Bench marking

BENCHMARKING – KEY DRIVERS FOR SUCCESSFUL DAIRY BUSINESSES
Matthew Newman, Economist, DairyNZ Jeremy Savage, Consultant, Macfarlane Rural Business

Summary
• • Benchmarking is important for determining how businesses are progressing The factors within our control that explain the majority of the variation in operating profit per hectare are operating expenses per Kg MS and milk production KgMS/ha. • • Regional location and production system are not good indicators of operating profit. Management ability and sound decisions are the main reasons for difference in farm-to-farm variations in operating profit/ha. • Pasture harvested (eaten) explains the majority of the variation in milksolids/ha between farms • • To be profitable, supplements must be used to fill a true feed deficit,Liquidity and cash flow will ensure the business survives and provides opportunities for growth.

Introduction
New Zealand dairy farm businesses are becoming more complex, with larger herds and more intensive farming requiring a greater level of farm management including labour, feed, financial and environmental aspects. However, the fundamentals for a successful and profitable dairy business havenot changed. These are based on sound financial, pasture, animal and human management decisions. In particular top farmers make superior marginal decisions around costs and extracting extra production from the inputs used (higher productivity). This paper outlines key performance indicators that can be monitored and benchmarked through time to determine how your dairy farm business is progressing.The analysis uses data from DairyBase and Dairy Systems Monitoring from 2005-06 to 2007-08. It must be stressed that each business is unique, and blanket statements while fundamentally correct, might not work for all farms. A concerted effort must be made to understand the strengths and weaknesses of individual farms and comparisons made (benchmarking) of the performance of the components. Toolssuch as DairyBase are ideal for benchmarking your farm progress through time.

Operating profit
The focus of this paper is on farm operations performance and therefore liquidity and operating profit are the main financial focus.

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Operating Profit per milking hectare (formerly EFS) is the key measure used in the dairy industry to compare profitability between farms. Irrespective ofwhat a business produces, profit is a function of the quantity of items sold multiplied by the per unit profit of each item sold (i.e., units sold x profit per unit sold), described for a dairy farm in equation 1 (Eq1). This operating profit equation is useful for quickly diagnosing how a business is performing compared to others and areas that may require improvements. Eq1: Operating Profit/ha =Production (kg MS/ha) * (GFR/kg MS – OpEx/kg MS) Where: GFR (Gross Farm Revenue) is cash income plus a non-cash adjustment for change in livestock numbers OpEx (Operating Expenses) is the cash farm working expenses, plus non-cash adjustments for unpaid labour and management, owned run-off, change in feed inventory, and depreciation. These non-cash adjustments put an economic value on resources usedthat are not accounted for by cash, and are necessary to allow for meaningful benchmarking.

Factors affecting profitability on NZ dairy farms
The analysis of actual farm economic data from DairyNZ’s DairyBase database over the last three seasons enables us to tease apart the primary factors contributing to operating profit across eight regions and five production systems. The production systemsare based on the timing, purpose and amount of feed both purchased as supplements and grazing off for dry cows. For example, System 1 is all grass, self contained while System 4 purchases feed for dry cows and to extend both ends of lactation. It is widely known that milk price is the key determinant of profit between years, but it is also outside farmers’ control. That aside, what other...