Buying A Dairy Farm

Buying a Dairy Farm

Buying an operating dairy farm is the way most people choose to enter the industry. From that point onwards there are several options for expansion:

  • Increase output on the current farm
  • Buy extra land
  • Sell up and buy a larger or more productive farm

This section outlines indicative budgets for the purchase of a dairy farm business in Tasmania.

Farms for sale may range in size from around 150 cows to in excess of 1,000 cows. It is generally accepted that a minimum herd size of around 200-250 cows is required for a business to be fully viable at the present time. If past trends continue, this number may increase over time.

The farm costings below outline the income and costs associated with running a relatively efficient dairy farm at the present time. Depending on a range of factors, actual financial performance may be better or worse than the examples outlined. Prospective investors should consult widely before deciding on a specific farm. A list of useful industry contacts has been provided in the "Contacts" section.

Farm Description

Managerial ability is the key factor in determining financial performance. The model farms here assume that management ability is above average.

The main profit drivers for dairy farms in Tasmania are:

  • Pasture utilisation (and stocking rate);
  • Labour efficiency; and
  • Milk price

Management has a major role in both pasture utilisation and labour efficiency. It can also affect milk price to some degree - through decisions on time of calving, milk company chosen, and by its impact on milk quality.

Pasture utilisation is a key profit driver. The model farms outlined below are assumed to have 50% dryland and 50% irrigated pastures with an average pasture consumption of 9.5 tonnes of dry matter per hectare. This is a reasonable average and should be achievable on most farms with good soil fertility and good pasture composition.

The main assumptions are outlined in the following table and explained below.

Farm Descriptions

1. Includes water and fixed irrigation infrastructure. Not including centre pivot, long laterals etc.
Source: Macquarie Franklin, March 2014.
Cows Milked

Cow No.

(replacements carried 

 on-farm)

250 500 750 1,000
20 unit HB 50 unit rotary 50 unit rotary 50 unit rotary
Farm Area
Total Farm Area ha 140 270 380 500
Total Effective Area ha 115 230 340 450
Irrigation Area (50%) ha 58 115 170 225
Milk Production
Per Cow kgMS 400 390 390 380
Total kgMS 100,000 195,000 293,000 380,000
Pasture Consumed
Irrigated Area KgDM/ha 12.0 12.0 12.0 12.0
Dryland Area KgDM/ha 7.0 7.0 7.0 7.0
Average KgDM/ha 9.6 9.6 9.6 9.6
Grain Fed per Cow t/cow 0.9 0.9 0.9 0.9
Labour Required
Total Units FTE 3.0 5.0 6.5 8.0
Cows per Labour Unit Cows/FTE 83 100 115 125
Bare Land Value
Dryland $ per ha $12,000 $12,000 $12,000 $12,000
Irrigated1 $ per ha $17,000 $17,000 $17,000 $17,000
Capital Investment
Land & Improvements $ million $2.21m $4.70m $6.43m $8.43m
Stock $ million $0.49m $0.98m $1.48m $1.92m
Plant & Machinery $ million $0.15m $0.20m $0.23m $0.35m
Working Capital $ million $0.10m $0.18m $0.26m $0.33m
Total Capital $ million $2.96m $6.10m $8.39m $11.03m
Per Total Hectare $ per ha $21,200 $22,500 $22,100 $22,100
Per Effective Hectare $ per ha $25,800 $26,400 $24,700 $24,500
Per Cow $ per cow $11,900 $12,200 $11,200 $11,000
Milk Price
Average for Season $/kgMS $5.95 $6.00 $6.00 $6.00

Farm prices can vary considerably. The values included here are reasonably representative of better farms sold in the past few years, and assume a bare-land value of $12,000 per hectare for dryland area and $17,000 per hectare for irrigation area (including water and underground mains etc).

On the assumptions here there is limited reduction in capital cost per hectare or per cow as farm size and cow numbers increase. Any reduction is likely to come from spreading the cost of the milking facility over additional hectares/cows especially with a rotary dairy (eg 500 cows versus 750 cows). On the other hand the 250 cow farm has a relatively low value herringbone shed included in its improvements and so has an overall capital per cow similar to the larger 500 cow farm with a rotary dairy.

 The average milk price is assumed to be around $6.00 per kg milk solids which is well below where prices are expected to finish up in 2013-14, but are in line with the longer term trend. They are shown to increase by 5c per kg milk solids between the 250-cow and the other farms. The actual increase based on quantity premiums should be higher than this but milk quality also needs to be taken into account and it can be difficult to maintain standards with larger herds.

Pasture Utilisation:

Pasture utilisation is the most significant driver of profit in Tasmanian pasture-based dairy systems.

Typically the best results are achieved by paying close attention to the pasture supply and demand situation and making astute decisions about grazing management and supplementary feeding. Increasing pasture utilisation by one tonne of dry matter per hectare (10%) can make a significant difference to overall profitability.

Training in grazing management is available through the Tasmanian Institute of Agriculture (TIA) and assistance in on-farm implementation and monitoring is available from private consultants.

Labour Use:

Labour and feed are the most significant cost inputs. Within the model farms, full time equivalents (FTE’s) have been used to define labour requirement. This is the number of employees (including the manager) required to run the farm - based on a 38-hour week. The budgets assume that all labour (including the owner/manager) is fully paid for.

In most instances significant increases in disposable income can be achieved if owners or share-farmers elect to take on a greater proportion of the work.

Labour use efficiency is generally measured as the number of cows milked per FTE. The average is around 80 to 90 cows per FTE but well set up farms can exceed 100 cows per FTE. Generally as farm size increases there are labour efficiencies. These may continue to increase with herd sizes up to 1,200 cows.

Wages Cost

Source: Macquarie Franklin, March 2014.
Number of Cows 250 500 750 1,000
Labour required (FTE)
Owner operator 1.0 1.25 1.5 1.5
Other wages 2.0 3.75 5.0 6.5
Total 3.0 5.0 6.5 8.0
Cows per labour unit 83 100 115 125
Wages cost
Owner operator $60,000 $95,000 $100,000 $130,000
Other wages $90,000 $169,000 $236,000 $293,000
Total $150,000 $264,000 $336,000 $423,000
Average cost per labour unit $50,000 $52,750 $51,750 $52,850
Labour Cost per kg Milk Solids $1.50 $1.35 $1.15 $1.10

Milk Price:

As discussed above the assumed milk price is $6.00 per kg milk solids which is well below that expected in 2013-14 (possibly $7.00 per kg milk solids) but in line with the longer term trend. Over time the real (adjusted for inflation) milk price in Tasmania has been relatively stable - but there has been considerable year-to-year variation.

Farming systems that have a reasonable stocking rate and typically feed up to one tonne of grain or pellets per cow can generally respond well to annual milk price variations. Farms with a heavy dependence on grain feeding can have more trouble coping when milk prices are low and/or grain prices are high. The indicative budgets below allow for around 0.7 tonnes of grain fed per cow.

Farm Profit

Indicative profit budgets are outlined below for the four farms described above.

Farm profit has been calculated as earnings before interest and tax (EBIT) and as a return on total capital invested.

Depending on the amount of borrowed capital there will be an interest cost to be deducted from the EBIT figure to arrive at a Net Profit estimate for a specific business. Also some operators may choose to pay themselves less than the commercial wages included in the EBIT calculation shown here.

250 Cow Farm

Total Per Effective Hectare Per Cow Per Kg Milk Solids
($’000) ($/ha) ($/Cow) ($/kgMS)
Source: Macquarie Franklin, March 2014
Income
Milk Sales 595 5,174 2,380 5.95
Stock Trading 27 238 110 0.27
Total Income 622 5,412 2,490 6.22
Expenses
Shed & Cow Costs 45 390 179 0.45
Feed Costs 139 1,211 557 1.39
Tractor & Plant Operating 21 183 84 0.21
Repairs to Structures & Improvements 20 174 80 0.20
General Overheads 15 130 60 0.15
Wages (Including Owner/Manager) 150 1,304 600 1.50
Capital Replacement (Depreciation) 15 133 61 0.15
Total Expenses 405 3,525 1,622 4.05
Profit
Earnings before Interest & Tax (EBIT) 217 1,887 868 2.17
Return on Capital (ROC) 7.3%

500 Cow Farm

Total Per Effective Hectare Per Cow Per Kg Milk Solids
($’000) ($/ha) ($/Cow) ($/kgMS)
Source: Macquarie Franklin, March 2014
Income
Milk Sales 1,170 5,087 2,340 6.00
Stock Trading 55 239 110 0.28
Total Income 1,225 5,326 2,450 6.28
Expenses
Shed & Cow Costs 90 389 179 0.46
Feed Costs 270 1,176 541 1.39
Tractor & Plant Operating 31 134 62 0.16
Repairs to Structures & Improvements 30 130 60 0.15
General Overheads 25 109 50 0.13
Wages (Including Owner/Manager) 264 1,147 528 1.35
Capital Replacement (Depreciation) 20 86 40 0.10
Total Expenses 729 3,171 1,459 3.74
Profit
Earnings before Interest & Tax (EBIT) 496 2,155 991 2.54
Return on Capital (ROC) 8.2%

750 Cow Farm

Total Per Effective Hectare Per Cow Per Kg Milk Solids
($’000) ($/ha) ($/Cow) ($/kgMS)
Source: Macquarie Franklin, March 2014.
Income
Milk Sales 1,755 5,162 2,340 6.00
Stock Trading 82 242 110 0.28
Total Income 1,837 5,404 1,966 6.28
Expenses
Shed & Cow Costs 134 395 179 0.46
Feed Costs 416 1,222 554 1.42
Tractor & Plant Operating 41 119 54 0.14
Repairs to Structures & Improvements 40 118 53 0.17
General Overheads 50 147 67 0.19
Wages (Including Owner/Manager) 336 989 448 1.15
Capital Replacement (Depreciation) 23 67 30 0.08
Total Expenses 1,039 3,057 1,386 3.55
Profit
Earnings before Interest & Tax (EBIT) 798 2,347 1,064 2.73
Return on Capital (ROC) 9.5%

1,000 Cow Farm

Total Per Effective Hectare Per Cow Per Kg Milk Solids
($’000) ($/ha) ($/Cow) ($/kgMS)
Source: Macquarie Franklin, March 2014.
Income
Milk Sales 2,280 5,067 2,280 6.00
Stock Trading 107 237 107 0.28
Total Income 2,387 5,303 2,387 6.28
Expenses
Shed & Cow Costs 179 397 179 0.47
Feed Costs 552 1,227 552 1.45
Tractor & Plant Operating 41 90 41 0.11
Repairs to Structures & Improvements 50 111 50 0.13
General Overheads 50 111 50 0.13
Wages (Including Owner/Manager) 423 939 423 1.11
Capital Replacement (Depreciation) 35 77 35 0.09
Total Expenses 1,329 2,953 1,329 3.50
Profit
Earnings before Interest & Tax (EBIT) 1,058 2,350 1,058 2.78
Return on Capital (ROC) 9.6%
 

Farm Summary

A comparison of the four farms is provided in the table below.

The analysis shows the potential for return on capital to increase with increasing farm size - due mainly to a relative reduction the cost of labour plus a slightly lower capital outlay per cow.

Farm Summary

Cows Milked

No.

(replacements carried

on-farm)

250 500 750 1,000
20 unit HB 50 unit rotary 50 unit rotary 50 unit rotary
1. Return on capital (EBIT) before capital appreciation
Source: Macquarie Franklin, March 2014.
Capital Investment
Total $million $2.96m $6.10m $8.39m $11.03m
Per Cow $ $11,900 $12,200 $11,200 $11,000
Pasture Consumed tDM/ha 9.6 9.6 9.6 9.6
Irrigation % 50% 50% 50% 50%
Grain fed t/cow 0.9 0.9 0.9 0.9
Labour Requirement
Total Units FTE 3.0 5.0 6.5 8.0
Cows per Unit Cows./FTE 83 100 115 1.25
Milk price $/Kg MS $5.95 $6.00 $6.00 $6.00
Return on capital1 % 7.3% 8.2% 9.5% 9.6%

The slight increase in capital investment per cow between the 250-cow and the 500-cow farms is associated with a shift in the type of dairy from a herringbone to a rotary shed. The cost per hectare falls after 500 cows with the nominated 50 bale rotary dairy able to milk up to 1,000 cows.