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 Revenue less Dairy Expenses where non-cash adjustments
have been made to ensure that businesses are being compared on an equivalent basis. Noncash adjustments include:
The value of change in dairy livestock numbers
Unpaid labour and management (labour adjustment)
The ownership of run-offs (run-off 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
Feed Inventory Adjustment
Owned Runoff Adjustment
Labour Adjustment
Depreciation
(cash)
(closing feed less opening feed inventory)
(if runoff is owned and not leased)
(for unpaid family management and labour)
(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.
Updated May 2012
Farmfact 9-3
Updated May 2012
Page 2
The following diagram shows the adjustments made to the cash income and expenses to
calculate Operating Profit.
CASH
Sales Milk
Livestock
Other
Less Livestock
Purchases
Farm Working
Expenses (FWE)
Wages & salaries
Stock expenses
Supplementary
Feed
Grazing & Run-off
Other Working
Expenses
Overheads
CASH
OPERATING
SURPLUS
NON-CASH
ADJUSTMENTS
PLUS
(Closing livestock
numbers at Closing
NAMV* less
Opening livestock
numbers at Closing
NAMV)
PLUS
Market value of family
labour & management
Run off adjustment
Depreciation
Minus
(Closing feed inventory
at market value less
Opening feed inventory
at market value)
CASH &
NON-CASH
DAIRY
Gross Farm
Revenue
Milk
Net livestock
Other
OPERATING
EXPENSES
Labour expenses
Stock expenses
Supplementary
Feed
Grazing & Run-off
Other Working
Expenses
Overheads
DAIRY
OPERATING
PROFIT
(EFS)
*NAMV is the National Average Market Value and is set annually by the IRD for taxation purposes.
Farmfact 9-3
Updated May 2012
Page 3
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. Do not adjust for capital expenditure on fertiliser, repairs and maintenance or
regrassing.
b. 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 May 2012
Page 4
Overheads
Overheads include administration, farm insurance, ACC and rates.
Include lease of land used to support the dairy operation, i.e. a run-off, 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. Talk to your DairyNZ Consulting
Officer if you have any queries or ring 0800 DairyNZ [0800 4 324 7969] and ask for DairyBase.
To get the up to date figures for adjustments refer to the DairyBase website and navigate to the
“Support Material” page where you will find a hotlink to the latest adjustments under the
“Operating Profit Adjustments” heading. Or use the link below:
http://www.dairybase.co.nz/page/pageid/2145841098/Support%20Materials#OperatingProfitAdj
ustments
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 May 2012
Page 5
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
2009/10
2010/11
2011/12
MA Cows
1378
1766
2155
R 2 yr Heifers
1106
1494
1806
R 1 yr Heifers
691
1035
1234
Breeding Bulls
1101
1370
1526
R 2 yr Steers & Bulls
635
767
822
R 1yr Steers & Bulls
393
459
521
National Market Value for Jerseys & Other Dairy Breeds
2009/10
2010/11
2011/12
MA Cows
1275
1631
1923
R 2 yr Heifers
1014
1344
1620
R 1 yr Heifers
575
792
955
Breeding Bulls
984
1140
1198
R 2 yr Steers & Bulls
577
616
662
R 1yr Steers & Bulls
335
363
412
Example for Friesian Breed
Opening
No’s (A)
Closing
No’s (B)
Difference
(B-A)
Value
2011/12
Adjustment
(Diff. x Value)
R 1 yr
60
58
-2
$1234
-$2,468
R 2 yr
50
55
5
$1806
$9,030
Cows
240
234
-6
$2155
-$12,930
-$6,368
Note: Make sure you transfer the negative sign (-) to the calculation sheet where a negative
occurs.
Runoffs or where young stock are grazed at home
If you lease a runoff or graze off, then no adjustment is needed - costs appear in your accounts
already (Grazing and Run-off).
People with run-off land will not have the full costs associated with the additional feed
grown on the run-off or grazed by dry cows and young stock. The run-off adjustment is
used in these cases to create the equivalent of a lease
The runoff 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 runoff, adjust the
Operating Profit down for the value of that land to you.
Farmfact 9-3
Updated May 2012
Page 6
$ Per Hectare
Year
Northland Waikato
BOP
Taranaki Lower NI
West
Coast
Tasman
Marlborough
Otago
Canterbury Southland
09-10
450
700
400
750
550
550
800
570
10-11
450
700
450
750
600
550
750
620
11-12
460
700
600
750
600
600
750
740
Calculate your runoff 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.
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.
Farmfact 9-3
Updated May 2012
Page 7
Wages for management are based on the number of Peak Cows Milked
No. of
Cows
Calculating
Wage to Management
Base Rate for Year ($BR)
2009/10
2010/11
2011/12
<=
100
$37,000
$37,500
<=
200
$44,500
101400
$37,000
$37,500
201400
$44,500
401999
$58,000
$58,700
401999
$60,000
>=
1000
$78,000
*$96,000
$79,000
*$97,000
$90,000
*$100,000
(Otago/Southland)
(Otago/Southland)
>=
1000
Base rate for year ($BR)
e.g. $37,500 for 210/11
$BR + (Herd size - 100 x $70)
e.g 300 cows: $37,500+(300100)x$70 = $51,500
$BR + (Herd size - 400 x $33)
e.g 500 cows: $58,700+(500400)x$33 = $62,00
* Higher rates apply to
Otago/Southland
(Otago/Southland)
Use the number of Peak Cows Milked to calculate the appropriate wages of management.
The management adjustment is based on hours worked, with 2,400 hrs/year for one full time
equivalent (FTE) manager. Where the hours worked are greater than 2,400 hours/year the
hours over and above 2,400 for the manager are calculated at the family unpaid hourly rate as
detailed in the table below up to 3,600 hours. Over 3,600 hours per annum there is no further
adjustment. These rates are also used for additional family labour.
Year
Annual Rate
Hourly Rate
2009/10
$33,600
*$40,800 (Otago/Southland)
$14.00
$17.00
2010/11
$34,000
*$41,300 (Otago/Southland)
$14.17
$17.21
2011/12
$34,000
*$42,000 (Otago/Southland)
$14.17
$17.50
For example, In 2010/11 (outside of Otago/Southland), where one unpaid family manager works
60hrs/week on average as the primary manager, and a second works 20 hours per week
assisting with milking a 500 cow herd the adjustment for unpaid labour would be:
Manager
1 FTE manager (2,400hrs)
Plus
Second unpaid person
Total Labour Adjustment:
$58,700 + (500-400 x 33)
=
$62,000
(60 x 52 – 2,400) x $14.17/hour
720 x $14.17
Total Adjustment for Manager
=
=
$10,202
$72,202
20 x 52 = 1,040 hours
1,040 hours x $14.17
=
$14,737
=
$86,939
Farmfact 9-3
Updated May 2012
Page 8
Calculate your labour adjustment here:
Wage for management
(a)
$
+Value of unpaid labour
(b)
$
= Labour adjustment
=$
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
2009/10
$250
2010/11
$270
2011/12
$280
Opening
Supplement
Tonnes DM
B
Difference
A–B
Cost $/tonne
DM
Adjustment
$
Note: Make sure you transfer the negative sign (-) to the calculation sheet where a negative
occurs.
Step 3. Calculate the Dairy Operating Profit
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), less the area young stock are grazed on.
Exclude any ungrazeable areas such as waste areas, waterways, races, fences, drains,
buildings and forestry.
Farmfact 9-3
Updated May 2012
Page 9
Dairy Operating Profit
Farm Name
Year
Kg MS Total
Effective Dairying Area
Kg MS/ha
Peak Cows Milked
Kg MS/cow
GROSS FARM REVENUE
Total $
$/kg MS
$/ha
Net Milk Sales
Net Dairy Livestock Sales
Value of Change in Dairy Livestock
Other Dairy Revenue
Dairy Gross Farm Revenue
$
OPERATING EXPENSES
$
Total $
$
$/kg MS
$/ha
Labour Expenses
Wages
Labour Adjustment – Unpaid
Labour Adjustment – Management
Total Labour Expenses
$
$
$
$
$
$
$
$
$
Total Grazing & Run Off Expenses
$
$
$
Total Feed Expenses
$
$
$
Stock Expenses
Animal Health
Breeding & Herd Improvement
Farm Dairy
Electricity (Farm dairy, water supply)
Total Stock Expenses
Feed Expenses
Supplement Expenses
Net Made, Purchased, Cropped
Less Feed Inventory Adjustment
Calf Feed
Total Supplement Expenses
Grazing & Run Off Expenses
Young & Dry Cow Grazing
Winter Cow Grazing
Run Off Lease
Owned Run Off Adjustment
Farmfact 9-3
Updated May 2012
Other Working Expenses
Page 10
Total $
$/kg MS
$/ha
Fertiliser
Nitrogen
Irrigation
Regrassing
Weed & Pest
Vehicles
Fuel
R&M Land & Buildings
R&M Plant & Equipment
Freight and General
Total Other Working Expenses
$
$
$
$
$
$
Total Dairy Operating Expenses
$
$
$
Dairy Operating Profit
$
$
$
Overheads
Administration
Insurance
ACC
Rates
Depreciation
Total Overheads