of farms

p Preliminary estimate. Source: ABARES

Herringbone (swingover and double) and rotary sheds provide improved layouts for higher cow throughput relative to older-style walkthrough sheds. Rotary sheds in particular are better suited to handling larger dairy herds and have become increasingly common on large dairy farms (Figure 26). The number of farms with walkthrough sheds has declined because many small dairy farms that had this older type of shed have exited the industry, and some sheds have been converted to more modern herringbone or rotary layouts.

Figure 26 Percentage of dairy farms by type of milking shed, 1993–94 to 2012–13

percentage of farms


Automated milking The equipment used in milking sheds has moved increasingly toward automated technologies, including automatic cup removers, automatic drafting and automated cleaning. Medium and large farms tend to have more automated technologies than smaller farms (Table 2).

0%10%20%30%40%50%60%70%80%90%

100%rotary

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walkthrough

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20

These technologies have allowed farmers to reduce their labour use without affecting milk output. Increasing the labour efficiency of milking can significantly affect productivity because around half of total farm labour is spent milking. In addition, information collected via automated equipment, such as milk meters, electronic cow identification and herd management software, has enabled farmers to better manage cow health and feeding requirements. This has also indirectly contributed to productivity growth.

Table 2 Dairy characteristics, by farm size, Australian dairy farms, 2012–13

Dairy characteristics Unit Less than 200 cows milked

200–350 cows milked

More than 350 cows

milked

Total number of bails no. 20 30 51

Number of cows milked no. 136 262 642

Automatic vat and milking plant cleaning % 53 83 89

Automatic cup removers % 36 56 61

Automatic teat disinfectant spray system % 14 32 47

Automatic milk meters % 11 13 35

Automatic drafting gates % 16 22 55

Computerised feeding % 8 20 54

Individual cow weighing facilities % 3 8 5

Milking time

Time bringing cows in hours 1.1 1.1 1.4

Time taken for milking hours 2.2 2.5 3.7

Time taken for cleaning hours 1.0 1.4 1.4

Total hours hours 4.3 4.9 6.5

Number of operators no. 1.7 1.8 2.4 Source: ABARES

Feeding systems The mix of calving patterns and feeding systems used by dairy farmers has implications for farm input use and, hence, productivity and profitability. The choice of calving pattern is affected, in part, by climate, landscape and the seasonal availability of feed. In some cases pricing incentives and milk supply contract arrangements may make some combinations of calving patterns and feeding systems more attractive than others.

The dairy technology survey included a set of questions on feeding and pasture management practices. Most dairy farmers supplement pasture production with grain or concentrates, with around two-thirds of farmers feeding more than 1 tonne of supplements each year (Table 3). The results show little difference by farm size in pasture and feeding management.


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Table 3 Feeding and pasture management, by farm size, Australian dairy farms, 2012–13

Feeding and pasture management Unit Less than 200 cows milked

200–350 cows milked

More than 350 cows

milked

System used to support grazing management

Stage of growth % 25 28 36

Height of pasture or quantity of dry matter % 19 24 27

Rotation Right or similar tool % 41 46 39

Other % 16 7 10

Tools used to assess pasture quality

Rising plate meter % 2 2 11

Electronic plate meter % 2 0 0

Motor bike pasture meter % 2 2 2

Other pasture meter % 28 34 37

None % 63 54 47

Pasture and feeding

Measure level of pasture consumption % 9 22 38

Supplementary feeding % 92 94 96

Individual cow feeding % 23 16 45

Pasture only % 6 0 1

Less than 1 tonne supplementary feeding % 13 14 13

More than 1 tonne supplementary feeding % 64 68 68

Partial mixed ration % 11 7 10

Total mixed ration % 2 2 1

Other % 2 2 1 Source: ABARES

Calving patterns Dairy farmers typically choose calving patterns to maximise their profitability, subject to seasonal price incentives, feed supply and other factors. Calving patterns commonly range from seasonal to year-round (Box 1), with the mix of these varying within and among the regions. The calving pattern chosen determines the seasonal demand for feed and the quantity of other inputs required to produce annual milk output.

Box 1 Common calving patterns

Seasonal calving: Most cows are calved within a single period from either July to November or March to June. For a spring calving, seasonal milk production peaks in spring, before gradually tapering off over summer and autumn. Cows are dried off for a period through winter. For an autumn calving, seasonal milk production peaks in autumn, before gradually tapering off over winter and spring. Cows are dried off for a period through summer. Split calving: Cows are calved in batches, usually one group in spring and the remainder in autumn. Split calving ‘smooths’ milk production through the year because there are two peaks in production, and less of a drop in production out of season compared with seasonal calving. Year-round calving: Cows may be calved continuously throughout the year or in batches periodically through the year. Milk production is relatively constant throughout the year.


22

Some calving systems are inherently more input intensive than others. However, ABARES analysis (Ashton et al. 2014) has shown that the way individual farmers manage these systems in their own particular operating environment is a more important determinant of farm productivity and profitability.

Survey results indicate the combination of calving systems used differs slightly for each size group. Smaller farms tend to use either seasonal or year-round calving, with fewer farms using split calving. Year-round calving was most common across all size categories (Figure 27).

Figure 27 Calving system, by farm size, 2012–13

percentage of farms


Supplementary feeding Since the early 1990s Australian dairy farmers have increasingly supplemented pasture-based production by feeding grains and concentrates to dairy cattle. The proportion of farmers using concentrates or grains increased from an estimated 81 per cent in 1991–92 to 92 per cent in 2012–13. The average quantity of purchased grains and concentrates used by dairy farms in 2012–13 was 386 tonnes, nearly three times higher than the average in 1991–92. The average quantity of grains and concentrates used per cow also increased, from around 0.9 tonnes in 1991–92 to an estimated 1.7 tonnes per head in 2012–13.

In 2012–13 most dairy farmers indicated that the primary reason for feeding concentrates, grains and by-products was to increase milk production by achieving higher milk yield per cow. Other reasons for supplementary feeding included to fill shortfalls in pasture quality and quantity, or to assist in pasture management.

The proportion of farms purchasing hay or silage has fluctuated from year to year, partly reflecting changing seasonal conditions, pasture quality and quantity, and prices for hay or silage. For example, around 68 per cent of farms purchased hay or silage in the drought year of 2006–07, while 58 per cent of farms purchased hay or silage in 2012–13.

The use of grains and concentrates to supplement pasture-based feeding has become an increasingly large component of dairy farm inputs in recent decades (Figure 28). At the same

%

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Less than 200 cows milked 200 to 350 cows milked More than 350 cows milked

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23

time, there has been greater attention to the nutritional value of various feed mixes, both of which have resulted in higher average milk yields per cow.

Although dairy farming in Australia is largely pasture-based, supplementary feeding is widely practised across all regions. The quantity of supplementary feed used per cow is highest in those regions where a high proportion of farms supply milk on a year-round basis. Also, farmers in regions that have less reliable rainfall (Murray, Subtropical, New South Wales and Western Australia) tend to use greater quantities of conserved or purchased fodder to meet seasonal pasture shortfalls. Those regions with relatively consistent annual rainfall and more seasonal milk supply (Tasmania, Gippsland, Western Victoria and South Australia) tend to have a higher proportion of pasture in their feed mix than the other regions.

Figure 28 Grains and concentrates fed per cow, 1991–92 to 2012–13


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Appendix A Selected estimates by region Table A1 Selected estimates, dairy farms, Northern NSW and Queensland

average per farm Selected estimates unit 2012–13p 2013–14y

Area of land operated 30 June ha 303 (9) 316 (10)

Dairy herd at 30 June no. 287 (4) 298 (4)

Cows milked 3 months no. 143 (3) 149 (4)

Milk production L 787 534 (4) 792 362 (4)

Milk production per cow L 5 523 (4) 5 329 (5)

Total milk receipts $ 403 127 (4) 414 400 (4)

Dairy cattle sales $ 25 594 (11) 22 118 (9)

Beef cattle sales $ 8 122 (39) 9 802 (57)

Crop receipts $ 1 942 (56) 3 527 (66)

Total cash receipts $ 452 024 (4) 466 727 (4)

Dairy cattle purchases $ 5 800 (25) 6 618 (66)

Hired labour $ 29 302 (15) 29 261 (17)

Fertiliser $ 18 979 (10) 21 295 (11)

Fodder $ 148 214 (7) 163 700 (9)

Fuel, oil and lubricants $ 17 550 (16) 19 397 (16)

Electricity $ 15 267 (9) 15 335 (10)

Repairs and maintenance $ 24 928 (7) 25 142 (8)

Interest payments $ 22 557 (15) 24 115 (15)

Rent $ 6 739 (24) 6 114 (29)

Total cash costs $ 384 648 (4) 403 317 (5)

Farm cash income $ 67 376 (19) 63 409 (30)

plus build-up in trading stocks $ 11 520 (45) 21 661 (6)

less depreciation $ 33 305 (8) 35 285 (9)

less owner/manager & family labour $ 64 990 (6) 67 651 (8)

Farm business profit $ –19 399 (60) –17 865 (109)

Rate of return a % 0.4 (99) 0.5 (144)

Rate of return b % –2.4 (111) na –

Farm debt at 30 June $ 318 935 (15) 366 222 (16)

Equity ratio at 30 June % 89 (2) na –

Off-farm income $ 17 038 (24) na – a Excluding capital appreciation. b Including capital appreciation. p Preliminary estimate. y Provisional estimate. na Not available. Note: Figures in parentheses are standard errors expressed as a percentage of the estimate. Source: ABARES Australian Dairy Industry Survey


25

Table A2 Selected estimates, dairy farms, Northern Victoria and Riverina





Total labour weeks worked wks 130 (10) na –

Milk production L 1 302 724 (14) 1 306 955 (12)





Crop receipts $ 3 967 (80) 4 833 (81)



Hired labour $ 31 072 (16) 35 234 (19)

Fertiliser $ 18 040 (25) 19 337 (21)

Fodder $ 131 828 (16) 150 557 (15)


Electricity $ 13 795 (12) 14 374 (12)



Rent $ 5 486 (41) 5 913 (50)

Total cash costs $ 487 623 (12) 524 355 (11)

Farm cash income $ 79 720 (38) 169 323 (22)



less owner manager and family labour $ 58 270 (8) 60 774 (10)

Farm business profit $ 9 434 (242) 90 686 (37)

Rate of return a % 2.4 (29) 5.5 (21)

Rate of return b % 2.1 (51) na –

Farm debt at 30 June $ 649 825 (13) 644 987 (18)




26

Table A3 Selected estimates, dairy farms, Tasmania











Crop receipts $ 48 397 (53) 98 954 (49)

Total cash receipts $ 804 604 (7) 1 023 527 (8)


Hired labour $ 55 096 (12) 58 693 (13)

Fertiliser $ 65 057 (13) 69 618 (13)

Fodder $ 168 252 (12) 184 185 (12)


Electricity $ 36 113 (12) 37 393 (13)



Rent $ 26 702 (30) 31 468 (32)

Total cash costs $ 769 893 (9) 813 225 (10)

Farm cash income $ 34 711 (89) 210 301 (19)

plus build-up in trading stocks $ –2 267 (490) 27 626 (7)



Farm business profit $ –73 450 (41) 123 696 (32)

Rate of return a % 1.3 (40) 5.0 (16)


Farm debt at 30 June $ 1 635 676 (14) 1 671 335 (19)




27

Table A4 Selected estimates, dairy farms, Western Australia











Crop receipts $ 2 286 (87) 2 632 (85)

Total cash receipts $ 1 002 663 (8) 998 562 (8)


Hired labour $ 77 963 (15) 75 958 (14)

Fertiliser $ 76 432 (15) 81 799 (14)

Fodder $ 239 295 (11) 263 721 (10)


Electricity $ 32 754 (11) 31 656 (12)



Rent $ 19 591 (15) 17 150 (17)

Total cash costs $ 869 290 (9) 860 356 (8)

Farm cash income $ 133 374 (22) 138 206 (25)




Farm business profit $ 75 715 (36) 21 972 (158)

Rate of return a % 1.8 (22) 1.1 (34)


Farm debt at 30 June $ 1 106 105 (19) 1 007 927 (17)




28

Table A5 Selected estimates, dairy farms, South Australia











Crop receipts $ 8 589 (61) 10 728 (58)



Hired labour $ 69 226 (13) 73 782 (13)

Fertiliser $ 42 617 (12) 48 042 (11)

Fodder $ 205 289 (9) 197 300 (9)


Electricity $ 26 722 (9) 28 006 (11)



Rent $ 7 243 (28) 7 255 (30)

Total cash costs $ 716 312 (5) 717 205 (5)

Farm cash income $ 88 680 (31) 189 086 (20)





Rate of return a % 1.2 (53) 3.4 (22)


Farm debt at 30 June $ 1 103 110 (17) 1 050 632 (15)




29

Table A6 Selected estimates, dairy farms, Gippsland











Crop receipts $ 1 842 (142) 2 230 (140)



Hired labour $ 18 704 (106) 16 616 (107)

Fertiliser $ 22 754 (102) 22 385 (99)

Fodder $ 121 485 (46) 129 333 (45)


Electricity $ 11 747 (33) 10 782 (33)



Rent $ 9 777 (54) 8 971 (55)

Total cash costs $ 424 315 (47) 414 916 (43)

Farm cash income $ 27 269 (82) 97 445 (35)





Rate of return a % 0.7 (125) 2.4 (40)


Farm debt at 30 June $ 629 822 (14) 614 063 (14)




30

Table A7 Selected estimates, dairy farms, Western Victoria











Crop receipts $ 0 – 0 –



Hired labour $ 23 389 (43) 25 706 (44)

Fertiliser $ 47 792 (17) 47 322 (20)

Fodder $ 173 975 (15) 185 541 (12)


Electricity $ 10 979 (17) 11 601 (15)



Rent $ 39 152 (69) 32 165 (71)

Total cash costs $ 601 808 (10) 604 746 (10)

Farm cash income $ –15 488 (197) 113 174 (26)





Rate of return a % –0.1 (861) 3.0 (11)

Rate of return b % –0.2 (847) na –

Farm debt at 30 June $ 1 006 396 (18) 1 043 438 (17)




31

Table A8 Selected estimates, dairy farms, Southern and Central New South Wales











Crop receipts $ 17 (98) 962 (98)



Hired labour $ 48 200 (12) 45 511 (11)

Fertiliser $ 29 708 (13) 35 815 (13)

Fodder $ 193 296 (5) 211 350 (7)


Electricity $ 28 512 (9) 28 403 (10)



Rent $ 10 462 (27) 12 296 (29)

Total cash costs $ 621 438 (5) 633 121 (5)

Farm cash income $ 70 271 (30) 134 403 (20)





Rate of return a % 1.2 (45) 2.1 (29)


Farm debt at 30 June $ 698 748 (15) 667 608 (15)




32

Survey methods and definitions ABARES has conducted surveys of selected Australian agricultural industries since the 1940s. These surveys provide a broad range of information on the economic performance of farm business units in the rural sector. This comprehensive dataset is used for research and analysis that forms the basis of many publications, briefing material and industry reports. Since 1978–79 ABARES has conducted the annual Australian Dairy Industry Survey to provide a set of data that are collected nationally using a consistent methodology.

Target populations ADIS covers farms that are engaged in dairying. The population list for ADIS is derived from farms that have paid levies based on their milk deliveries. This list is provided to ABARES by Dairy Australia and consists of dairy businesses with their corresponding region and total milk production. The design measure for ADIS is total milk production for each dairy business on the frame.

ABARES surveys target farming establishments that make a significant contribution to the total value of agricultural output (commercial farms). Farms excluded from ABARES surveys will be the smallest units, which in aggregate will contribute less than 2 per cent to the total value of agricultural production for the industries covered by the surveys.

The size of operation variable used in ABARES survey designs is usually ‘estimated value of agricultural operations’ (EVAO). However, in some surveys in recent years other measures of agricultural production have also been used. EVAO is a standardised dollar measure of the level of agricultural output. A definition of EVAO is given in Agricultural industries: financial statistics (ABS 2001). Since 2004‒05 the ABARES survey has included establishments classified as having an EVAO of $40 000 or more. Between 1991‒92 and 2003‒04 the survey included establishments with an EVAO of $22 500 or more. Between 1987‒88 and 1991‒92 the survey included establishments with an EVAO of $20 000 or more. Before 1986‒87 the survey included establishments with an EVAO of $10 000 or more.

Survey design The target population is grouped into strata defined by ABARES region and size of operation. The sample allocation is a compromise between allocating a higher proportion of the sample to strata with high variability in the size variable and an allocation proportional to the population of the stratum.

A large proportion of sample farms is retained from the previous year’s survey. The sample chosen each year maintains a high proportion of the sample between years to accurately measure change while meeting the requirement to introduce new sample farms. New farms are introduced to account for changes in the target population, as well as to reduce the burden on survey respondents.

The sample size for ADIS is around 300.

The main method of collecting data is face-to-face interviews with the owner–manager of the farm business. Detailed physical and financial information is collected on the operations of the farm business during the preceding financial year. Respondents to ADIS are also contacted by telephone in October each year to obtain estimates of projected production and expected receipts and costs for the current financial year. ABARES surveys also allow supplementary


33

questionnaires to be attached to the main survey or to the telephone surveys. These additional questions help address specific industry issues—such as livestock management practices and adoption of new technologies on dairy farms.

Sample weighting ABARES survey estimates are calculated by appropriately weighting the data collected from each sample farm and then using the weighted data to calculate population estimates. The weighting methodology for ADIS uses a model-based approach, with a linear regression model linking the survey variables and the estimation benchmark variables. The details of this method are described in Bardsley and Chambers (1984).

For ADIS, the benchmark variables provided by Dairy Australia are:

· total number of in-scope dairy farms

· total milk production.

Generally, larger farms have smaller weights and smaller farms have larger weights. This reflects the strategy of sampling a higher fraction of larger farms than smaller farms and the relatively lower number of large farms. Large farms have a wider range of variability of key characteristics and account for a much larger proportion of total output.

Reliability of estimates The reliability of the estimates of population characteristics published by ABARES depends on the design of the sample and the accuracy of the measurement of characteristics for the individual sample farms.

Preliminary estimates and projections Estimates for 2011‒12 and all earlier years are final. All data from farmers, including accounting information, have been reconciled; final production and population information from the ABS has been included and no further change is expected in these estimates.

The 2012‒13 estimates are preliminary, based on full production and accounting information from farmers. However, editing and addition of sample farms may be undertaken and ABS production and population benchmarks may also change.

The 2013‒14 estimates are projections developed from the data collected through on-farm and telephone interviews from October to December, and from the preliminary estimates. Projection estimates include crop and livestock production, receipts and expenditure up to the date of interview together with expected production, and receipts and expenditure for the remainder of the projection year. Modifications are made to expected receipts and expenditure where significant production and price change has occurred post interview. Projection estimates are necessarily subject to greater uncertainty than preliminary and final estimates.

Preliminary and projection estimates of farm financial performance are produced within a few weeks of the completion of survey collections. However, these may be updated several times at later dates. These subsequent versions will be more accurate because they will be based on upgraded information and slightly more accurate input datasets.


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Sampling errors Only a subset of farms out of the total number of farms in a particular industry is surveyed. The data collected from each sample farm are weighted to calculate population estimates. Estimates derived from these farms are likely to be different from those that would have been obtained if information had been collected from a census of all farms. Any such differences are called ‘sampling errors’.

The size of the sampling error is influenced by the survey design and the estimation procedures, as well as the sample size and the variability of farms in the population. The larger the sample size, the lower the sampling error is likely to be. Hence, national estimates are likely to have lower sampling errors than industry and state estimates.

To give a guide to the reliability of the survey estimates, standard errors are calculated for all estimates published by ABARES. These estimated errors are expressed as percentages of the survey estimates and termed ‘relative standard errors’.

Calculating confidence intervals using relative standard errors Relative standard errors can be used to calculate ‘confidence intervals’ that give an indication of how close the actual population value is likely to be to the survey estimate.

To obtain the standard error, multiply the relative standard error by the survey estimate and divide by 100. For example, if average total cash receipts are estimated to be $100 000 with a relative standard error of 6 per cent, the standard error for this estimate is $6000. This is one standard error. Two standard errors equal $12 000.

There is roughly a two-in-three chance that the ‘census value’ (the value that would have been obtained if all farms in the target population had been surveyed) is within one standard error of the survey estimate. This range of one standard error is described as the 66 per cent confidence interval. In this example, there is an approximately two-in-three chance that the census value is between $94 000 and $106 000 ($100 000 plus or minus $6000).

There is roughly a 19-in-20 chance that the census value is within two standard errors of the survey estimate (the 95 per cent confidence interval). In this example, there is an approximately 19-in-20 chance that the census value lies between $88 000 and $112 000 ($100 000 plus or minus $12 000).

Comparing estimates When comparing estimates between two groups, it is important to recognise that the differences are also subject to sampling error. As a rule of thumb, a conservative estimate of the standard error of the difference can be constructed by adding the squares of the estimated standard errors of the component estimates and taking the square root of the result.

For example, suppose the estimates of total cash receipts were $100 000 in the dairy industry and $125 000 in the sheep industry—a difference of $25 000—and the relative standard error is given as 6 per cent for each estimate. The standard error of the difference can be estimated as:

A 95 per cent confidence interval for the difference is:

$25 000 ± 1.96*$9605 = ($6174, $43 826)


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Hence, if a large number (toward infinity) of different samples are taken, in approximately 95 per cent of them, the difference between these two estimates will lie between $6174 and $43 826. Also, since zero is not in this confidence interval, it is possible to say that the difference between the estimates is statistically significantly different from zero at the 95 per cent confidence level.


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Glossary Owner–manager The primary decision-maker for the farm business. This person is

usually responsible for day-to-day operation of the farm and may own or have a share in the farm business.

Physical items

beef cattle Cattle kept primarily for the production of meat, irrespective of breed.

dairy cattle Cattle kept or intended mainly for the production of milk or cream.

hired labour Excludes the farm business manager, partners and family labour and work by contractors. Expenditure on contract services appears as a cash cost.

labour Measured in work weeks, as estimated by the owner–manager or manager. It includes all work on the farm by the owner–manager, partners, family, hired permanent and casual workers and sharefarmers but excludes work by contractors.

total area operated Includes all land operated by the farm business, whether owned or rented by the business, but excludes land sharefarmed on another farm.

Financial items

capital The value of farm capital is the value of all the assets used on a farm, including the value of leased items but excluding machinery and equipment either hired or used by contractors. The value of ‘owned’ capital is the value of farm capital excluding the value of leased machinery and equipment.

ABARES uses the owner–manager’s valuation of the farm property. The valuation includes the value of land and fixed improvements used by each farm business in the survey, excluding land sharefarmed off the sample farm. Residences on the farm are included in the valuations.

Livestock are valued at estimated market prices for the land use zones within each state. These values are based on recorded sales and purchases by sample farms.

Before 2001‒02 ABARES maintained an inventory of plant and machinery for each sample farm. Individual items were valued at replacement cost, depreciated for age. Each year the replacement cost was indexed to allow for changes in that cost.

Since 2001‒02 total value of plant and machinery has been based on market valuations provided by the owner–manager for broad categories of capital, such as tractors, vehicles and irrigation plant.

The total value of items purchased or sold during the survey year was added to or subtracted from farm capital at 31 December of the


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relevant financial year, irrespective of the actual date of purchase or sale.

change in debt Estimated as the difference between debt at 1 July and the following 30 June within the survey year, rather than between debt at 30 June in consecutive years. It is an estimate of the change in indebtedness of a given population of farms during the financial year and is thus unaffected by changes in sample or population between years.

farm business debt Estimated as all debts attributable to the farm business but excluding personal debt, lease financed debt and underwritten loans, including harvest loans. Information is collected at the interview, supplemented by information contained in the farm accounts.

farm liquid assets Assets owned by the farm business that can be readily converted to cash. They include savings bank deposits, interest bearing deposits, debentures and shares. Excluded are items such as real estate, life assurance policies and other farms or businesses.

receipts and costs Receipts for livestock and livestock products sold are determined at the point of sale. Selling charges and charges for transport to the point of sale are included in the costs of sample farms.

Receipts for crops sold during the survey year are gross of deductions made by marketing authorities for freight and selling charges. These deductions are included in farm costs. Receipts for other farm products are determined on a farmgate basis. All cash receipt items are the revenue received in the financial year.

Farm receipts and costs relate to the whole area operated, including areas operated by on-farm sharefarmers. Thus, cash receipts include receipts from the sale of products produced by sharefarmers. If possible, on-farm sharefarmers’ costs are amalgamated with those of the sample farm. Otherwise, the total sum paid to sharefarmers is treated as a cash cost.

Some sample farm businesses engage in off-farm contracting or sharefarming, employing labour and capital equipment also used in normal on-farm activities. Since it is not possible to accurately allocate costs between off-farm and on-farm operations, the income and expenditure attributable to such off-farm operations are included in the receipts and costs of the sample farm business.

total cash costs Payments made by the farm business for materials and services and for permanent and casual hired labour (excluding owner–manager, partner and other family labour). It includes the value of livestock transfers onto the property as well as any lease payments on capital, produce purchased for resale, rent, interest, livestock purchases and payments to sharefarmers. Capital and household expenditures are excluded from total cash costs.

Handling and marketing expenses include commission, yard dues and


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levies for farm produce sold.

Administration costs include accountancy fees, banking and legal expenses, postage, stationery, subscriptions and telephone.

Contracts paid refers to expenditure on contracts such as harvesting. Capital and land development contracts are not included.

Other cash costs include stores and rations, seed purchased, electricity, artificial insemination and herd testing fees, advisory services, motor vehicle expenses, travelling expenses and insurance. While other cash costs may comprise a relatively large proportion of total cash costs, individually the components are relatively small overall and, as such, have not been listed.

total cash receipts Total of revenues received by the farm business during the financial year, including revenues from the sale of livestock, livestock products and crops, plus the value of livestock transfers off a property. It includes revenue received from agistment, royalties, rebates, refunds, plant hire, contracts, sharefarming, insurance claims and compensation, and government assistance payments to the farm business.

Financial performance measures

build-up in trading stocks

The closing value of all changes in the inventories of trading stocks during the financial year. It includes the value of any change in herd or flock size or in stocks of wool, fruit and grains held on the farm. It is negative if inventories are run down.

depreciation of farm improvements, plant and equipment

Estimated by the diminishing value method, based on the replacement cost and age of each item. The rates applied are the standard rates allowed by the Commissioner of Taxation. For items purchased or sold during the financial year, depreciation is assessed as if the transaction had taken place at the midpoint of the year. Calculation of farm business profit does not account for depreciation on items subject to a finance lease because cash costs already include finance lease payments.

farm business equity

The value of capital, less farm business debt, at 30 June. The estimate is based on those sample farms for which complete data on farm debt are available.

farm business profit

Farm cash income plus build-up in trading stocks, less depreciation and the imputed value of the owner–manager, partner(s) and family labour.

farm cash income The difference between total cash receipts and total cash costs.

farm equity ratio Calculated as farm business equity as a percentage of capital at 30 June.

imputed labour cost

Payments for owner–manager and family labour may bear little relationship to the actual work input. An estimate of the labour input of the owner–manager, partners and their families is calculated in work


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weeks and a value is imputed at the relevant Federal Pastoral Industry Award rates.

off-farm income Collected for the owner–manager and spouse only, including income from wages, other businesses, investment, government assistance to the farm household and social welfare payments.

profit at full equity Farm business profit, plus rent, interest and finance lease payments, less depreciation on leased items. It is the return produced by all the resources used in the farm business.

rates of return Calculated by expressing profit at full equity as a percentage of total opening capital. Rate of return represents the ability of the business to generate a return to all capital used by the business, including that which is borrowed or leased. The following rates of return are estimated: rate of return excluding capital appreciation; and rate of return including capital appreciation.


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References ABS 2013, Value of principal agricultural commodities produced, Australian Bureau of Statistics, cat. no. 7501.0, Canberra, available at www.abs.gov.au/ausstats/[email protected]/mf/7501.0.

ABS 2001, Agricultural industries, financial statistics, Australia, preliminary, 1999‒2000, cat. no. 7506.0, Australian Bureau of Statistics, Canberra, available at abs.gov.au/ausstats/[email protected]/cat/7506.0.

Ashton, D, Cuevas-Cubria, C, Leith, R & Jackson, T 2014, Productivity in the Australian dairy industry: pursuing new sources of growth, ABARES research report 14.11, Canberra, September.

Bardsley, P & Chambers, RL 1984, ‘Multipurpose estimation from unbalanced samples’, Journal of the Royal Statistical Society, Series C (Applied Statistics), vol. 33, pp.290–9.

Dairy Australia 2014, Dairy cows and farm numbers, available at www.dairyaustralia.com.au/Markets-and-statistics/Farm-facts/Cows-and-Farms.aspx.

Harris, D 2005, Industry adjustment to policy reform: A case study of the Australian dairy industry, report for the Rural Industries Research and Development Corporation, August.

http://www.abs.gov.au/ausstats/[email protected]/mf/7501.0

http://www.abs.gov.au/ausstats/[email protected]/cat/7506.0

http://www.dairyaustralia.com.au/Markets-and-statistics/Farm-facts/Cows-and-Farms.aspx

Australian dairy

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