Farm Working Expenses: a Worked Example

A dairy farm's income is a volume times a price, and the farmer controls only part of the volume and none of the price. A lender reading a season therefore needs a measure of the farm's own performance that does not move every time the price does. Working expenses are that measure. They are the decisions made on the farm: how many cows, how much feed bought in, how much fertiliser spread, how many staff, how much spent keeping the shed and the tracks in order.

Expressed per kilogram of milk solids, the unit New Zealand farms are paid in, the figure lets a lender compare a 400-cow farm with a 1,000-cow farm, and this season with the last five. It also sets the costs directly against the price: a farm with working expenses of NZ$5.00 per kgMS paid NZ$8.00 has NZ$3.00 per kgMS left for everything that sits below the line. Those figures are for illustration, not a benchmark.

The industry's own budget templates in New Zealand list the lines: wages, animal health, breeding, the farm dairy, electricity, supplements made and bought, grazing for young stock and wintering cows, fertiliser, regrassing, vehicles and fuel, repairs and maintenance, administration, insurance, ACC levies and rates. Below that total the templates add non-cash adjustments, including depreciation and an allowance for unpaid labour and management, to reach dairy operating expenses, the figure used to compare farms as businesses. The change in livestock numbers is adjusted too, but on the revenue side.

Two boundaries need watching. The same templates carry a line for a run-off lease among the working expenses, so a figure described as before rent may still include rent on a support block. And a farm that winters its cows on its own run-off shows lower grazing costs than one that pays to send them away, while carrying the cost of that land elsewhere; DairyNZ's benchmarking evens this out by charging an owned support block a notional lease at a regional market rate. A lender comparing two farms checks where each has put its land costs. Outside New Zealand the vocabulary changes: Australian farm monitoring splits costs into variable and overhead costs per kgMS, and UK farms usually report costs per litre.

An owner-operated dairy farm in New Zealand, constructed for this page like every figure on it, produced 345,000 kgMS last season and 330,000 this season after a dry summer. Its working expenses, in NZ$ per kgMS:

In dollars the farm spent 3.5% more. Per kilogram it spent 8.2% more, because the same costs were spread over less milk. Had total spending stayed at last season's NZ$1.69m, the cost would have been NZ$5.12 per kgMS. So of the 40-cent rise, about 22 cents is lost production and 18 cents is extra spending, most of it feed bought to get the herd through the dry months.

At a milk price of NZ$9.00, the example's, the season divides like this:

Livestock sales and other income are left out to keep the arithmetic plain. The lender's question is whether the extra feed was a dry-summer cost that will not recur, or a sign the farm carries more cows than its grass supports in an ordinary season.

Working expenses are the largest single deduction from the milk cheque, but not the only one. Add the interest, the loan repayments and the drawings, and the total in the example is NZ$7.70 per kgMS: the price at which this farm covers every cash commitment, its breakeven milk price. Two farms with the same working expenses can sit a long way apart on breakeven, and the difference is the debt. That is why a lender reads debt per kgMS beside it.

The share of the cheque needs care. It moves with the price even when nothing on the farm changes. At NZ$7.50 the same NZ$5.30 of working expenses takes 71% of the cheque instead of 59%. A lender comparing seasons reads the cost per kgMS first and the percentage second, because the percentage carries the price inside it.

DEFINED IN ONE PARAGRAPH → · COST OF PRODUCTION, WORKED → · WHEN THE MILK PRICE FALLS →

At the annual review, working expenses are the line a lender questions most, because they are the line the farm can change. A rise explained by a season, with a plan to bring it back, is read very differently from a rise that has repeated for three years. At budget time they drive the seasonal facility: much of the year's spending falls in winter, calving and spring, before most of the milk is paid for, and the peak of the overdraft is set by how much is spent before the money arrives.

In a bad season they are where the room is. The interest and the loan repayments are contracted. Working expenses are not, and a lender agreeing to support a farm through a low price will want a revised budget showing which lines move: feed, fertiliser, repairs. It will also ask what deferring them costs later, because fertiliser not spread this year and repairs left undone return as lower production or a larger bill. In Issue 03 the senior read tests each farm's breakeven, working expenses included, at a payout well below the season just paid.