Benchmarking: Measure it to be sure

BUSINESS BENCHMARKING

Measuring it,

to be sure

Words by: Dianna Malcolm

Numbers don’t lie, but which ones should dairy producers listen to?

Benchmarking statistics have just been released by MilkMaP Consulting for the 2020-2021 season for clients throughout the country with the results encouraging farmers to look deeper into measures of profitability.

Senior farm consultant Andrew Trounce says they have never dug so deep into the cost/benefits before, and his findings have thrown new light on some age-old debates.

The business focuses on milk, management and profitability, Trounce says, by analysing the cost structure of the business – and the impact of any proposed feeding/stocking rate changes.

COSTS CAN BE MISLEADING

While the industry is heavily weighted towards keeping costs down, this season’s findings are telling him a different story, Trounce says, and it has a different ending.

“We 100% agree that good cost control measures are important. But, it can be misleading to use farm working expenses on a per kilogram of milksolids (MS) as your only measure of profitability.

“Because, at the end of the day you might have done a really good job keeping that number low, but it could be reflecting a missed opportunity. You must ask yourself, ‘Does this cost contribute to improved production?’ Also, ‘What other impacts could restricting it have on my overall result on everything from production to Body Condition Score (BCS) to reproduction?’”

Trounce says the work is giving them a better understanding of their clients’ businesses, it is also giving their team validation for the company’s philosophy – that if cows are working close to (or at) their potential it will lift production per hectare. That, in turn, means more milk from fewer cows which creates a more efficient system because there will be less per cow fixed costs.

“If you own a farm your investment is in your land. Surely your measure of profitability should be against that hectare? So, how I look at it is, ‘What is your EBITD/ha (Earnings before Interest, Tax, and Depreciation)? If you have a big mortgage you need to know if you’re performing on that basis.”

MilkMaP’s senior farm consultant Andrew Trounce says New Zealand farmers are better positioned to deliver the best level of profitability for their farm by taking the time to understand the costs and key profit drivers (production/cow and therefore/ha).

With increasing compliance and regulation, the need for solid cash flow in times of uncertain payouts is also critical.

“Especially, given that farm values are unlikely to see the gains made in the past two decades going forward because of new regulation. Creating efficiencies and having strong performance within your system will be vital.”

MILKMAP BENCHMARKING

“Other industry systems will give you a quartile result or an average, but they don’t give you an idea around the spread of the farms, or a true understanding of the total picture,” Trounce says.

“Each farm that has agreed to be included in this season’s summary is identified by a number, and they can look themselves up and also further refine that selection by comparing themselves to other farms that might be in the same region, might also have a runoff, have irrigation or not, or winter milk premiums. So, it is comparing apples with apples.

“It’s about understanding the main profit drivers for your dairy business in a forever changing environment. We use this summary as a way to give our clients the scope to understand their own business within their own operation and against their direct peers. Information is power.”

The benchmarking supplies EOY summaries, which includes comparisons on all the main income/cost categories, the data breakdowns, the costs and profit per hectare, per cow, and per kg of MS. The reports are visual and numerical and show correlations between key performance criteria.

PRODUCTION PER COW DILUTES OVERHEADS

This year’s numbers clearly tell Trounce that additional and mindful production/ cow dilutes overhead costs.

The 10-year average milk price in New Zealand is $6.26/kg MS (2010-2020). The five-year average is $6.05/kg MS.

To achieve a more profitable system fully feeding cows at feeding systems 3-5, Trounce says the milk price needs to be above $5/kg MS. On the 2019-2020 season milk price, system 3-5 farms achieved almost $1000 more/ha than the farms on a 1-2 feeding system.

“This tells me – going on that 10-year average – that you should build your system towards a system 3 to 5 to be more profitable.

“We need to stress that it’s not all about maximising MS/cow, it has to be within reason with the cows’ bodyweight and the farm’s physical resources. It’s how well you implement a system, which will truly be the measure of how profitable you can be.

“It’s helpful to know how you got there. Farmers who might not be doing as well might wonder, ‘Are we spending a lot, or are we not producing enough so we can’t dilute our costs? Or, are we not investing enough into regrassing to grow the pasture required each year?’”

PRODUCTION LINKED TO PROFIT

Trounce believes maximising pasture growth – combined with the right supplementary feed when it’s needed – will help achieve better production outcomes and drive stronger financial results. “We understand that grass is king, and we understand all the other parts of that conversation that drives optimum profitability.” Last season MilkMaP’s clients (on average) lifted their production by 48kg MS/ha (+2.95%), in addition to a 19kg MS/cow increase (+3.93%)

Andrew acknowledges that – for the most part – their clients are more weighted towards 3-5 feeding systems.

“Farm working expenses/kg MS are up by 2.5%. Without that extra production/ cow and per hectare it would have been an increase of 5.50% in farm working expenses. Overall the farms had a 13% increase in EBITD/ha. Half of which is fuelled by the 6.3% increase in the milk price.

“As inflationary pressure continues on products used onfarm, and in the service industry what we’re seeing is a greater need to dilute overhead costs. If we stand still those costs will keep creeping up and eat into the profit.”

“The take-home message I’m seeing is that by understanding your costs and knowing your key profit drivers (production/cow and therefore/ha) you can deliver the best level of profitability for your farm,” Trounce says.

“And, unless you know the data and you’ve seen the analysis it can be very hard to stay on top of it.”

If cows are working close to or at their potential it will lift production per hectare.

‘If you own a farm your investment is in your land. Surely your measure of profitability should be against that hectare?’