A FINANCIAL AND ECONOMIC SURVEY OF
SOUTH AUCRLANO
TOWN MILK PRODUCERS AND FACTOKY
SUPPLY DAIRY FARMERS
1983-84
R.G.
Moffitt
R e s e a r c h R e p o r t No.
17 6
O c t o b e r 1985
A g r i c u l t u r a l Economics Research Unit
Lincoln College
Canterbury
ISSN
0069-3790
T H E AGKIC'ljI,TLTi?/1I. EO'ONOMIC'S h ' t ; c k A K i ' ! I liAllT
1.1ncoln C,ollege, Canterbury, N.%
The Agricultural Economics Research I.Jnit (AERU) was established in 1962 at Lincoin
College, University of Cantcrbury. 'I'he aims of the Unit are to assist by way ofeconomic
research those groups involved in the inany aspects of New Zealand primary production
and product processing, distribution and marketing.
Major sources of funding have been annual grants from the Department of Scientific
and Industrial Research and the College. However,, a substantial proportion of t h e
Unit's budget is derived from specific project research under contract to government
departments, producer boards: farmer organisations and to conimercial and industrial
groups.
T h e Unit is involved in a wide spectrutn of' agricultural economics and management
research, with some concentration o n production economics, natural resource
economics, marketing, processing and transportation. The results of research projects
are pubtished as Research Reports or Discussion Papers. (For further information
regarding the Unit's publications see the inside back cover). The Unit also sponsors
periodic conferences and seminars on topics of regional and national interest, often in
conjunction with other organisations.
T h e Unit is guidedin policy formation by a Review Committee first established in 1982.
T h e AERU, the Department of Agricultural Economics and Marketing, and the
Department of Farm Management and Rura.! Valuation maintain a close working
relationship on research and associated matters. The heads of these two Departments
are represented on the Review Committee, and together with the Director and
Principal, constitute an AERU Management Committee.
UNIT REVIEW COMMITTEE
B.D. Chamberlin
(Junior Vice-President, Federated Farmers of New Zealand Inc.)
J. Clarke, C.M.G.
(Member, New Zealand Planning Council)
J.B. Dent, B.Sc., M.Agr.Sc., Ph.D.
(Profsssor a Mead of 9ep&ent
of Fan;. Management & Rural Valuation, Lincoln College)
Professor 3.j.Ross, M.Agr. Sc.
(Principal of Lincoln College)
R G . Lattimcre; %.Agr.Sc., FX.Agr.Sc., Ph.D.
(Director, Agricu1tural.Economics Eesearch Unit, Lincoln College) (ex officio)
A.T.G. McArthur, B.Sc.jAgr.), M.Agr.Sc., Ph.D.
f IIead ofDspatment of Agricultural Economics & Marketing, Lincoln College)
E.J. Neilson, B.A.,B.Com., F.C.A., F.C.I.S.
(Lincoln College Council)
RL. Sheppard, B.Agr.Sc.(Hons), B.B.S.
(Assistaat Director, Agricultural Economics Research Unit, Lincoln College) (exofficio)
P. Shirtcliffe, I%.Com.,ACA
(Nominee of Advisory Committee)
E.J. Stonyer, B.Agr. Sc.
(Director, Economics Division, Ministry of Agriculture and Fisheries)
J.H. Troughtcn, K.Agr.Sc., Ph.B.,D.Sc., F.R.S.N. 2.
( A s s i s t a ~ Director-Genera.1,
t
Department of Scientific & Industrial Research)
UNIT RESEARCH STAFF: 1985
Directof
R.G. Lattiinore, B.Agr.Sc., M.Agr.Sc.,Ph. D.
Assistant fibe~tO7
R L . Sheppard, B.Agr.Sc.(Hons), B.B.S.
Research Fellow in Agrimlttlral Policy
J.G. Pryde, O.B.E., M.A., F.N.Z.I.M.
Senior Research Zconomist
R D . Lough, B.Agr.Sc.
Research Economists
D.E.Fowler, B.B.S.: Dip. Ag. Econ.
6. G:eer, B.Agr.Sc.(Hons)
S.K. Martin, B.Ec., M.A.(Hons.), Dip.Tchg.
RG. Moffifiet,B.Hort.Sc., N.D.H.
I? esearcb Sociologist
J.R Fairneather, B.Wgr.Sc., B.A.,M.A.,Ph.D.
Assistant Research Economists
J.E. Chamberlain, B.Agr.Sc.
T.P. Grundy, B.Sc.(Hons), hif.Com.
P.J. McCartin, B.Agr.Com.
S.M. Scanlan, B.Com.(Agr).
G. Tait, B.Hort.Sc.
Post Graduate Fellow
P. Seed, B.Com.(Agr)
Secsetaries
L.M. Bellamy
R Searle
CONTENTS
PAGE
LIST OF TABLES
(i)
LIST OF FIGURES
(iii)
PREFACE
(v)
SUWY
(vii)
CHAPTER 1
1.1
1.2
1.3
CHAPTER 2
2.1
2.2
2.3
2.4
2.5
CHAPTER 3
3.1
3.2
3.3
3.4
CHAPTER 4
4.1
4.2
4.3
4.4
4.5
4.6
APPENDIX
BACKGROU MI
1
Purpose of t h i s Study
Producer P r i c e s
The Sample
PHYSICAL AM) PRODUCTION DATA
5
Farm Area
Labour
The Farmer
Milk Production
Supplementary Feed U s e
P I NANC I A L DATA
15
Capital Structure
Gross Revenue
Expenditure
N e t Farm Income
A COMPARISON OF ECONOMIC PROFITABILITY
25
Introduction
Return on C a p i t a l
C a p i t a l Turnover R a t i o
Estimated Labour and Management R e s i d u a l
Other F i n a n c i a l R a t i o s
Conclusion
25
28
29
30
30
30
33
LIST OF TABLES
Table
1
Page
Balance Dates of South Auckland Farmer's
Annual Accounts 1983-84
N a t i o n a l Average Town Milk Producer P r i c e s
2
South Auckland Dairy Farm P o p u l a t i o n and Sample
Numbers 1983-84
4
Average Areas of Town Milk & F a c t o r y Supply Dairy
Farms
5
Run-Of f Area
6
Types of Labour U n i t s
7
Non-Family Adult Worker, Annual Wage P a i d and
Years of Experience
Farmer's Age, Years of Management C o n t r o l and
Number of Dependants
9
Milk P r o d u c t i o n
Monthly Milk P r o d u c t i o n & Number of Milking Cows
11
Supplementary Feed U s e
13
Supplementary Feed U s e Converted t o Dry M a t t e r and
Hay Bale E q u i v a l e n t s
14
Capital Structure
Liabilities
-
Value of A l l Assets and
16
Gross Revenue Components
18
Types of Milk Payments Received by South Auckland
Town Milk Farms
19
Farm E x p e n d i t u r e Components
21
Net Farm Income Components
23
Measures of Economic P r o f i t a b i l i t y
26
R e l a t i v e S t a n d a r d E r r o r s (RSE) of Some Key V a r i a b l e s
33
LIST OF FIGURES
Figure
Page
1
Monthly Average Milk P r o d u c t i o n f o r Town Milk
and Factory Supply Farms
2
Gross Revenue and Net Farm Income per Dairy
P r o d u c t i v e Hectare
PREFACE
The town milk industry has been linked to returns in the
factory supply industry for many years by a pricing formula. While the
formula has been changed from time to time, it is basically designed to
provide equity between these two groups of milk producers.
It is
difficult to maintain such equity given that the production systems are
so different. For this reason it is useful to carry out an analysis of
comparative returns from time to
time.
Such an analysis
is
particularly relevant at this time giu*:~the examination of the Town
Milk industry by the IDC.
K G Lattimore
Director
SUMMARY
A s u r v e y sample of South Auckland town milk and f a c t o r y s u p p l y
d a i r y farms w a s undertaken e a r l y i n 1985. The o b j e c t was t o compare
t h e f i n a n c i a l and economic d i f f e r e n c e s between t h e two t y p e s of d a i r y
farms i n 1983/84.
A f u r t h e r o b j e c t i v e was t o a s s e s s t h e i n c r e a s e d
c o s t s of autumn and w i n t e r m i l k p r o d u c t i o n which have t o be m e t on a
town m i l k farm.
I n t h e 1983/84 year t h e 29 town milk farms and 18 f a c t o r y d a i r y
farms had a s i m i l a r a v e r a g e d a i r y p r o d u c t i v e a r e a . T o t a l l a b o u r u n i t s
on t h e two a v e r a g e farms were s i m i l a r a l t h o u g h h i g h e r wages were p a i d
on town s u p p l y farms.
A number of
a r e made b u t w h i l e
farming e n t e r p r i s e s ,
farm i s d i f f e r e n t .
p h y s i c a l measures of
comparisons of o u t p u t between t h e two farm systems
t h e r e a r e many s i m i l a r i t i e s between t h e two d a i r y
t h e day-to-day management of r e s o u r c e s on e a c h
This imposes d i f f i c u l t i e s when comparing some
output.
Over 12 months both a v e r a g e farms produced a s i m i l a r q u a n t i t y
of milk.
The a c t u a l b u t t e r f a t produced on t h e a v e r a g e f a c t o r y s u p p l y
farm f o r t h e y e a r was 19,757 kilograms o r 320 kilograms p e r p r o d u c t i v e
hectare.
I f t h e t o t a l l i t r e s on t h e town milk farm i s c o n v e r t e d t o
m i l k f a t a t a 4.28 p e r c e n t t e s t , t h e a n n u a l t o t a l would be 16,854
kilograms (278 kilograms p e r p r o d u c t i v e h e c t a r e ) .
The s t o c k i n g rate on
m i l k i n g demands c a r e f u l
a town m i l k farm i s low. A l l year-round
p a s t u r e management i n c l u d i n g t h e s e t t i n g a s i d e of l a n d f o r hay and
I n December 1983 t h e a v e r a g e number of m i l k i n g cows
s i l a g e production.
was 85.17 on a town milk farm compared w i t h 131.06 on a s i m i l a r s i z e
f a c t o r y s u p p l y farm
.
Both a v e r a g e d a i r y farms grew and purchased a v a r i e t y of
supplementary feed.
The t o t a l hay b a l e e q u i v a l e n t s of supplementary
f e e d on t h e a v e r a g e town milk farm was 4,994 b a l e s . The f a c t o r y s u p p l y
on p a s t u r e f o r most of h i s m i l k i n g
herds
feed
farmer relies
r e q u i r e m e n t s and needs o n l y h a l f t h e supplementary f e e d .
T o t a l a s s e t s were 65 p e r c e n t h i g h e r on a town milk farm w i t h
t h e v a l u e of f r e e h o l d l a n d ( a t $10,918 p e r h e c t a r e ) c a u s i n g most of t h e
difference.
Land on t h e a v e r a g e f a c t o r y s u p p l y farm was valued a t
$5,098 p e r h e c t a r e .
A h i g h e r payment p e r l i t r e f o r milk produced was r e c e i v e d by
t h e a v e r a g e town milk producer (22.41 c e n t s p e r l i t r e compared w i t h
17.88 c e n t s p e r l i t r e ) . However t h e $14,353 advantage i n g r o s s revenue
was eroded by t h e $19,653 h i g h e r t o t a l e x p e n d i t u r e .
Some of t h e main
town m i l k farm c o s t s c o n t r i b u t i n g t o t h i s e x p e n d i t u r e d i f f e r e n c e w e r e
f e e d , i n t e r e s t payments, r e n t and n e t d e p r e c i a t i o n .
The a v e r a g e town milk farm r e c e i v e d a n e t farm income of
$25,191.
T h i s w a s 21 p e r c e n t ( o r $5,300) less t h a n t h a t of t h e
a v e r a g e f a c t o r y supply farm ($30,491).
It i s d i f f i c u l t t o compare two d i f f e r e n t t y p e s of d a i r y farms
which have d i f f e r e n t o b j e c t i v e s and r e c e i v e a d i f f e r e n t payout p e r
l i t r e of milk.
However, some comparisons of economic p r o f i t a b i l i t y
such as r e t u r n on c a p i t a l (3.27 p e r c e n t f o r town milk farms and 4,11
p e r c e n t f o r f a c t o r y supply farms) and a c a p i t a l t u r n o v e r p e r c e n t a g e
(21.32 p e r c e n t
town milk and 17.69 per c e n t - f a c t o r y s u p p l y ) have
been made.
Other f i n a n c i a l r a t i o s have a l s o been c a l c u l a t e d i n t h e
f i n a l chapter.
(vii)
-
CHAPTER 1
BACKGKOU ND
1.1
Purpose of t h i s Study
I n l a t e 1984 t h e Town Milk Producers' F e d e r a t i o n of NZ ( I n c )
a l o n g w i t h t h e NZ Milk Board commissioned t h e A g r i c u l t u r a l Economics
Research Unit t o u n d e r t a k e a f i n a n c i a l and economic s u r v e y of a sample
The
of South Auckland town milk and f a c t o r y s u p v l y d a i r y farms.
purpose of t h e s t u d y w a s t o e n a b l e an a c c u r a t e f i n a n c i a l comparison t o
A
be made of t h e two t y p e s of d a i r y p r o d u c t i o n i n t h e one d i s t r i c t .
f u r t h e r o b j e c t i v e of t h e s t u d y was t o c o n t i n u e t h e i n v e s t i g a t i o n i n t o
t h e c o s t s of autumn and w i n t e r milk p r o d u c t i o n i n t h i s d i s t r i c t .
The
y e a r b e f o r e a p r e l i m i n a r y s t u d y had been u n d e r t a k e n of 29 South
Auckland town m i l k farms. 1
Whilst t h e f i n a n c i a l performance of t h e two d a i r y systems can
be compared i t i s more d i f f i c u l t t o e v a l u a t e t h e management of t h e
physical resources.
Both d a i r y farming s y s t e m s s h a r e many similar
f e a t u r e s b u t t h e day t o day management of t h e p r o d u c t i v e assets of e a c h
farming system i s d i f f e r e n t .
The o b j e c t i v e s of t h e two t y p e s of
farming a r e n o t t h e same. One farmer must s t a g g e r h i s c a l v i n g p a t t e r n
and supplementary f e e d needs t o m a i n t a i n a c o n t i n u a l d a i l y m i l k
p r o d u c t i o n w h i l e t h e o t h e r a r r a n g e s a l l h i s c a l v i n g f o r t h e s p r i n g and
h i s p r o d u c t i o n f o l l o w s t h e p a s t u r e growth curve.
In
measures
1.2
t h e f i n a l c h a p t e r t h i s problem i s d i s c u s s e d and a number of
of comparative economic
profitability are
calculated.
Producer P r i c e s 2
Because t h e a n n u a l b a l a n c e d a t e s of t h e NZ Milk Board (August),
t h e NZ Dairy Board (May) and most d a i r y f a r m e r s ( s e e Table 1 ) do n o t
correspond, t h e c a l c u l a t i o n of t h e f a r m e r s 1983-84 producer p r i c e s
e x t e n d o v e r a t least two y e a r s .
I n 1983-84 t h e p r i c e r e c e i v e d by town
m i l k producers ( T a b l e 2 ) w a s f u r t h e r i n f l u e n c e d by t h e p r e v i o u s y e a r s
c o n t i n u i n g wage and price f r e e z e .
U n t i l t h e August 1982-83 y e a r t h e r e had been no change i n t h e
It had been
b a s i c method of f i x i n g t h e town m i l k producer p r i c e .
l i n k e d t o t h e a v e r a g e manufacturing p r i c e f o r whole milk. An i n c r e a s e
i n p r i c e of one per c e n t p e r kilogram of m i l k f a t r e s u l t e d i n a n
i n c r e a s e of 0.06 c e n t s p e r l i t r e i n t h e town m i l k producer p r i c e .
1 A Survey of t h e C o s t s of Producing Autumn & Winter Milk on Some
South Auckland Town Supply Farms.
R G Moffitt, Agricultural
Economics Research U n i t , unpublished, May 1984.
2
NZ Milk Board 3 0 t h and 3 1 s t Annual Keports, 1983 and 1984
TABLE 1
Balance Dates of South Auckland Farmer's
Annual Accounts 1983-84
.......................................................................
.......................................................................
South Auckland
Town Milk Farms
South Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
29
18
Month Ending:
%
%
March
April
May
June
August
Total
I n June 1983 t h e Dairy Board announced a n advance end-of-season
s u r p l u s payment f o r t h e 1982-83 season. This brought t h e a v e r a g e farm
g a t e v a l u e f o r t h e s e a s o n up from 333.48 c e n t s t o 360 c e n t s p e r
T r a d i t i o n a l l y t h i s i n c r e a s e would have been
k i i o g r a m of m i l k f a t .
However, because
w h o l l y t r a n s l a t e d i n t o t h e town milk producer price.
of t h e wage and p r i c e f r e e z e , and t h e f a c t t h a t town m i l k p r o d u c e r s
were e s s e n t i a l l y s e r v i c i n g t h e domestic market, Government r u l e d t h a t
f o r t h e remainder of t h e f r e e z e and u n t i l 29 February 1984, town milk
p r o d u c e r p r i c e s were r e s t r i c t e d t o t h e maximum approved f o r t h e 1981-82
year.
These were based on a n a v e r a g e farm g a t e v a l u e of 333.48 c e n t s
p e r kilogram of m i l k f a t f o r wholemilk.
A f t e r t a k i n g i n t o account
a d j u s t m e n t s f o r v a r i a t i o n s i n c o l l e c t i o n c o s t s , t h e town milk s u p p l i e r
r e c e i v e d 1.8102 c e n t s p e r l i t r e less f o r t h e August 1982-83 y e a r t h a n
i f t h e t r a d i t i o n a l p r i c e l i n k had a p p l i e d .
TABLE 2
N a t i o n a l Average Town Milk Producer P r i c e s
.......................................................................
Year Commencing
1 September
F i n e s t Grade
Final Price
(cents per l i t r e )
.......................................................................
1980
18.7347
1981
22.9593
1982
22.9593
1983 (To 2 9 February 1984)
23.4303
1983 ( 1 March t o 31 Aug 1984)
24.0405
For t h e p e r i o d 1 September 1983 t o 29 February 1984 t h e i n i t i a l
town milk producer p r i c e was based on t h e ~ n a c l ~ ~ f a c t u r ipnrgi c e of 333.48
c e n t s p e r kilogram of m i l k f a t . However Government l a t e r allowed a n
end-of-season
s u r p l u s payout of 10 c e n t s per kilogram of m i l k f a t t o be
t r a n s l a t e d i n t o t h e town m i l k p r i c e f o r t h e year.
The f i n a l 1983184
town milk p r i c e was based on farm g a t e v a l u e s of 343.48 c e n t s p e r
kilogram of m i l k f a t f o r t h e p e r i o d September 1983/ February 1984, and
350 c e n t s p e r kilogram f o r t h e March/August 1984 p e r i o d (Table 2).
1.3
The Sample
The sampling u n i t f o r t h e s u r v e y was t h e farm, and t h e
s o u r c e s of i n f o r m a t i o n t h e farmer and h i s annual farm accounts.
main
The survey a r e a was i n t h e South Auckland a r e a , s o u t h of
Manurewa t o Pokeno. Most of t h e surveyed town milk farms were i n t h e
Karaka, Drury & P a e r a t a d i s t r i c t s . The f a c t o r y supply d a i r y farms were
mostly i n t h r e e d i s t r i c t s Manukau P e n i n s u l a , Aka Aka and Paparimu.
To
be e l i g i b l e f o r s e l e c t i o n t h e f o l l o w i n g c r i t e r i a needed
to
be m e t :
(1)
The farm engaged no s h a r e m i l k e r
(ii)
The farm r e c e i v e d a t least 75 p e r c e n t of g r o s s revenue
from milk sales and r e l a t e d d a i r y a c t i v i t y .
From p r e v i o u s town milk f a r m e r s u r v e y s and i n f o r m a t i o n r e c e i v e d
from t h e producer company s e c r e t a r i e s , d e t a i l s on t h e number of
e l i g i b l e South Auckland town milk producers was known. I n f o r m a t i o n on
t h e number of e l i g i b l e f a c t o r y supply d a i r y f a r m e r s was n o t as d e t a i l e d
b u t d i s c u s s i o n s w i t h producer company e x e c u t i v e s d i d h e l p d e f i n e t h e
e l i g i b l e p o p u l a t i o n (Table 3).
TABLE 3
South Auckland Dairy Farm
P o p u l a t i o n and Sample Numbers 1983-84
South Auckland
Town Milk Farms
South Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
T o t a l Number of Dairy Farms
261
359
Number of Farms w i t h Sharemilkers
119
118
Number of Farms w i t h Less t h a n
75% of Revenue from Dairy A c t i v i t i e s
43
Number of Farms E l i g i b l e t o Survey
99
180
Number of Farms Surveyed
29
18
a
The e s t i m a t e d number of farms w i t h less t h a n 75% of revenue from
d a i r y a c t i v i t i e s f o r t h e f a c t o r y supply farms was based on t h e
known p r o p o r t i o n f o r t h e town m i l k farms.
A random sample was s e l e c t e d and f a r m e r s c o n t a c t e d by m a i l .
Provided t h a t t h e farm was found t o be e l i g i b l e and t h e farmer a g r e e d
t o p a r t i c i p a t e i n t h e s u r v e y , a farm v i s i t w a s undertaken. Where farms
were found t o be i n e l i g i b l e f u r t h e r replacement farmers were c o n t a c t e d
u n t i l s u f f i c i e n t numbers were o b t a i n e d .
CHAPTER 2
PHYSICAL AND PRODUCTION DATA
2.1
Farm Area
T a b l e 4 compares t h e farm a r e a of t h e two South Auckland d a i r y
f a r m t y p e s , town milk farms and f a c t o r y s u p p l y d a i r y farms.
The d a i r y p r o d u c t i v e area f o r both a v e r a g e farms was s i m i l a r
(60.59 ha f o r t h e average town supply farm and 61.68 ha f o r t h e a v e r a g e
f a c t o r y supply farm) a l t h o u g h t h e t o t a l a r e a , unproductive a r e a and
non-dairying
l a n d a r e a was d i f f e r e n t .
In t o t a l freehold a r e a the
f a c t o r y supply farm had o v e r 21 p e r c e n t more l a n d a t 69.87 h e c t a r e s .
The town milk farm however r e n t e d more l a n d (9.04 ha compared w i t h 3.15
ha).
TABLE 4
Average Areas of Town Milk & Factory Supply Dairy Farms
.......................................................................
Area p e r Farm
S-Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
D a i r y Farms
.......................................................................
Number of farms surveyed
Freehold Area
Crown & Maori Lease
Rented Area
T o t a l Farm Area
L e s s Unproductive Area
P r o d u c t i v e Area
L e s s E s t i m a t e d Non-Dairying Area
P l u s Estimated "Grazing Gut" Area
E s t i m a t e d Dairy P r o d u c t i v e Area
U t i l i s e d f o r Milk Productions
a
Hereafter abbreviated t o d a i r y productive hectares.
There w a s s u b s t a n t i a l l y more l a n d
which w a s c l a s s e d as
u n p r o d u c t i v e and non-dairying on t h e a v e r a g e f a c t o r y supply farm (13.38
ha) compared w i t h t h e town s u p p l y farm (8.23 ha).
This probably
r e f l e c t s b o t h t h e l o c a t i o n of t h e town supply farms ( w i t h t h e i r h i g h e r
l a n d v a l u e s , i n t e r e s t and rate payments) and t h e need t o m a i n t a i n
c o n t i n u a l milk p r o d u c t i o n a l l y e a r . This encourages t h e f a r m e r t o keep
h i s u n p r o d u c t i v e and non-dairying l a n d a r e a t o a minimum.
TABLE 5
Run-Off Area a
S.Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
Number of Farms w i t h a Run-off
-
Area
Run-off Area ( h a )
D i s t a n c e from Home Farm t o Run-Off
a
(km)
29
18
21
8
17.5
7
23.6
4
The a v e r a g e f o r t h e s e r e s u l t s i s c a l c u l a t e d a c c o r d i n g t o t h e number
of p r a c t i s i n g farms.
Nearly t h r e e i n e v e r y f o u r town milk f a r m e r s have a run-off
a r e a where young s t o c k and d r y cows g r a z e ( T a b l e 5).
Fewer f a c t o r y
s u p p l y farms have l a n d used a s a run-off (44.4 p e r c e n t ) but t h e a r e a
(23.6 h e c t a r e s ) i s g r e a t e r t h a n t h a t on a town milk farm (17.5
hectares).
The run-off a r e a is c l o s e r
( 4 km) compared w i t h t h e town milk
i n t e n s i v e farming of l a n d around
l a t t e r f a r m e r f u r t h e r away t o f i n d
2.2
t o t h e farm on a f a c t o r y supply farm
farm (7km).
The h i g h v a l u e and more
t h e town milk farms h e l p f o r c e t h e
s u i t a b l e l a n d f o r a run-off.
Labour
T o t a l l a b o u r u n i t s on a town s u p p l y farm were m a r g i n a l l y h i g h e r
Table
(1.87 u n i t s ) t h a n on a f a c t o r y supply d a i r y farm (1.78 u n i t s
6 ) . There was no marked d i f f e r e n c e i n t h e composition of l a b o u r f o r
t h e two a v e r a g e farms. A similar p r o p o r t i o n of b o t h permanent l a b o u r
and f a m i l y l a b o u r w a s used.
-
Most f a r m e r s thought t h e y worked s i m i l a r h o u r s t o t h e i r farm
It i s l i k e l y t h a t t h e d a i r y m i l k i n g t a s k s of town milk
neighbours.
f a r m e r s d u r i n g t h e w i n t e r months r e s u l t I n l o n g e r h o u r s b e i n g worked
over t h i s p e r i o d t h a n do f a c t o r y s u p p l y f a r m e r s . On a f a c t o r y s u p p l y
farm t h e w i n t e r months a r e t h e u s u a l t l m e t o c a t c h up on maintenance
and r e p a i r s t o equipment.
TABLE 6
Types of Labour U n i t s
S.Auckland
Town Milk
Farms
Type of Labour
S.Auckland
Factory Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
29
18
1.41
1.37
1.87
1.78
Farmer
Permanent Family
Casual Family
T o t a l Family Labour U n i t s
Permanent Non-Family
Casual Non-Family
T o t a l Non-Family Labour U n i t s
T o t a l Labour U n i t s
P r o p o r t i o n of Permanent Labour
P r o p o r t i o n of Family Labour
Table 7 l i s t s d e t a i l s of wages p a i d and t h e y e a r s of e x p e r i e n c e
of non-family a d u l t workers employed on t h e s e d a i r y farms.
Higher
wages were paid on t h e s i x town milk farms which employed a permanent
non-family
a d u l t worker.
This w a s a n a v e r a g e of $14,215 p e r y e a r
compared w i t h $10,600 p e r y e a r on t h e t h r e e f a c t o r y supply farms.
The
a v e r a g e d a i r y e x p e r i e n c e of t h e s e farm employees was less (2.8
years)
on t h e town milk farms compared w i t h t h e o t h e r d a i r y farms (5.8 y e a r s ) .
TABLE 7
Non-Family Adult Worker, Annual Wage P a i d
and Years of Experience
a
S.Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
29
Number of Farms w i t h a Non-Family
Adult Worker Employed All Year
6
-
-
a
Annual Average Wage Paid
P r e v i o u s Years of Dairy Experience
$ 14,215
2.8
18
$ 10,600
5.8
The a v e r a g e f o r t h e s e r e s u l t s i s c a l c u l a t e d a c c o r d i n g t o t h e number
of p r a c t i s i n g farms.
Town milk farmers appear t o pay highe; wages t o farm employees.
T h i s may be because of t h e competitio,n from nearby i n d u s t r y i n t h e
s o u t h e r n Auckland suburbs.
,There i s a l s o a problem of h i g h labour
t u r n o v e r on t h e s e farms. Some of t h e town milk f a r m e r s have b u i l t
e x t r a employe& accommodation on t h e i r farm b u t t h e y have found i t very
d i f f i c u l t t o o b t a i n r e l i a b l e l a b o u r prepared t o work t h e l o n g e r hours.
They o f t e n choose t o run t h e farm w i t h o u t any o u t s i d e a s s i s t a n c e .
TABLE 8
.......................................................................
S.Auckland
Town Milk
Farms
Number of Farms Surveyed
29
18
Age of Farmer
( p r i n c i p a l decision-maker)
48
45
Number of Years of
The a v e r a g e a g e o
farmers ( T a b l e 8 ) on t h e two t y p e s of
The town milk
d a i r y farms w a s v e r y s i m i l a r (48 y e a r s and 45 y e a r s ) .
farmer has 2.7 dependants ( i n c l u d i n g h i s w i f e ) and has had management
c o n t r o l of h i s farm f o r 22 years.
The a v e r a g e f a c t o r y supply farmer
h a s 2 . 3 dependants and h a s had c o n t r o l of h i s farm f o r t h e l a s t 17
years s i n c e he
2.4
Milk P r o d u c t i o n
I n t h i s s e c t i o n a number of comparisons of o u t p u t between t h e
It should be remembered t h a t w h i l e t h e r e
two farm systems a r e made.
a r e many s i m i l a r i t i e s between t h e two d a i l y faming e n t e r p r i s e s , t h e
This
day-to-day
management of r e s o u r c e s on each farm i s d i f f e r e n t .
imposes d i f f i c u l t i e s when comparing some p h y s i c a l measures of o u t p u t
a able 9 ) .
TABLE 9
Milk Production
-
J
.......................................................................
Milk P r o d u c t i o n p e r Farm
.
S Auckland
Town Milk
Farms
S-Auckland
F a c t o r y Supply
D a i r y Farms
.......................................................................
Number of Farms Surveyed
29
Dairy P r o d u c t i v e Hectares ( h a )
60.59
Town
Town
at
Town
at
I f i l k Daily Quota ( 1 )
Milk P r o d u c t i o n Sold
Quota P r i c e s ( 1 )
Milk P r o d u c t i o n Sold
Surplus P r i c e s ( 1 )
18
61.68
639
257,392
136,392
-------
T o t a l L i t r e s Produced ( 1 )
393,784
T o t a l kgs of M i l k f a t
(Town milk l i t r e s
4.28 % a M i l k f a t
supply kgs
Kg M i l k f a t p e r Dairy
16,854
278
(kg)
converted t o
& actual factory
Prod. H a (kg)
19,757
320
Kg M i l k f a t p e r December
Milking Cow ( k g )
Average No. Milking Cows
i n June 1983 (No.)
Average No. Milking Cows
i n December 1983 (No.)
Number of December Milking Cows
p e r Dairy P r o d u c t i v e Ha, (No.)
76.78
85.17
1-41
T o t a l L i t r e s o f Milk Produced
i n June 1983 ( 1 )
27,090
T o t a l L i t r e s of Milk Produced
i n December 1983 ( 1 )
37,072
T o t a l Stock Units/Farm (No.)
Stock U n i t s / D a i r y Prod. ha (No.)
L i t r e s / D a i r y Prod, ha ( 1 )
941
15.5
47,764
1,028
16.7
6,499
6,460
.......................................................................
a
The a v e r a g e m i l k f a t test f o r t h e 1983-84 Auckland town milk
producers w a s 4-28 p e r c e n t ,
Over 12 months b o t h a v e r a g e farms produced a s i m i l a r q u a n t i t y
of m i l k from a s i m i l a r d a i r y p r o d u c t i v e a r e a (Table 9 ) . The town milk
a v e r a g e farm produced 393,784 l i t r e s from 60,59 h e c t a r e s o r 6,499
-1itres per d a i r y p r o d u c t i v e h e c t a r e . The a v e r a g e f a c t o r y supply d a i r y
farm produced 398,449 l i t r e s from 61.68 h e c t a r e s .
T h i s was 6,460
l i t r e s per d a i r y productive hectare.
Monthly p r o d u c t i o n (Table 10) on t h e town s u p p l y farm w a s
continuous.
It v a r i e d from a low of 25,697 l i t r e s i n A p r i l (from 79.35
cows), t o a h i g h of 39,643 l i t r e s i n October (from 85.72 cows).
Monthly p r o d u c t i o n on t h e f a c t o r y supply farm showed marked v a r i a t i o n
from v i r t u a l l y n o t h i n g i n June t o a peak of 55,424 l i t r e s i n October
(from 132.11 cows), A g r a p h i c a l r e p r e s e n t a t i o n of monthly p r o d u c t i o n
a p p e a r s i n Figure 1.
I f t h e t o t a l l i t r e s on t h e town milk farm i s c o n v e r t e d t o
m i l k f a t a t a 4.28 p e r c e n t t e s t , t h e t o t a l f o r t h e y e a r would be 16,854
kilograms,
The 4 - 2 8 p e r c e n t t e s t was t h e a v e r a g e t e s t f o r t h e
Auckland town milk p r o d u c e r s i n 1983/84. The a c t u a l p r o d u c t i o n on t h e
a v e r a g e f a c t o r y supply farm was 19,757 kilograms, To c o n v e r t t o t h e
same q u a n t i t y of m i l k f a t a s t h e f a c t o r y supply farm, t h e a v e r a g e f a t
t e s t f o r t h e town milk farm would have t o i n c r e a s e from 4.28 p e r c e n t
t o a h i g h 5.017 p e r c e n t ,
I n December t h e a v e r a g e number of m i l k i n g cows numbered 85.17
on t h e town milk farm and 131.06 on t h e o t h e r a v e r a g e d a i r y farm - a 54
per cent increase.
I n o t h e r words i f a town milk farmer i n t h i s
d i s t r i c t on 60.59 h e c t a r e s of d a i r y p r o d u c t i v e l a n d gave up h i s town
m i l k quota t o produce f a c t o r y s u p p l y m i l k f a t h e c o u l d e x p e c t t o
i n c r e a s e h i s milking herd i n December by 54 p e r c e n t .
The town m i l k f a r m e r h a s a lower s t o c k i n g rate i n milking cows
p e r p r o d u c t i v e h e c t a r e ( l e 4 1 compared w i t h 2.12) because of t h e need t o
s h u t up more p a s t u r e f o r s i l a g e and hay production. The management of
a v a i l a b l e p a s t u r e r e s o u r c e s i s more c r i t i c a l on a town milk farm i n
o r d e r t o m a i n t a i n c o n t i n u a l m i l k production. R a i n f a l l r e c o r d s i n d i c a t e
t h a t l a t e summer and autumn d r o u g h t s i n t h i s r e g i o n are n o t uncommon'+
w i t h town milk f a r m e r s f e e d i n g o u t s i l a g e as e a r l y as January.
Fresh
m i l k i n g s t o c k which need h i g h f e e d i n g
l e v e l s f o r optimum
milk
p r o d u c t i o n e a r l y i n t h e i r l a c t a t i o n , a r e r e g u l a r l y being i n t r o d u c e d
i n t o t h e herd,
On a f a c t o r y s u p p l y farm t h e maximum p r o d u c t i o n of 13.53 litres
p e r cow p e r day o c c u r s i n October (on town milk farms i t r e a c h e s 15.19
l i t r e s i n October) and by December p r o d u c t i o n i s s t a r t i n g t o f a l l ( a t
11.76 l i t r e s p e r cow p e r day). Unlike t h e town s u p p l y h e r d , f e e d
management a f t e r December i s not a s c r i t i c a l . Already a b o u t h a l f t h e
y e a r s milk has been c o l l e c t e d and t h e cows milk r e s p o n s e t o e x t r a
n u t r i t i o n i s very l i m i t e d . A f t e r J a n u a r y p r o v i d i n g f a c t o r y s u p p l y
m i l k i n g s t o c k w i t h e x c e s s f e e d cannot l e a d t o a p r o p o r t i o n a l i n c r e a s e
i n milk production.
........................
3
Pers. comm. V i l j o e n , P.T.
and B l a c k i s t o n , R.P.
4
A Survey of t h e Costs of Producing Autumn and Winter Milk on
Some South Auckland Town Supply Farms; R G Moff i t t , AEKU,
unpublished, May 1984, p,7,
(1985)
TABLE 10
.......................................................................
S.Auckland
Town Milk
Farms
Number of Farms Surveyed
.
S Auckland
F a c t o r y Supply
Dairy Farms
29
18
------393,784
-------
-------
June 1983 Cows Milked
Litres
July
Cows Milked
L l t res
August
Cows Milked
L i tres
September Cows Milked
Litres
October
Cows Milked
Litres
November Cows Milked
Litres
December Cows Milked
L i tres
J a n 1984 Cows Milked
Litres
February Cows Milked
Litres
March
Cows Milked
Litres
April
Cows Milked
Litres
May
Cows Milked
Litres
T o t a l L i t r e s f o r 12 Months
398,449
-------
2.5
Supplementary Feed Use
T a b l e s 11 and 12 have d e t a i l s of t h e range and
supplementary f e e d produced on t h e two t y p e s of farm.
quantity
of
The town m i l k producer c l o s e s o f f from g r a z i n g some of h i s farm
i n t h e l a t e s p r i n g and e a r l y summer. This saved p a s t u r e i s c u t f o r hay
and s i l a g e f o r l a t e r f e e d i n g o u t t o t h e m i l k i n g herd d u r i n g t h e autumn
d r o u g h t s and c o l d w i n t e r s when p a s t u r e growth i s very slow.
TABLE 11
--
Supplementary Feed U s e
S.Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
Dairy Farms
29
393,784
18
398,449
.......................................................................
Number of Farms Surveyed
T o t a l L i t r e s Produced
L i t r e s Converted t o M i l k f a t
& Actual F a c t o r y Supply (kgs)
Cows i n Milk i n December 1983
D a i r y P r o d u c t i v e Hectares
16,578
85.17
60.59
19,757
131.06
61.68
Home Grown Bales of Hay
Purchased Bales of Hay
Tonnes of S i l a g e Made
( a s s e s s e d a t 15 t o n n e s p e r h e c t a r e )
261
Tonnes of Dairy Meal Purchased
(includes c a l f feed)
Hectares of Greenfeed D r i l l e d
0.74
0.56
I n South Auckland t h e town m i l k producer made and purchased a
t o t a l of 2253 b a l e s of hay and made 261 t o n n e s of s i l a g e .
He a l s o
purchased 6.62 t o n n e s of a d a i r y meal o r b r a n r a t i o n and grew 0.74
h e c t a r e s of greenfeed.
The t o t a l hay b a l e e q u i v a l e n t s of a l l t h i s
supplementary f e e d was 4,994 b a l e s .
The f a c t o r y supply f a r m e r relies on p a s t u r e growth f o r most of
h i s m i l k i n g h e r d s n u t r i t i o n a l needs a l t h o u g h as t h e s o i l w a t e r d e f i c i t
d e v e l o p s and t e m p e r a t u r e s rise i n t h e l a t e summer and autumn some
supplementary f e e d ( u s u a l l y s i l a g e ) i s f e d t o t h e milking herd.
The
t o t a l hay b a l e e q u i v a l e n t s on t h e a v e r a g e f a c t o r y supply farm a t 2,607
b a l e s was n e a r l y h a l f t h a t of t h e town m i l k producer. Much of t h i s
conserved f e e d is f e d o u t t o t h e d r y cows i n t h e w i n t e r and l e a d i n g up
t o calving.
TABLE 12
and Hay Bale E q u i v a l e n t s
S. Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
T o t a l Bales of Hay (grown & purchased)
Dry Matter ( k g )
Hay B a l e E q u i v a l e n t s
29
2,253
51,706
(2,253)
18
1,781
40,874
(1,781)
P a s t u r e S i l a g e (Tonnes)
Dry M a t t e r (kg)
Hay Bale E q u i v a l e n t s
Dairy Meal o r Bran (Tonnes)
Dry m a t t e r (kg)
Hay Bale E q u i v a l e n t s
Greenfeed o r T u r n i p s (Ha)
Dry Matter (kg)
Hay Bale E q u i v a l e n t s
T o t a l Dry M a t t e r (kg)
T o t a l Hay Bale E q u i v a l e n t s
Among t h e 29 surveyed town m i l k farms a l l b u t one made hay and
a similar number made s i l a g e . While hay making was common on t h e
f a c t o r y s u p p l y farm (15 o u t of 18 farms) s i l a g e making was less common
(10 o u t of 18 farms).
The 1.13 t o n n e s of d a i r y meal o r b r a n l i s t e d f o r t h e a v e r a g e
f a c t o r y s u p p l y f a n was made up s o l e l y of c a l f meal. Nearly h a l f of
t h e town m i l k producers purchased d a i r y meal o r bran.
The a v e r a g e
q u a n t i t y purchased was 14.77 t o n n e s and most was f e d d u r i n g t h e autumn
and w i n t e r months.
CHAPTER 3
FINANCIAL DATA
3.1
Capital Structure
T o t a l a s s e t s on t h e average town milk farm a t $737,787 were 65
p e r c e n t h i g h e r compared w i t h t h e o t h e r d a i r y farm (Table 13).
The
major s i n g l e item making up t h i s
difference w a s freehold
land
(re-valued t o 31.12.1983).
The a v e r a g e v a l u e of town milk farm l a n d
from t h e 29 farms surveyed was $10,918 p e r h e c t a r e . T h i s high v a l u e i s
a r e f l e c t i o n of t h e proximity t o t h e Auckland motorway and t h e
i n c r e a s i n g demand f o r h o r t i c u l t u r a l land. On t h e more i s o l a t e d f a c t o r y
supply d a i r y farms f r e e h o l d land w a s w o r t h $5,098 p e r h e c t a r e .
Housing and farm b u i l d i n g s on t h e town milk farm were valued a t
$45,559.
This was 30 per c e n t h i g h e r than b u i l d i n g s on a f a c t o r y
Farm v e h i c l e s were a l s o h i g h e r i n v a l u e on a town s u p p l y
supply farm.
farm ($19,836 compared w i t h $14,935), Dairy s t o c k v a l u e s however were
lower ($18,061 compared w i t h $21,012) and t h i s would be due t o t h e
fewer s t o c k and lower s t o c k i n g r a t e .
On t h e town milk farm c u r r e n t l i a b i l i t i e s were more t h a n t w i c e
Milk p r o d u c t i o n
t h a t of t h e o t h e r d a i r y farin ($16,221 and $7,147).
must be maintained a l l y e a r and t h e c o s t s of supplementary f e e d
Some of t h e d i f f e r e n c e
c o n s e r v a t i o n a r e h i g h d u r i n g t h e summer months.
i n l i a b i l i t i e s may a l s o be due t o t h e d i f f e r e n t b a l a n c e d a t e s of t h e
farmers annual accounts,
Most townmilk farmers balance i n March
whereas most f s c t ~ r ysupply f a r m e r s b a l a n c e i n May o r June. C r e d i t o r s
a c c o u n t s f o r summer work and o t h e r summer expenses may not have been
p a i d by March on t h e town milk farm b u t p a i d by May o r June on t h e
f a c t o r y supply farm.
The f a c t o r y s u p p l y farm a l s o r e c e i v e s many
end-of-season
and r e t r o s p e c t i v e payments i n t h e autumn when h i s c o s t s
of milk p r o d u c t i o n a r e f a l l i n g and t h i s money could be used t o reduce
b o t h h i s o v e r d r a f t and t h e number of c r e d i t o r s .
The town milk farm has h i g h e r t o t a l f i x e d l i a b i l i t i e s compared
w i t h t h e f a c t o r y supply farm ($110,955 and $78,370).
The most common
s o u r c e of funds on t h e town supply farm i s from a f a m i l y mortgage
whereas t h e r u r a l bank i s t h e major l e n d e r t o f a c t o r y supply d a i r y
farms. Equity i s almost 70 p e r c e n t h i g h e r on a town milk farm
compared w i t h t h e f a c t o r y supply farm.
3.2
Gross Revenue
Table 14 l i s t s t h e g r o s s revenue components and Table 15
d e t a i l s f o r t h e milk s a l e s of t h e a v e r a g e town milk farm.
has
T o t a l g r o s s revenue a t $102,949 w a s 16.2 p e r c e n t h i g h e r on t h e
The
town supply farm compared w i t h t h e f a c t o r y supply farm ($88,596).
most s i g n i f i c a n t d i f f e r e n c e w a s milk sales which w a s 23.9 p e r c e n t
g r e a t e r t h a n f a c t o r y supply. Milk sales make up 85.7 p e r c e n t of a l l
revenue on t h e town milk farm and 80.4 p e r c e n t o n , t h e o t h e r farm. On
a f a c t o r y s u p p l y farm l i v e s t o c k p r o f i t and c o n t r a c t i n g f e e s c o n t r i b u t e
more t o revenue t h a n t h e y do on a town milk farm.
TABLE 13
Capital Structure
-
Value of a l l Assets and L i a b i l i t i e s
1
-
.......................................................................
S.Auckland
Town Milk
Farms
.
S Auckland
F a c t o r y Supply
D a i r y Farms
.......................................................................
Number of Farms Surveyed
T o t a l L i t r e s Produced
L i t r e s Converted t o M i l k f a t ( k g s )
Cows i n Milk i n December 1983
D a i r y P r o d u c t i v e Hectares
29
18
393,784
16,578
85.17
60.59
398,449
19,757
131.06
61.68
Assets
Freehold Land
( v a l u e d a t 31.12.1983)
Farmers House
(1/2)
Other Farm Houses
Farm B u i l d i n g s
P l a n t & Equipment
Farm V e h i c l e s
D a i r y Stock
Other Stock
Company Shares
T o t a l Farm Assets
Cash a t Bank
Sundry Debtors
Other Current Assets
.......................................................................
T o t a l All Assets
737,787
Table 13 c o n t i n u e d over page
446,601
...
TABLE 13 cont'd
Capital Structure
-
Value of A l l A s s e t s and L i a b i l i t i e s
S.Auckland
Town Milk
Farms
.
S Auckland
F a c t o r y Supply
D a i r y Farms
.......................................................................
Current L i a b i l i t i e s
Bank Overdraft
Sundry C r e d i t o r s
Other Current
Liabilities
T o t a l Current
Liabilities
Fixed L i a b i l i t i e s
R u r a l Bank Mortgages
Trading Bank Mortgages
B u i l d i n g S o c i e t y Mortgages
I n s u r a n c e Company Loans
S t o c k Firm Loans
Finance Co Loans
S o l i c i t o r s Loans
Family Mortgages
Other L i a b i l i t i e s
T o t a l Fixed L i a b i l i t i e s
110,955
78,370
737,787
446,601
..........................................
Total A l l L i a b i l i t i e s
Equity
Total
Milk sales p e r l i t r e of milk produced f o r t h e two farms
averaged 22.41177 c e n t s p e r l i t r e on town milk farms and 17.87606 c e n t s
p e r l i t r e on t h e o t h e r d a i r y farm, a d i f f e r e n c e of 4.5357 c e n t s .
TABLE 14
Gross Revenue Components
.......................................................................
.
Number of Farms Surveyed
T o t a l L i t r e s Produced
L i t r e s Converted t o M i l k f a t ( k g s )
Cows i n Milk i n December 1983
D a i r y P r o d u c t i v e Hectares
S Auc kland
Town Milk
Farms
S. Auckland
F a c t o r y Supply
Dairy Farms
29
393,784
16,578
85.17
60.59
18
398,449
19,757
131.06
61.68
.......................................................................
Milk S a l e s
Produce Sold
Wool & Skins Sold
C o n t r a c t i n g Fees
Rent & Lease Fees
Employee's House
Livestock P r o f i t
- Dairy
- Other Stock
Other Revenue
Gross Revenue
( Standard Deviation)
$
88,254
130
25
114
977
422
$
71,227
145
159
1,077
690
97
10,752
577
1,698
12,479
470
2,252
102,949
(40,743)
88,596
(32,139)
.......................................................................
The s t a n d a r d d e v i a t i o n is an
important measure of
the
d i s p e r s i o n of t h e d a t a about t h e mean. The more d i s p e r s i o n t h e r e is i n
a body of d a t a t h e b i g g e r t h e s t a n d a r d d e v i a t i o n . Given t h i s v a l u e i t
i s p o s s i b l e t o c a l c u l a t e t h e p e r c e n t a g e i n t h e sample t h a t f a l l s w i t h i n
1,2 o r 3 s t a n d a r d d e v i a t i o n s of t h e sample mean. Within p l u s o r minus
one s t a n d a r d d e v i a t i o n of t h e mean l i e 68.3 per c e n t of t h e sample,
95.4 p e r c e n t l i e w i t h i n 2 2 s t a n d a r d d e v i a t i o n s and 99.7 p e r c e n t l i e
w i t h i n 23 s t a n d a r d d e v i a t i o n s .
Other s t a t i s t i c s a r e l i s t e d i n t h e
Appendix.
The town milk farmer r e c e i v e d a h i g h e r quota m i l k p r i c e f o r
65,36 per c e n t of h i s milk.
I f t h i s p r o p o r t i o n was a l s o t h e same f o r
h i s end-of-season,
r e t r o s p e c t i v e and o t h e r payments which t o t a l l e d
$9,831 t h e n h i s average payment p e r l i t r e f o r quota milk w a s 25.4196
c e n t s per l i t r e .
H i s payment f o r s u r p l u s milk ( a f t e r adding I n t h e
p r o p o r t i o n of end-of-season and o t h e r payments of $3,405) w a s 16.7173
c e n t s p e r l i t r e . The major r e a s o n f o r t h e d i f f e r e n c e between t h e p e r
l i t r e payout f o r s u r p l u s milk (16.7173 c e n t s ) and t h e payout r e c e i v e d
by t h e f a c t o r y supply f a r m e r s (17.87606 c e n t s ) was due t o t h e d i f f e r e n t
a n n u a l balance d a t e s of t h e two farm types. The l a t e r t h e farmer
b a l a n c e s t h e more l i k e l y he i s t o r e c e i v e t h e f i n a l end-of-season
and
r e t r o s p e c t i v e payments.
TABLE 15
Types of Milk Payments Received by South Auckland Town Milk Farmers
v
.
*
*
.......................................................................
South Auckland
Town Milk Farms
------------------------------------------,-----------------------------
Number of Farms Surveyed
29
Town Milk Production Sold a t Quota P r i c e s
Cash Received f o r Quota Milk
257,392 l i t r e s
$ 59,002
Town Milk Production Sold a t Surplus P r i c e s
Cash Received f o r S u r p l u s Milk
136,392 l i t r e s
$ 19,396
Surplus Milk Converted t o kgs M i l k f a t
( a t 4.21 % t e s t )
5,742 kgs
S p e c i a l Allowances Received
$
90
P e n a l t i e s Paid
$
-65
Farm C h i l l i n g Allowances
End of Season, R e t r o s p e c t i v e
and Other Payments
0
$
9,831
.......................................................................
T o t a l IYIilk Payments Received
(Milk S a l e s )
3.3
Expenditure
On t h e South Auckland town supply farm o p e r a t i n g expenses
t o t a l l e d $38,962 o r $6,837 more t h a n comparable expenses from t h e o t h e r
d a i r y farm type.
Feed expenses made up more t h a n h a l f of t h i s
d i f f e r e n c e , followed by repairs and maintenance, v e h i c l e expenses and
f e r t i l i s e r and seed.
A s noted e a r l i e r t h e town milk farmer h a s t o produce around
t w i c e as much supplementary f e e d compared w i t h h i s f a c t o r y supply d a i r y
neighbour. The c o s t of f e e d (which u s u a l l y i n c l u d e s c o n t r a c t haybaling
and s i l a g e making c o s t s ) w a s 280.4% g r e a t e r on a town supply farm. I n
a d d i t i o n t h e town milk farmer has h i g h e r l a b o u r c o s t s ($11,215 compared
w i t h $7,852).
The t o t a l of 1.87 l a b o u r u n i t s employed on a town milk
farm were o n l y 5.1% g r e a t e r t h a n on a f a c t o r y supply d a i r y farm (1.78)
but t h e proximity t o Auckland's i n d u s t r i a l suburbs may h e l p t o e x p l a i n
t h e Karaka d l s t r i c t town milk farm's wage payments.
The need t o c o n t i n u e m i l k i n g f o r t h e e x t r a t h r e e months d u r i n g
t h e cold winter period r e s u l t s i n an i n c r e a s e i n e l e c t r i c i t y c o s t s (up
36.9 p e r c e n t ) .
This i n c r e a s e i s due t o t h e e x t r a w a t e r h e a t i n g and
l i g h t i n g needs i n t h e d a i r y shed d u r i n g t h e w i n t e r .
The i n c r e a s e of o t h e r major
expenses (eg.
r e p a i r s and
maintenance - up 24.9 per c e n t , and v e h i c l e expenses - up 20.7
per
c e n t ) are due t o t h e need t o m a i n t a i n a d a i l y milk quota throughout t h e
y e a r . I n o r d e r t o e n s u r e a c o n t i n u o u s s u p p l y of milk t h e f a r m e r has t o
m a i n t a i n h i s equipment and v e h i c l e r e s o u r c e s .
Unlike t h e f a c t o r y
s u p p l y d a i r y farmer he i s unable t o put a s i d e some r e p a i r s u n t i l t h e
w i n t e r s e a s o n when t h e cows are dry.
A f t e r l a b o u r expenses t h e s i n g l e l a r g e s t o p e r a t i n g expense w a s
f e r t i l i s e r and seed f o r b o t h farm t y p e s . The town milk f a r m e r s p e n t
n e a r l y 15 p e r c e n t more on f e r t i l i s e r and s e e d t o h e l p promote g r a s s
growth f o r as many months as p o s s i b l e .
F r e i g h t c o s t s on t h e a v e r a g e town milk farm were v e r y low.
They were o n l y 34,3 p e r c e n t of t h e a v e r a g e f a c t o r y supply farms. T h i s
r e f l e c t s t h e g r e a t e r d i s t a n c e and d i v e r s e l o c a t i o n of t h e surveyed
f a c t o r y supply farms.
Nearly a l l of t h e 29 surveyed town m i l k farms
were i n t h e same Karaka - North P a e r a t a d i s t r i c t .
A l l a d m i n i s t r a t i o n expenses were h i g h e r on t h e town milk farm
although the t o t a l
$2654 - was o n l y $878 g r e a t e r t h a n t h a t on t h e
f a c t o r y supply farm.
-
A l l . overhead expenses were a l s o h i g h e r on t h e town m i l k farm.
The overhead t o t a l of $18,329 was $6,774 more than t h e t o t a l f o r t h e
f a c t o r y supply farm.
The amount of r e n t p a i d by t h e town m i l k farm
($2,203) was c o n s i d e r a b l y g r e a t e r t h a n t h a t paid by t h e f a c t o r y supply
f a r m ($150).
A common management p r a c t i s e on 21 of t h e 29 surveyed
town milk farms w a s t o r e n t l a n d f o r u s e as a run-off f o r young and d r y
s t o c k . T h i s h e l p s p r e s e r v e t h e home farm g r a s s f o r t h e m i l k i n g cows.
The a v e r a g e town milk farmer r e n t e d and l e a s e d 9.32 h e c t a r e s compared
w i t h 3.25 h e c t a r e s r e n t e d and l e a s e d by t h e f a c t o r y s u p p l y farmer. The
r e n t a l charge f o r l a n d c l o s e t o t h e Karaka d i s t r i c t was h i g h e r t h a n
land further distant.
For both farm t y p e s i n t e r e s t payments made up t h e l a r g e s t
s i n g l e overhead expense. The v a l u e of f r e e h o l d farm l a n d (updated t o
31.12.1983)
w a s $10,918 p e r h e c t a r e on t h e a v e r a g e town m i l k farm and
$5,098 p e r h e c t a r e on t h e f a c t o r y supply d a i r y farm. I n t e r e s t payments
t o t a l l e d $12,280 ( o r $213 p e r f r e e h o l d h e c t a r e ) on t h e town m i l k farm
and $9,269 ( o r $133 p e r f r e e h o l d h e c t a r e ) on t h e o t h e r d a i r y farm. The
h i g h v a l u e of l a n d i n t h e town m i l k supply a r e a r e f l e c t s t h e p r o x i m i t y
o f t h e motorway t o Auckland and a l t e r n a t i v e l a n d u s e a c t i v i t i e s s u c h as
horticulture.
The a v e r a g e town m i l k farm h a s $73,746 i n v e s t e d i n b u i l d i n g s ,
v e h i c l e s and p l a n t and machinery. This i s o v e r 30 per c e n t more t h a n
t h e a v e r a g e f a c t o r y supply farm. The town milk farmer h a s more money
invested
i n these resources t o
h e l p m a i n t a i n y e a r round m i l k
production.
The h i g h e r n e t
depreciation reflects t h i s
higher
investment.
T o t a l expenses on t h e town milk farm was $77,758 and t h i s was
$19,653 g r e a t e r t h a n t h e t o t a l f o r t h e o t h e r d a i r y farm type. The main
i t e m s c o n t r i b u t i n g t o t h i s $19,653
d i f f e r e n c e were f e e d ($3,708
d i f f e r e n c e ) , i n t e r e s t ($3,011),
rent
($2,053),
net
depreciation
($1,801), non-family p a i d l a b o u r ($1,718), r e p a i r s and maintenance
($1,539) and rates ($1,271 d i f f e r e n c e ) . Many of t h e s e c o s t s a r e h i g h
s o l e l y because of t h e need t o c o n t i n u e milk p r o d u c t i o n d u r i n g t h e
w i n t e r months.
The h i g h v a l u e of some of t h e s e c o s t s , n o t a b l y i n t e r e s t and
r a t e s a r e due t o t h e l o c a t i o n of t h e town milk farms. Nearly a l l town
m i l k i s produced on farms l o c a t e d on v e r y h i g h v a l u e land.
TABLE 16
Farm E x p e n d i t u r e Components
.......................................................................
.......................................................................
S. Auckland
Town Milk
Farms
.
S Auckland
F a c t o r y Supply
Dairy Farms
.......................................................................
Number of Farms Surveyed
T o t a l L i t r e s Produced
L i t r e s Converted t o M i l k f a t ( k g s )
Cows i n Milk i n December 1983
D a i r y P r o d u c t i v e Hectares
29
393,784
16,578
85.17
60.59
18
398,449
19,757
131.06
61.68
.......................................................................
Labour
Family Labour
Family Casual Labour
Non-Family Permanent
& Casual Labour
Unpaid Family Labour
Labour Accommodation
Sub-Total Labour
Operating
P
A n i m a l Health
Breeding & Herd T e s t i n g
Contractors
D a i r y Shed Expenses
Electricity
F e r t i l i s e r & Seed
Feed
Grazing Expenses
Freight
Weed & P e s t Expenses
V e h i c l e Expenses
R e p a i r s & Maintenance
I r r i g a t i o n Expenses
Sub-Total Operating
Table 16 continued
...
TABLE 16 cont'd
Farm Expenditure Com~onents
7
-
P
.
S.Auckland
Town Milk
Farms
S Auckland
Factory Supply
Dairy Farms
2,654
1,775
--------------------------.---------------------------------------------
Administration
Accountancy
Telephone
General Administration
Sub-Total Administration
Overheads
Insurance
Interest
Rates
Rent
Sub-total Overheads
Total Cash Expenses
Net Depreciation
Total Expenditure
(standard deviation)
3.4
- Net Farm Income
The average town milk farm
received a net farm income
This was nearly 1 8 per cent (or $5,300)
(financial basis) of $25,191.
less than the net farm income received by the average factory supply
Total revenue on the town milk farm was up by 16.2 per
farm ($30,491).
cent compared with the other farm but total expenses were also up by a
more substantial 33.8 per cent. There was a $14,353 difference in
total revenue and a larger $19,653 difference tn total expenses (Table
17).
For his 257,392 litres of quota milk the town milk farmer
received a total payment of $65,428 ($59,002 plus 65.36 per cent of the
end-of-season payments of $9,831).
This is 25.4196 cents per litre or
593.92 cents per kilogram. The surplus milk returned 16.7173 cents per
litre or 390.59
cents per kilogram. The factory supply producer
The
received 17.8761 cents per litre or 360.51 cents per kilogram.
surplus milk per kilogram payout was higher for some town milk supply
farmers in South Auckland because an extra premium was paid for town
milk surplus milk which was used for the manufacture of cultured dairy
foods.
TABLE 17
Net Farm Income Components
-.w*
P
S. Auckland
Town Milk
Farms
S. Auckland
Factory Supply
Dairy Farms
29
393,784
16,578
85.17
60.59
18
398,449
19,757
131.06
61.68
25,191
(15,977)
30,491
(17,445)
.......................................................................
Number of Farms Surveyed
T o t a l L i t r e s Produced
L i t r e s Converted t o M i l k f a t ( k g s )
Cows i n Milk i n December 1983
D a i r y P r o d u c t i v e Hectares
Gross Revenue
T o t a l Fxpenditure
N e t Farm -Income
(standard deviation)
.......................................................................
N e t Farm Income p e r Stock Unit
$
$
26.8
29.7
N e t Farm Income per Dairy
P r o d u c t i v e Hectare
N e t Farm Income p e r December
Milking Cow
I n June 1983 d u r i n g t h e p r i c e f r e e z e town milk p r o d u c e r s were
d e n i e d a n advance end-of-season s u r p l u s payment of 1.8102 c e n t s p e r
l i t r e . The f r e e z e a p p l i e d u n t i l 29 February 1984. Had t h i s payment
been made and p r o v i d i n g e x p e n d i t u r e remained t h e same, t h e n n e t farm
incomes f o r t h e two farm t y p e s would have been c l o s e r .
If this
i n c r e a s e i s a p p l i e d t o quota milk o n l y t h e n revenue (and t h e n e t farm
income) would have i n c r e a s e d by $4,659.
Had t h e town milk producer r e c e i v e d a n i n c r e a s e of one c e n t p e r
l i t r e above h i s a v e r a g e q u o t a m i l k p r i c e of 25.4196 c e n t s p e r l i t r e
t h e n t h e r e s u l t would have been a n i n c r e a s e i n t o t a l revenue of $2,574.
For t h e town milk farmer t o have r e c e i v e d t h e same n e t farm income a s
t h e f a c t o r y s u p p l y farmer ($30,491) h i s a v e r a g e payment f o r h i s 257,392
l i t r e s of q u o t a milk would have had t o i n c r e a s e from 25.4196 c e n t s p e r
l i t r e t o 27.4787 c e n t s (up 2.0591 c e n t s o r 8.1 p e r c e n t ) .
FIGURE 2
Gross Revenue and Net Farm Income
Per Dairy Productive Hectare
DOLLARS
gross
I---
net
factory
--A
gross
net
townmilk
REVENUE
---4FARMS
CHAPTER 4
A COMPARISON OF ECONOMIC PROFITABILITY
4.1
Introduction
When comparing two d i f f e r e n t t y p e s of d a i r y farm b u s i n e s s e s ,
which have d i f f e r e n t o b j e c t i v e s and r e c e i v e a d i f f e r e n t payout p e r
l i t r e of milk, f i n a n c i a l p r o f i t s a r e n o t a r e l i a b l e i n d i c a t o r of
r e l a t i v e economic performance.
P r o f i t s p e r cow o r n e t income p e r
h e c t a r e are more u s e f u l measures when e v a l u a t i n g t h e performance
between farms engaged i n t h e same farming a c t i v i t y .
Other u s e f u l
p h y s i c a l e f f i c i e n c y r a t i o s such a s milk p r o d u c t i o n p e r h e c t a r e o r m i l k
p r o d u c t i o n p e r cow can a l s o be c a l c u l a t e d . However i t i s important t o
recognise
t h a t maximizing a p h y s i c a l
efficiency r a t i o is
not
necessarily
c o n s i s t e n t w i t h economic
efficiency.
For
example,
p r o d u c t i o n p e r cow can be enhanced i f e x t r a d a i r y meal i s fed.
To
permit comparisons
across d i f f e r e n t types
(and s i z e s ) of
farm
b u s i n e s s e s , d i f f e r e n t f i n a n c i a l r a t i o s , such a s t h e r a t e of r e t u r n on
c a p i t a l can be a p p l i e d .
It i s important t o n o t e t h a t t h e r a t i o s d e r i v e d from farm
b u s i n e s s a c c o u n t s a r e a l l measures of a v e r a g e performance and g i v e no
i n d i c a t i o n of marginal e f f i c i e n c y .
The m a r g i n a l e f f i c i e n c y i s a
measure of what happens t o t h e v a l u e of o u t p u t ( f o r example m i l k
p r o d u c t i o n ) when e x t r a o r fewer u n i t s of a r e s o u r c e a r e used.
For
example, w h i l e o u t p u t per man on a two man farm may be $50,000,
there
i s no g u a r a n t e e t h a t , by engaging a t h i r d man, o u t p u t w i l l i n c r e a s e by
a f u r t h e r $50,000.
The l a s t u n i t of any f a c t o r employed ( i n t h i s c a s e
t h e t h i r d man) i s termed t h e marginal u n i t , and t h e i n c r e a s e i n t h e
V",
,
I,
,of o u t p u t , which r e s u l t s from engaging t h e marginal u n i t of t h e
r e s o u r c e i s c a l l e d i t s marginal v a l u e product.5 An e f f i c i e n t f a r m e r
a s s e s s e s t h e a l l o c a t i o n of h i s marginal v a r i a b l e i n p u t s r a t h e r t h a n h i s
a v e r a g e performance t o a c h i e v e h i s maximum o u t p u t .
..
I n Table 18 t h r e e d i f f e r e n t measures of economic p r o f i t a b i l i t y
are a s s e s s e d .
The c a l c u l a t i o n s a r e s i m i l a r t o t h o s e published i n t h e
NZ Meat and Wool Board's
Economic S e r v i c e s u r v e y of sheep and beef
farms.6 I n c a l c u l a t i n g t h e s e r e s u l t s a number of assumptions are made
and t h e s e should be t a k e n i n t o account when i n t e r p r e t i n g t h e r e s u l t s .
One major a r e a of d i f f e r e n c e i n t h i s s u r v e y ' s i n t e r p r e t a t i o n i s
i n t h e h a n d l i n g of t h e v a l u e of farm land. Any of t h e surveyed f a c t o r y
supply farms were c a p a b l e of producing milk 365 days of t h e year.
The
h i g h v a l u e of t h e Karaka d i s t r i c t town milk farm l a n d was due t o i t s
l o c a t i o n and s t r o n g demand from h o r t i c u l t u r e
n o t because i t was
producing milk every day of t h e year.
To e n a b l e a f a i r comparison of
economic e f f i c i e n c y t o be made and remove t h e b i a s c r e a t e d by t h e
uneven l a n d v a l u e s , t h e average f r e e h o l d a r e a l a n d v a l u e of t h e f a c t o r y
s u p p l y d a i r y farm i s used f o r both farm types.
-
5
S i z e and E f f i c i e n c y i n Farming; D.K.
House, 1975
6
New Zealand Meat and Wool Board's Economic S e r v i c e , Sheep and Beef
Farm Survey, 1982-83, P.44
B r i t t o n , B H i l l , Saxon
TABLE 18
Measures of Economic P r o f i t a b i l i t y
a
_--______----------------------------------------------_--------------_____-_-------------------------------------------------.--------------S.Auckland
Town Milk
Farms
S.Auckland
F a c t o r y Supply
Dairy Farms
Number of Farms Surveyed
Freehold Land Area ( h a )
Rented and Grazing-out Area (ha)
Ao
1.
2.
3.
4.
5.
6.
Return on C a p i t a l
Working Expenses (Labour, Operating
& A d m i n i s t r a t i o n less Imputed Family
Labour & Accommodation Costs)
49,663
39,205
23,938
19,370
T o t a l Adjusted Working Expenses (lf-2)
73,601
Working C a p i t a l (8.33% of 3 )
6,131
Farm C a p i t a l ( C a p i t a l Value of
Buildings [excluding farmer's
house], P l a n t & Machinery,
V e h i c l e s [ l e s s p r i v a t e car valued a t
$8,1701, L i v e s t o c k and Freehold
p l u s Rented and Grazing Land
[ a s s e s s e d a t f a c t o r % supply
value per hectare])
474,799
58,575
4,879
495,381
T o t a l Farm C a p i t a l (4+5)
500,260
P l u s Assessed Managerial Reward
($19,190 & $14,416) p l u s 1%
of Farm C a p i t a l ( s e e 5 )
Table 18 continued
..........................
480,930
...
a
Most of t h e terms used h e r e a r e p a r t i c u l a r t o t h i s t a b l e alone.
They a r e similar t o t h o s e used by t h e NZ Meat & Wool Board's
Economic S e r v i c e i n t h e i r "Sheep and Beef Farm Survey"
b
The farm l a n d f o r b o t h t h e town milk and t h e f a c t o r y s u p p l y farms
are valued h e r e a t t h e same a v e r a g e f a c t o r y supply p e r h e c t a r e
f i g u r e ($5,098 p e r h e c t a r e )
TABLE 18 cont'd
Measures of Economic P r o f i t a b i l i t y
.......................................................................
Auckland
Town Milk
Farms
S.
7.
8.
9.
N e t Farm Income
P l u s I n t e r e s t Paid
P l u s Rent Paid
10.
11,
Sub- t o t a l ( 7+8+9 )
Less Assessed Managerial Reward ( 2 )
12.
13.
Economic Farm S u r p l u s (10-11)
Less Assessed Opportunity Cost
of C a p i t a l (11.8% of 6 ) '
14.
15.
Economic Farm S u r p l u s l e s s a n
Opportunity Cost of C a p i t a l (12-131d
Rate of Return on C a p i t a l (12/6)
B.
C a p i t a l Turnover P e r c e n t a g e
14.
15.
16.
C.
17.
18.
Gross Revenue ( l e s s worker's house)
T o t a l Farm C a p i t a l ( 6 )
C a p i t a l Turnover P e r c e n t a g e , ( 1 4 / 1 5 )
T o t a l Farm C a p i t a l ( 6 )
P l u s Cash a t Bank Sundry Debtors
and Other C u r r e n t A s s e t s
Sub-Total (17+18)
Less Fixed L i a b i l i t i e s
Less Current L i a b i l i t i e s
22.
23.
T o t a l Equity C a p i t a l (19-20-21)
N e t Farm Income less I n t e r e s t and
Rent (10)
Less 12.0% of E q u i t y C a p i t a l ( 2 2 )
25.
39,674
23,938
39,910
19,370
15,736
20,540
56,750
59,031
-41,014
3.27X
-38,491
4.11%
..........................
------
------
102,527
480,930
21.32%
-------
Labour & Management R e s i d u a l
19.
20.
21.
24.
S.Auckland
Factory Supply
Dairy Farms
Labour & Management R e s i d u a l
(23-24)
-
480,930
500,260
15,009
10,635
368,763
425,378
39,674
44,252
39,910
51,045
-4,578
-11,135
...........................
...........................
Loss
-------
-------
c
The 11.8% i n t e r e s t rate w a s t h e mean i n t e r e s t p a i d by f a r m e r s as
noted i n A Review of A g r i c u l t u r a l C r e d i t i n NZ; J G Pryde and
L.B.
Bain, AEKU D i s c u s s i o n Paper No. 93, June 1985, p.12
d
Capital gains
analysis.
or
l o s s e s on land have been
excluded
from
this
4 - 2 Return on Farm C a p i t a l
-=-
The r e t u r n on c a p i t a l Is t h e r a t i o of n e t o u t p u t ( e x p r e s s e d a s
a d j u s t e d n e t farm income) o r economic farm s u r p l u s t o t o t a l c a p i t a l
involved.
To make a l l t h e surveyed farms comparable t h e n e t farm income
i s a d j u s t e d s o a l l farms a r e assumed t o be f r e e h o l d , un-encumbered and
owner-operated,
It i s c a l c u l a t e d by t a k i n g t h e n e t farm income and
a d d i n g back t h e i n t e r e s t p a i d and t h e r e n t paid. The a d j u s t e d income
i s c a l l e d t h e Economic Farm Surplus. T h i s i s t h e s u r p l u s a v a i l a b l e t o
a n owner t o pay i n t e r e s t on h i s investment a f t e r he has been paid a n
a s s e s s e d sum f o r h i s l a b o u r and management s k i l l s .
The managerial reward i s based on a n a r b i t r a r y b u t r e a l i s t i c
It i s a s s e s s e d by f i r s t t a k i n g t h e a v e r a g e a n n u a l a d u l t wage
formula.
p a i d i n t h e d i s t r i c t ($14,215 on town milk farms and $10,600 on f a c t o r y
Table 7 ) , and a d j u s t i n g i t f o r t h e number of f a m i l y
s u p p l y farms
permanent workers (1.35 and 1-36
Table 6).
This p r o v i d e s f o r farms
where more t h a n one working owner e x i s t s (e.g.
a f a t h e r and son
partnership),
A f u r t h e r a d d i t i o n t o t h i s imputed owners r e t u r n t o
l a b o u r of $19,190 (town m i l k ) and $14,416 ( f a c t o r y s u p p l y ) i s a n
imputed r e t u r n t o management. T h i s t a k e s account of t h e v a l u e of t h e
f a r m (measured a s one p e r c e n t of t h e a v e r a g e farm c a p i t a l ) . A s n o t e d
earlier any of t h e f a c t o r y supply farms have t h e l a n d and o t h e r
r e s o u r c e s which could be used t o produce year-round milk.
The h i g h
l a n d v a l u e of t h e Karaka town m i l k farms (due t o t h e i r l o c a t i o n ) would,
To
i f i t i s i n c l u d e d i n t h e c a l c u l a t i o n , d i s t o r t t h i s comparison.
a v o i d t h i s , t h e a v e r a g e i a n d v a l u e of t h e f a c t o r y supply d a i r y farm i s
used f o r both farm types.
-
-
The t o t a l imputed m a n a g e r i a l reward f o r t h e owner-operator(s)
f o r h i s l a b o u r and management s k i l l i s $23,938 f o r t h e town m i l k f a r m
and $19,370 f o r t h e f a c t o r y s u p p l y d a i r y farm.
An a c c u r a t e c a l c u l a t i o n of t h e r e t u r n on c a p i t a l i s dependent
v a l u a t i o n of t h e farm c a p i t a l components.
on a r e l i a b l e up-to-date
These components i n c l u d e l a n d and improvements t o l a n d , b u i l d i n g s ,
l i v e s t o c k and p l a n t and machinery. H i s t o r i c a l c o s t a c c o u n t i n g less
d e p r e c i a t i o n can be a p p l i e d t o p l a n t and equipment b u t t h i s method
c a n n o t be a p p l i e d , w i t h any c o n f i d e n c e , t o t h e o t h e r c a p i t a l i t e m s .
For
the annual d a i r y stock
account and b a l a n c e
sheet
c a l c u l a t i o n s t h e l i v e s t o c k h a s had s t a n d a r d v a l u e s a p p l i e d .
For a n
a c c u r a t e e v a l u a t i o n of a n up-to-date c a p i t a l v a l u e f o r l i v e s t o c k , t h e y
w e r e r e - a s s e s s e d a t end-of-year market v a l u e s .
The v a l u a t i o n of l a n d and improvements t o land and b u i l d i n g i s
more d i f f i c u l t t o e s t a b l i s h because t h e s e assets a r e v a l u e d a c c o r d i n g
t o t h e i r e s t i m a t e d market r e a l i s a t i o n and t o a lesser e x t e n t by t h e i r
p r o d u c t i v e c a p a c i t y o r t h e i n t e n s i t y w i t h which t h e p r o p e r t y i s farmed.
"The volume of p r o d u c t i o n depends on a m i x t u r e of i n p u t s , and t h e r e f o r e
t h e only c o r r e c t way of v a l u i n g l a n d i n economic t h e o r y i s t o a s s i g n t o
it, i t s v a l u e when t h e q u a n t i t i e s of c a p i t a l and l a b o u r used are such
t h a t t h e v a l u e s of t h e i r m a r g i n a l p r o d u c t s e q u a l t h e i r r e s p e c t i v e
prices" 7
7
I b i d , p,44
A s a measure of e f f i c i e n c y t h e r a t e of r e t u r n on c a p i t a l c a n be
used t o compare two farms of i d e n t i c a l s i z e which use t h e same amount
of c a p i t a l , o t h e r i n p u t s and s t a n d a r d i z e d v u t p u t p r i c e s . Provided b o t h
farms had similar r e s o u r c e s t h e n t h e farm e a r n i n g t h e h i g h e r r e t u r n on
c a p i t a l i s t h e more e f f i c i e n t .
The rate of r e t u r n on i n v e s t e d c a p i t a l , 3.27X (town m i l k ) and
4.11% ( f a c t o r y s u p p l y ) may seem low compared w i t h o t h e r non-farm
investment o p p o r t u n i t i e s ( f o r example s h a r e s , d e b e n t u r e s o r f i x e d term
savings accounts),
It should be r e c o g n i s e d t h a t t h e r a t e of r e t u r n on
c a p i t a l does n o t i n c l u d e u n r e a l i s e d c a p i t a l g a i n s on land. I f t h e s e
c a p i t a l g a i n s on farm land were added t o income i n t h e c a l c u l a t i o n s
t h e n t h e r a t e of r e t u r n on t o t a l investment would o f t e n be c o n s i d e r a b l y
higher.
I f t h e a c t u a l v a l u e of farm l a n d f o r t h e a v e r a g e town milk farm
($10,918
per h e c t a r e i n s t e a d of $5,098 p e r h e c t a r e of t h e f a c t o r y
s u p p l y farm l a n d ) w a s used i n t h e c a l c u l a t i o n , t h e n t h e rate of r e t u r n
on c a p i t a l f a l l s from 3.27 p e r c e n t t o 1.80 p e r c e n t ,
The economic farm s u r p l u s i s t h e a d j u s t e d n e t farm income less
a n a s s e s s e d managerial reward.
I f t h e o p p o r t u n i t y c o s t of c a p i t a l
( a s s e s s e d a t 11.8 p e r c e n t of t o t a l farm c a p i t a l ) i s s u b t r a c t e d from
t h e economic farm s u r p l u s t h e b a l a n c e , i f p o s i t i v e , i n d i c a t e s t h a t t h i s
farming system u s e s i t s r e s o u r c e s p r o f i t a b l y .
I f it is negative then
It must be
t h e s e r e s o u r c e s would be b e t t e r employed elsewhere.
remembered t h a t t h e economic farm s u r p l u s ought t o i n c l u d e t h e v a l u e of
land appreciation.
This i s excluded on t h i s a n a l y s i s because i t i s
highly variable,
4.3
C a p i t a l Turnover R a t i o
The c a p i t a l t u r n o v e r r a t i o measures t h e t o t a l farm revenue
It i s
g e n e r a t e d p e r d o l l a r of farm b u s i n e s s assets t h e farmer owns.
used t o i n d i c a t e t h e e f f i c i e n c y w i t h which c a p i t a l i s being employed i n
t h e business.
R e s u l t s from Table 18 demonstrate t h a t t h e a v e r a g e town
m i l k farm g e n e r a t e s 21 c e n t s i n revenue f o r each d o l l a r of c a p i t a l
invested.
The a v e r a g e f a c t o r y s u p p l y farm g e n e r a t e s n e a r l y 18 c e n t s i n
revenue f o r e v e r y i n v e s t e d d o l l a r of c a p i t a l .
A more d e t a i l e d e v a l u a t i o n of t h e e f f i c i e n c y of t h e b u s i n e s s i s
p o s s i b l e by c o n s i d e r i n g both t h e c a p i t a l t u r n o v e r p e r c e n t a g e a l o n g w i t h
t h e rate of r e t u r n on c a p i t a l , Farms w i t h a h i g h c a p i t a l t u r n o v e r
p e r c e n t a g e t o g e t h e r w i t h a h i g h rate of r e t u r n on c a p i t a l a r e l i k e l y t o
be u s i n g t h e i r r e s o u r c e s more e f f i c i e n t l y .
The u s e f u l n e s s of t h e s e measurements is l i m i t e d by t h e a c c u r a c y
of t h e e s t i m a t i o n of t h e farm c a p i t a l . Problems do e x i s t when making
comparisons between d i f f e r e n t d a i r y farm b u s i n e s s e s because of t h e
d i f f e r e n c e s i n t h e imputed v a l u e a s s i g n e d t o unpaid f a m i l y l a b o u r and
management and t h e d i f f e r e n t o u t p u t p r i c e s .
I f t h e c a p i t a l a s s e t s are
v a l u e d a t c u r r e n t market v a l u e s and a r e e q u i t a b l e between d i f f e r e n t
farm b u s i n e s s e s ( p s y c h o l o g i c a l f a c t o r s such as l o c a l i t y v a l u e being
i g n o r e d ) t h e n t h e c a p i t a l t u r n o v e r p e r c e n t a g e can p r o v i d e t h e b a s i s f o r
useful analyses.
The c a p i t a l t u r n o v e r p e r c e n t a g e f o r town milk farms f a l l s from
21.32 p e r c e n t t o 11.73 p e r c e n t i f t h e a c t u a l v a l u e of t h e f a n n l a n d
f o r t h e a v e r a g e town milk farm ($10,918 p e r h e c t a r e ) i s used.
4.4
Estimated Labour and Management R e s i d u a l
The e s t i m a t e d l a b o u r and management r e s i d u a l is a n e v a l u a t i o n
of what t h e farmer e a r n s as a reward f o r h i s own l a b o u r and management.
It assumes t h a t he pays i n t e r e s t of 12 p e r c e n t on h i s own e q u i t y
c a p i t a l , i n a d d i t i o n t o t h e i n t e r e s t he a l r e a d y pays on borrowed
c a p i t a l . T o t a l e q u i t y c a p i t a l c o n s i s t s of t o t a l farm c a p l t a l p l u s c a s h
a t bank, sundry d e b t o r s and o t h e r c u r r e n t a s s e t s . From t h i s f i x e d and
c u r r e n t l i a b i l i t i e s a r e s u b t r a c t e d . Twelve p e r c e n t of t h i s e q u i t y
c a p i t a l i s s u b t r a c t e d froin t h e n e t farm income t o g i v e a l a b o u r and
management r e s i d u a l l o s s of - $4,578 f o r t h e town milk farin and
-$11,135 f o r t h e f a c t o r y supply farm.
I f t h e a c t u a l v a l u e of farm l a n d f o r t h e average town milk farm
($10,918 p e r h e c t a r e ) was used i n t h e c a l c u l a t i o n i n s t e a d of t h e v a l u e
of t h e f a c t o r y supply farm land ($5,098 p e r h e c t a r e ) then t h e l a b o u r
and management r e s i d u a l would show a g r e a t e r l o s s a t -$52,446.
The o b j e c t i v e i n c a l c u l a t i n g i n t e r e s t on e q u i t y c a p i t a l i s t o
e s t i m a t e t h e o p p o r t u n i t y r e t u r n t h e farmer c o u l d r e a l i s e by i n v e s t i n g
h i s e q u i t y c a p i t a l elsewhere (such a s i n non-farm i n v e s t m e n t s ) . It i s
important t o n o t e t h a t management r e t u r n s f o r one year a l o n e may be
m i s l e a d i n g and r e t u r n s f o r s e v e r a l y e a r s should be c o n s i d e r e d i n
judging t h e c a p a b i l i t y of t h e o p e r a t i o n .
4-5
Other F i n a n c i a l R a t i o s
Another u s e f u l e f f i c i e n c y measure i s t h e g r o s s r a t i o .
It
i l l u s t r a t e s t h e siiiounnt of t o t a l expenses s p e n t p e r d o l l a r of g r o s s farm
revenue.
It i s c a l c u l a t e d by d i v i d i n g t o t a l expenses by g r o s s farm
revenue. The g r o s s r a t i o f o r t h e average town milk w a s 0.76 and i t w a s
0,66 f o r t h e a v e r a g e f a c t o r y supply farm. For each d o l l a r of g r o s s
revenue earned t h e town milk farmer r e c e i v e d 24 c e n t s i n n e t farm
income.
The f a c t o r y supply farmer d i d b e t t e r , because he d i d n o t have
t o produce milk d u r i n g t h e h i g h c o s t w i n t e r months.
He earned 34 c e n t s
i n n e t farm income p e r d o l l a r of g r o s s farm income.
The g r o s s r a t i o i s a n i n d i c a t o r of c o s t c o n t r o l and can be used
as a u s e f u l measure of e f f i c i e n c y i n t h e u s e of r e s o u r c e s .
It
The t u r n o v e r r a t i o i s a n o t h e r u s e f u l f i n a n c i a l r a t i o .
measures t h e g r o s s farm revenue g e n e r a t e d p e r d o l l a r of farm a s s e t s t h e
The g r o s s farm revenue i s d i v i d e d by t h e farm c a p i t a l
farmer c o n t r o l s .
( a t c u r r e n t market v a l u e ) owned and r e n t e d .
The t u r n o v e r r a t i o f o r t h e
two t y p e s of d a i r y farms i s 0.22 (town m i l k ) and 0.18 ( f a c t o r y s u p p l y ) .
For each d o l l a r of farm a s s e t s c o n t r o l l e d , t h e town milk f a r m e r
g e n e r a t e d $0.22 i n g r o s s farm income.
The h i g h e r t h e value of t h i s t u r n o v e r
s i m i l a r - s i z e farms, t h e more e f f i c i e n t t h e farmer.
4.6
ratio
relative
to
Conclusion
Notwithstanding t h e f a c t t h a t f i n a n c i a l r a t i o s a r e based on
h i s t o r i c a l r e s u l t s and compare average f i g u r e s and not marginal v a l u e s ,
t h e c a l c u l a t i o n of a range of r a t i o s from t h e f a r m e r ' s f i n a n c i a l
Often farm l e n d e r s u s e a v a r i e t y of
a c c o u n t s i s v e r y worthwhile.
analytical
r a t i o s developed from
b a l a n c e s h e e t s t a t e m e n t s when
a s s e s s i n g t h e v i a b i l i t y of a borrowers f i n a n c i a l base,
The d i f f e r e n t o u t p u t p r i c e s found on t h e s e two t y p e s of d a i r y
farms c r e a t e a n o t h e r d i f f i c u l t y .
Comparisons between some of t h e
f i n a n c i a l r a t i o s of two o r more d i f f e r e n t f a r ~ n i n gsystems a r e more
r e l i a b l e when a l l o u t p u t p r i c e s a r e market l e d . Both t h e town milk and
f a c t o r y supply
producer p r i c e s s h a r e a l i n k a g e w i t h t h e market
e s t a b l i s h e d o u t p u t m i l k f a t p r i c e a l t h o u g h f o r t h e town milk farmer t h e
T h i s makes i t more
l i n k a g e is complicated because of a d i f f e r e n t base.
d i f f i c u l t t o compare t h e r a t i o s which i n v o l v e a revenue o r income
component.
Another c o m p l i c a t i o n i s t h e v a r y i n g e f f e c t of c a p i t a l g a i n s
r e f l e c t e d i n t h e a p p r e c i a t i n g v a l u e of farm land. I n t h i s a n a l y s i s
t h i s has been excluded because i t i s h i g h l y v a r i a b l e . The v a l u e of
t h e s e v a r i o u s r a t i o s i s t o h e l p monitor t h e f i n a n c i a l s t r e n g t h of t h e
farm. U n f o r t u n a t e l y u n l i k e o t h e r n o n - a g r i c u l t u r a l i n d u s t r i e s t h e r e are
few w e l l e s t a b l i s h e d farm s t a n d a r d s o r norms f o r comparing f i n a n c i a l o r
e f f i c i e n c y r a t i o values.
Nor i s i n f o r m a t i o n a v a i l a b l e t o suggest what
d e v i a t i o n s from t h e norm i s a c c e p t a b l e o r what a c t i o n i s needed t o
c o r r e c t a n u n s a t i s f a c t o r y s i t u a t i o n . U n t i l such comparative f i g u r e s
a r e p u b l i s h e d farmers a r e l i m i t e d t o comparing t h e i r own f i n a n c i a l
r a t i o s o v e r time.
APPENDIX
RELIABILITY OF SURVEY ESTIMATES
E s t i m a t e s of farm c h a r a c t e r i s t i c s based on a sample of farms
a r e l i k e l y t o d i f f e r from t h e e s t i m a t e which would have been o b t a i n e d ,
had a l l farms i n t h e p o p u l a t i o n been v i s i t e d . The d i f f e r e n c e s a r e
c a l l e d sampling e r r o r s and t h e i r l i k e l y s i z e i n p e r c e n t a g e terms i s t h e
r e l a t i v e s t a n d a r d e r r o r of t h e e s t i m a t e s . The r e l a t i v e s t a n d a r d e r r o r
i s d e f i n e d as t h e s t a n d a r d e r r o r ( c o r r e c t e d f o r a s m a l l p o p u l a t i o n )
d i v i d e d by t h e mean. The s m a l l e r t h e r e l a t i v e s t a n d a r d e r r o r , t h e more
r e l i a b l e t h e estimate.
Table 19 sets o u t t h e mean and r e l a t i v e s t a n d a r d e r r o r f o r key
survey v a r i a b l e s .
For example, Table 19 shows t h a t f o r South Auckland
Town Milk farms t h e survey e s t i m a t e of a v e r a g e n e t farm income i s
$25,191 w i t h a r e l a t i v e s t a n d a r d e r r o r (RSE) of 9.90 p e r c e n t .
In
o t h e r words, i t i s 95 p e r c e n t c o n f i d e n t t h a t t h e t r u e v a l u e of a v e r a g e
n e t farm income l i e s w i t h i n t h e range of 1.96 x 9.90 p e r c e n t x $25,191
e i t h e r s i d e of t h e e s t i m a t e d value. That i s w i t h i n $25,191
$4,888.
+
TABLE 19
R e l a t i v e Standard E r r o r s (RSE) of Some Key V a r i a b l e s
S.Auckland
Town Milk
Farms
S. Auckland
F a c t o r y Supply
Dairy Farms
------.-----------------------------------------------------------------
Number of Farms Surveyed
29
18
Dairy P r o d u c t i v e Hectares
- Mean
- RSE (%)
T o t a l L i t r e s Produced
- Mean
- RSE (%)
Milking Cows i n December
- Mean
- RSE (%)
Gross Revenue
- Mean
- RSE (%)
T o t a l Expenditure
- Mean
- RSE (%)
N e t Farm Income
Mean
RSE (%)
25,191
30,491
9.90
12.79
.......................................................................
.......................................................................
Using a two-sided h y p o t h e s i s t e s t f o r comparing two means, i t
w a s not p o s s i b l e t o reject t h e n u l l h y p o t h e s i s t h a t t h e town milk
sample mean n e t income f i g u r e i s e q u a l t o t h e f a c t o r y s u p p l y sample
mean n e t income f i g u r e a t t h e 95 p e r c e n t l e v e l of confidence.
However, a t a c o n f i d e n c e l e v e l of 64 p e r c e n t t h e mean of t h e Town milk
n e t farm income i s s t a t i s t i c a l l y d i f f e r e n t from t h e mean of t h e f a c t o r y
s u p p l y n e t farm income. For t h e second c a s e t h i s i n d i c a t e s t h a t t h e r e
i s a p r o b a b i l i t y l e v e l of 0.34 of having a t y p e 1 e r r o r . There is a
h i g h p r o b a b i l i t y of r e j e c t i n g a t r u e n u l l h y p o t h e s i s ( t h a t t h e r e i s no
d i f f e r e n c e i n t h e mean) and a low p r o b a b i l i t y of a c c e p t i n g a f a l s e n u l l
hypothesis.
RECENT PUBLICATIONS
RESEARCH REPORTS
138. Thi, Wflrld .Shc.rpmt,wt ;I/l</rkrf:~n c.cono~1c.tn~
rnodc~/,N . Blyth,
1783.
139. An Econonzli Slirvcy o~/-h'eu'Z~,a/an(:/
Town Mi/k Prod~icers,198182, R.G. Moffirt, 1983.
140. Economic R~/at~i~mrhrp.r
7c:ithln the -Jupane.re Fl,ed and LiueJtock
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T/JcJ ~ ( , I L ,~ ( , o / t / r / ( : / r#b/v .y?( tor. Fi~re/j!nExc.h(/~~,y~
Itnp//t~//tiot~
R.D. 1,ough. W.A.N. Brown, 1983.
14 1 .
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Analysis, S~lrvpyNo. 7. 1982-83, R.D.Lough, P.J. McCartin,
1983.
143. An Economic Survey of New Zealand W1heatgmwers: Finantinl
Analysi.r, 1981-82, R.D. Lough, P.J. McCartin, 1983.
144. Developm~nt of the South Canterbury-Otago Sorrthern Bl~(efin
Tuna Fishery. D.K. O'Donnell, R.A. Sandrey, 1983.
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146. Potatoes: Dirtribution and Processing, S.A. Hughes, R.L.
Sheppard, 1983.
147. The Demandfor Milk: An Econometric Analysisofthe New Zealand
Market, R J . Brodie, R.G. Moffitt, J.D. Gough, 1984.
148. The Christchurch and New Zeahnd Eatin8 Out Market.r, A. van
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145.
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M.D. Clemes, L.D. Woods, 1985.
An Econottzzc Survey of N e w Zealand Wheatgrowers: Eizteipnse
AnalyJ~s,Survey N o 9, 1984-85, R. D. Lough, P.J. McCart~n,
1985.
A N Econon7tc Survey of N e w Zealat7d IY'heatgro~uerrF/nanc~a/
Analyszs, 1983-84, R D . Lough, P.J. McCartln, 1985.
Rro/o'yic(z/ C'ontro/ of G m e : NU ( J ~ . - ( :ei~al~~atiou.
~~ti,
R. A. Sand re y.
1985.
Thr (,'fJllfpl'ti~i~~'
P/J.litiiJll of- NCW z U l / ~ / / dFwsh Fl.//;f E.Y/)(I~%I;
M.T. Laing, S.A. Hughes, R.L. Sheppard, 1985.
MnrketincySt>-/rctrtre.r.for
the Horticltltr/,?rlInd~i.rtr~~,
N . I,. Taylor,
R.G. Lattimore, 1985.
A IJ Econo1/7icStirvi<]ldAri>zc?
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A Financial and Economic Survey of South Auckland Town Milk
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Moffitt, 1985.
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150. The WorU Market for Fruit Juice Products: Current Situation and
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152. Survey of New Zealand Farmer Intentions and Opinions.
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15 3.
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1984
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The New Zealand Farm Business and the Current Changes in its
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1985.
Pap1,r.r Presented at the Tenth Annnnl Collference qf the Next
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Agricr/ltnra/ Economics Society. 1985.
An Ex(:1111i17ntion
/ ~ A l t e i n a t i uM(:irketirzg
e
Strat-tnres - 0 / i t ( , r a t ~ o ~
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