Dairy Operating Profit (9-3)
Dairy Operating Profit (formerly known as Economic Farm Surplus (EFS)) is a measure of
farm profitability used for benchmarking comparison between dairy farms. The guidelines
described in this Farmfact are based on the industry standard as set by DairyBase.
Dairy Operating Profit is the Dairy Gross Farm Revenue less Dairy Operating Expenses where
non-cash adjustments have been made to ensure that businesses are being compared on an
equivalent basis. How the business is financed is not included, leases for cows or milking
platforms and debt-servicing are excluded from calculations. Non-cash adjustments include:





The value of change in dairy livestock numbers
Unpaid labour and management (labour adjustment)
The ownership of support blocks (support block adjustment)
Depreciation
The value of change in supplementary feed inventory
Operating Profit Calculation
Dairy Gross Farm Revenue (Dairy GFR)
Milk & Net Dairy Livestock Stock Sales
(cash)
Other Dairy income
(cash)
Value of Change in Dairy Livestock Numbers (non-cash)
Less
Operating Expenses
Farm Working Expenses
(cash)
Feed Inventory Adjustment
(closing value of feed less opening)
Owned Support block Adjustment (if block is owned and not leased)
Labour Adjustment
(for unpaid family management and labour)
Depreciation on dairy assets
(non-cash as per accounts)
Equals Dairy Operating Profit
50% Sharemilkers - Use your own set of accounts to calculate Operating Profit. This can be
compared with other 50% sharemilkers, but not farm owners.
Variable Order Sharemilkers - Combine the accounts of the farm owner and the
sharemilker to calculate Operating Profit for the farm. This can be compared with other owneroperator farms.
The following diagram shows the adjustments made to the cash income and expenses to
calculate Operating Profit.
Updated November 2014
CASH
NON-CASH
CASH &
NON-CASH
Farmfact 9-3
Updated November 2014
Page 2
Calculating Operating Profit
The following section defines the method and information required to calculate operating profit
and ensure that the final result is comparable with other dairy farms. Use this guide to calculate
your Operating Profit by filling in the template on the back page of this Farmfact.
Step 1. Fill in income and expenses in the table on the back page of this
Farmfact, using information which is in your financial accounts.
Net Milk Revenue

Milk sales less DairyNZ levy (include any colostrum sales and milk insurance claims).
Include Milk Dividends.
Net Livestock Income (Stock Sales - Purchases)


Total revenue from dairy livestock sold less the total cost of dairy livestock purchased
during the year.
To ensure that stock adjustments to be made later will be correct, make the following
changes to livestock sales and purchases:
a. If stock has been purchased early in the season then add them to the opening stock
numbers, and deduct their purchase price from stock purchases.
b. Stock purchases made late in the season should be deducted from the closing stock
numbers and again their purchase price should be deducted from stock purchases.
c. Large numbers of stock sales made late in the season should also be added back into
stock numbers and their sale price deducted from stock sales.
Other Dairy Revenue

Dairy farm revenue, other than from milk and livestock sales. This includes items such as
rebates that cannot be netted off a specific expenditure category (e.g. trading company
rebates), rent for farm houses/cottages (check that any rent from farm staff for
accommodation is netted off wages paid) and other revenue. Revenue from land leased
out is included if there is no lease expenditure to offset. Also include revenue from other
use of dairy farm assets e.g. small amounts of contracting and prize money for dairy
livestock. Note: Rent received from staff for accommodation should be netted off wages.
Off Farm Income

We are interested in profit from your dairy farm. Income which is not generated from the
dairy assets should not be considered in Dairy Operating Profit. Operating Profit does not
include income from dividends (other than milk dividends)/shares or off-farm assets such
as a rental property.
Expenses

Expenses should be included in Operating Profit as they appear in your financial accounts.
a. Exclude lease for milking platform or cows.
b. Exclude interest.
c. Do not adjust for capital expenditure on fertiliser, repairs and maintenance or
regrassing.
d. Exclude large one off expenditure items (such as fertiliser and R&M) caused by severe
weather events resulting in civil defence status.
Farmfact 9-3
Updated November 2014
Page 3
Overheads




Overheads include administration, farm insurance, ACC and rates.
Include lease of land used to support the dairy operation, i.e. a support block, where the
lease is paid to an external party. If the lease is paid to a related entity, that entity will
need to be included in the calculations. Also include machinery leased/hired for R&M
purposes.
Do not include leases for milking land, cows, vehicles and plant – these are all
excluded from Operating Profit.
Do not include the cost of interest. When comparing Operating Profit between farms,
we are focusing on the operational efficiency of the farm and not how a business is
funded.
Depreciation

Include depreciation related to dairy farm assets (buildings, improvements, plant,
machinery and vehicles). Include depreciation recovered and loss on sale of dairy fixed
assets (only on sale of assets to external parties). Exclude depreciation on off-farm
assets or any private portions of depreciation on buildings and vehicles.
Step 2. Estimate adjustments using the tables below. Add them in to the
Operating Profit table below.
It is important that the basic financial information from your accounts is adjusted when
calculating Operating Profit, so all farming systems can be compared on an equal footing. The
following are the adjustments used and a brief explanation.
The latest DairyBase adjustments are online; navigate to the “Support Material” page to find the
“Operating Profit Adjustments”.
http://www.dairynz.co.nz/farm/dairybase/support/support-materials/
DairyBase is a web-based package that records and reports standardised dairy farm business
information - both physical and financial. DairyBase analyses the resources of the farm and, by
way of benchmarking, compares their use of resources with other farm businesses.
Talk to your DairyNZ Consulting Officer or ring 0800 4 DairyNZ [0800 4 324 7969] and ask for
DairyBase for more information or to join.
Value of change in dairy livestock
If stock numbers change between the start of one season, and the start of the next, this will
affect stock income for the year.

If stock numbers go up then less stock will have been sold than usual. Stock income will
be lower than usual, and we adjust Operating Profit up.

If stock numbers go down income will be higher than usual, and we adjust Operating Profit
down.
Such movements make comparison of Operating Profit between years and between farms
difficult. Therefore an adjustment is made to smooth the differences. The value of the change in
livestock numbers adjustment is calculated using National Average Market Values (NAMV) and
is completed for each stock class. The calculation used is:
Closing numbers of dairy livestock - opening numbers of dairy livestock x closing NAMV
Farmfact 9-3
Updated November 2014
Page 4
Calculate the stock adjustment for your farm using the following table. The stock numbers you
need can be found in the stock reconciliation section of your accounts.
National Market Value for Friesians & Related Breeds
2011/12
2012/13
2013/14
MA Cows
2155
1873
1963
R 2 yr Heifers
1806
1560
1616
R 1 yr Heifers
1234
892
946
Breeding Bulls
1526
1337
1398
R 2 yr Steers & Bulls
822
736
780
R 1yr Steers & Bulls
521
442
442
National Market Value for Jerseys & Other Dairy Breeds
2011/12
2012/13
2013/14
MA Cows
1923
1627
1782
R 2 yr Heifers
1620
1343
1421
R 1 yr Heifers
955
668
699
Breeding Bulls
1198
1091
1255
R 2 yr Steers & Bulls
662
597
690
R 1yr Steers & Bulls
412
342
399
Example for Friesian Breed
Opening
No’s (A)
Closing
No’s (B)
Difference
(B-A)
Value
2013/14
Adjustment
(Diff. x Value)
R 1 yr
60
58
-2
$946
-$1,892
R 2 yr
50
55
5
$1,616
$8,080
Cows
240
234
-6
$1,963
-$11,778
-$5,590
Note: Make sure you transfer the negative sign (-) to the calculation sheet where a negative
occurs.
Support blocks or where young stock are grazed at home
If you lease a support block or graze off, then no adjustment is needed - costs appear in your
accounts already (Grazing and Support block lease).

People with support land will not have the full costs associated with the additional feed
grown on the support block or grazed by dry cows and young stock. The support block
adjustment is used in these cases to create the equivalent of a lease.

The support block adjustment is either an estimate of the market rate to lease the land for
dry stock or the default values as detailed in the table below. If you own a support block,
adjust the Operating Profit down for the value of that land to you.

Any lease on the milking platform is excluded.
$ Per Hectare
Year
Northland Waikato
BOP
Taranaki Lower NI
West
Coast
Tasman
Marlborough
Otago
Canterbury Southland
11-12
460
700
600
750
600
600
750
740
12-13
460
800
650
800
700
600
800
800
13-14
460
800
650
800
700
600
800
800
Farmfact 9-3
Updated November 2014
Page 5
Calculate your Support block adjustment here:
Area
Lease value $/ha
Adjustment
ha $
ha $
$
Labour adjustment
All unpaid labour is valued when calculating the Operating Profit
Some farms are managed by people who receive no direct payment for their work through the
farm working expenses in their financial accounts, in other words they take drawings. Other
farms employ a manager and/or staff to run the farm, whose wages do appear in the financial
accounts. This can result in a significant difference in wage expenses for otherwise very similar
farms. Drawings cannot be used as a reliable indicator of the value of the labour provided due
to people’s different standards of living.
The value of the unpaid labour adjustment is calculated based on a differential rate for wages to
the primary manager of the business and other unpaid labour involved in operations rather than
management. DairyBase calculates a full-time labour unit as someone working 41-60 hours per
week for 48 weeks of the year.
Wage for management (a)


If the principal farm manager is employed, then the wage cost of the manager will already
be in the accounts. No wage for management is needed. This should not include director’s
fees or shareholder salaries.
If the farm manager is also the farm owner or 50:50 sharemilker, you need to include a
wage for management in the Operating Profit, to value the labour of that person.
Wages for management are based on the number of Peak Cows Milked
Season
Number of cows
Basic rate
Per cow rate
2011/12
<200
$44,500
N/A
200 - 399
$44,500
Herd size-200
77
400 - 999
$60,000
Herd size-400
66
1000 - 1199
$100,000
Herd size-1000
40
>= 1200
$120,000
N/A
< 900
$35,000
65
900 – 1199
$39,000
62
>= 1200
$120,000
N/A
< 900
$36,000
65
900 – 1199
$39,000
62
>= 1200
$120,000
N/A
2012/13
2013/14
Farmfact 9-3
Updated November 2014
Page 6
The management adjustment is based on hours worked, with 2,400 hrs/year for one full time
equivalent (FTE) manager. Hours worked over and above 2,400 hours/year, for the manager,
are calculated at the family unpaid rate as detailed in the table below up to a maximum of 3,600
hours (0.5FTE). These rates are also used for additional family labour.
Year
Annual Rate
2011/12
$34,000
*$42,000 (Otago/Southland)
2012/13
$34,500
*$42,600 (Otago/Southland)
2013/14
$35,500
*$42,600 (Otago/Southland)
To calculate farm management adjustments:
Unpaid manager 1
=
Unpaid person 2
=
=
=
Total labour adjustment
=
Basic rate (cow # adjusted) + (# cows x per cow rate)
hours/week x 52 weeks  number of hours
number of hours/2400  FTE equivalent
FTE equivalent x Annual rate
unpaid manger 1 + unpaid person 2
For example, in 2013/14 one unpaid family manager works 50hrs/week on average and a
second family member works 20 hours per week milking a 500 cow herd.
Manager
1 FTE manager (2,400hrs)
$36,000 + (500 x 65)
Second unpaid person
20 x 52 = 1,040 hours
=
1,040/2400 = 0.43FTE
0.43FTE x $35,500
Total Labour Adjustment:
$68,500
=
$15,265
=
$83,765
Calculate your labour adjustment here:
Wage for management
(a)
$
+Value of unpaid labour
(b)
$
= Labour adjustment
=$
Farmfact 9-3
Updated November 2014
Page 7
Feed inventory adjustment

This is a financial adjustment for the change in supplementary feed held on hand at the
start of each season. This is calculated by taking the Closing supplementary feed (DM
tonnes) less Opening supplementary feed (DM tonnes) and multiplying by the value of the
feed $/tonne DM as per the table below.
Closing
Supplement
Tonnes DM
A
Year
$/tonne DM
2011/12
$280
2012/13
$300
2013/14
$320
Opening
Supplement
Tonnes DM
B
Difference
A–B
Adjustment
(Difference x
cost)
Cost $/tonne
DM
$
Note: Make sure you transfer the negative sign (-) to the calculation sheet where a negative
occurs.
Step 3. Calculate the Dairy Operating Profit
Complete table on the following page.
Step 4. Divide this by the milking area to work out Operating Profit/ha
Milking Area


Milking area is the area (in hectares) normally available for grazing by milking cows
(although it may be in crop for part of the year).
Exclude any ungrazeable areas such as waste areas, waterways, races, fences, drains,
buildings and forestry.
Farmfact 9-3
Updated November 2014
Page 8
Dairy Operating Profit
Farm Name
Year
Kg Milksolids
Effective hectares
Kg MS/ha
Peak Cows Milked
Kg MS/cow
GROSS FARM REVENUE
Total $
$/ha
$/kgMS
Milk Sales (deduct DairyNZ levy)
Dairy Livestock Sales
(sales – purchases)
Other Dairy cash income
Dairy Cash Income
$
plus Value of change in dairy livestock
GROSS FARM REVENUE
$
/ha
$
DAIRY OPERATING EXPENSES
Total $
$
/kgMS
$/ha
$/kgMS
Wages
Animal Health
Breeding & Herd Improvement
Farm Dairy
Electricity
Supplements made
Supplements purchased
Young & Dry Cow Grazing
Winter Cow Grazing
Support Block Lease
Fertiliser (incl Nitrogen)
Irrigation
Regrassing
Weed & Pest
Vehicles & Fuel
Repairs & Maintenance
Freight and General
Administration
Insurance
ACC
Rates
Total Farm Working Expenses
$
$
/ha $
/kgMS
DAIRY OPERATING EXPENSES
$
$
/ha $
/kgMS
DAIRY OPERATING PROFIT
$
$
/ha $
/kgMS
plus Labour adjustment
less Feed inventory adjustment
plus Owned support block adjustment
plus Depreciation