Dairy runoff management and profitability
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Authors
Date
2006
Type
Thesis
Abstract
This study investigated the issues pertaining to runoff ownership in Canterbury, focusing
particularly on reasons for purchase, how the runoff was used, and profitability.
Six case study farmers were selected and interviewed, following identification by
industry key informants. Initial selection criteria were runoff ownership, and availability
of comprehensive and reliable information. Final criteria included achieving diversity of
situation in respect to land type and farming system. The runoffs were evaluated
according to the net benefits they contributed to the overall dairying operation.
Achieving greater business control was the major driver for runoff purchase. A
secondary driver related to increased profitability opportunities, including both operating
returns and capital gains. Farmers also enjoyed the diversity of operations and decision
making challenges that runoff ownership provided.
All case study farmers used their runoff for wintering purposes and supplying feed to the
milking platform for lactating cows. Four farmers used the runoff for rearing their
heifers, with three farmers pursuing dairy beef, carrying-over empty cows, and cash
cropping activities. Three farmers also sold surplus feed on the open market.
The relative amount of runoff area to milking platform area ranged from 0.4 to 0.98ha
(per Iha of milking platform). The value of runoff capital invested ranged from $1,540
to $8,645 per lactating cow (on peak numbers). These ratios were dependent on both the
management activities undertaken on the runoff and the runoff's resources.
Annual operating returns (EBIT) ranged between 3.4% and 6.0% for the 2004/05 year.
These cash rates of return are comparable to returns generated through other capital
appreciating assets. Capital gains ranged from 15.5% to 23.9% compounded per annum,
from the year of purchase through to 2005, net of development expenditure. Currently
these operating returns are less than the interest costs incurred, assuming the current
market value is totally funded with debt capital. Runoff cashflow levels were found to
become self-funding after a small period of time. Due to capital gains, a 4% cash return
on current market values is considerably greater when expressed across the historical
purchase price (debt employed). The financial success of future runoff investments will
depend strongly on market price movements for runoff-grown feed and the levels of
capital gains that are achieved.