Tuesday, January 29, 2013

Actually, The $58K From 20 Cows Is Not That Easy

In my last post, How To Make $58,788 Per Year With 20 Cows. I talked about how a simple dairy can be set up for quite a small investment of just over $100,000 and the milk can be sold direct to the customer.

I hoped the post would encourage people to think differently about dairy farming and the possibilities available. 

It's certainly a good illustration of how profitable a business can be if it can retain the whole retail price.


It's not quite that simple.

It's easy enough to buy a few cows and build a cheap dairy to process the milk. That's easy. There are plenty of experts who can design or build the components for you.

But the production of the milk is only a very small part of the equation.

There are many examples of farmers around New Zealand who have tried to process, market & retail their own farm products and either failed or simply decided to gave up, as it's just too hard.

There are a few who are successful, but they are a minority.

The skills required to produce milk or lamb are very different to those required to process the product and the skills to successfully market and retail the product are different again.

Processing Skills

The hygiene standards required to process a product are much greater than the average farmer has to deal with. I've heard of farmers complaining about the minimal and rudimentary hygiene standards insisted upon by Fonterra, they wouldn't cope with the requirements of many food producing businesses. 
There is no room for error!

Marketing Skills

You can spend $50,000 by putting one print ad per week in the Christchurch Press, and there is no guarantee it will help you sell a single bottle of milk. 

There are so many examples of marketing campaigns and product launches that fall flat or are simply not noticed.

All of the people behind these marketing efforts were convinced they would be successful.

Retail Skills

Customer service is hard work and unrelenting. Customers are demanding and often unsympathetic. They don't care the hours you work or the effort you put in. They care about them selves and if they feel your product is not good value or another product is better, they will switch.
You can give 100 customers in a row great service, but if you drop the ball on customer 101. They will let you know or worse, they won't let you know and instead tell their friends about it and tell facebook, twitter or that review site.

Farming Skills

There are approximately 11,000 dairy farmers in New Zealand. They all milk cows on grass the same way. They have over 100 years of collective knowledge to draw from. Combine this with farm advisors, fertiliser reps and accountants all available to give you information.

There is no excuse for a farmer to fail as they are surrounded by experience and knowledge.

There isnt really the same experience in the business world, as every product or business is different.

Who knows if your product is different and in demand by customers.

Microsoft were promoting tablet computers in the early 2000's and nobody bought them. Why did everybody want tablets when Apple made them?

Klondyke Fresh supply milk with no permeate in it, but do people really care?


Maybe you have all the skills and your farm produce is much better than anything else on the market and maybe you're awesome at marketing and sales and maybe you have your processing sorted.

You might be fine for the first 6 months while its all still exciting. But what happens when you are sick or run off your feet for months on end or one of your staff leave. 

Can you maintain the standards? 

What happens when you (who does all the customer service duties) is sick for a week. Your husband, wife or son, who possess the people skills of a Tasmanian devil take over and rub 10% of your customers up the wrong way.

Happy Vally Dairies is an example of maintaing consistency.

The owners of a Southland dairy factory at the centre of a food recall say their business has been destroyed.

Frans and Jeanine Venekamp have decided to walk away from the factory after E.coli bacteria was detected in a sample of milk.
The couple closed the 16-month-old business, Happy Valley Dairy Factory in Tuatapere, and laid off two staff yesterday.

The owners had gone away to the national cheese awards, when E.coli was detected in their milk. The NZFSA tried to call them but the contact number they had was not answered. They issued a full recall and alerted the media to ensure nobody drank the contaminated milk.

That day they got the most media attention of their lives, unfortunately for all the wrong reasons.

The brand was destroyed. 

The owners took their first break away from the business and one mistake by a negligent employee destroyed the entire business.

All the years of planning, the hundreds of thousands of dollars spent the hours worked, all destroyed by one person not washing their hands after going to the toilet or mud on someones boots getting inside the processing area.

If you had a choice, would you rather run 100 metres a day and get paid $100 or would rather complete a 100 metre obstacle course and get paid $500?

Thats how I think of it. 

Maybe its better to just get the tanker to pick up your milk every day and get paid $0.50/litre for your milk.

But there if definitely an opportunity to make $2.50/litre but you need to have the skills to complete the obstacle course and you need to be able to do it every day without fail.

If you can do that, then that just gives you the right to compete against the other brands.

You then have the opportunity to go up against the multi national food companies with marketing departments and legal teams and deep pockets.

Sounds like fun to me!

Saturday, January 19, 2013

How Much Money Do Dairy Farmers Make-Part 2

How much money do dairy farmers really make?

Are they really that rich?

Do they really pay no tax?

One of my first posts was "how much money do dairy farmers make". It's one of my most popular posts too. The major source for this post is the google search, "how much money do dairy farmers make?".

I thought I'd go into a little more depth.

But first, what constitutes a dairy farmer? 

I'll just concentrate on owner operator farmers in this post as its simple and gives a good indication of dairy farm incomes.

Some quick facts:

76% of all herds are in the North Island

30% of all herds are based in the Waikato alone

The average herd size in the North Island is 325 cows and 596 cows in the South Island.

North Island farms are different to South Island farms, they tend to be smaller and owned by different types of farmers. So I'll look at two types of farmers. The first is your typical irrigated farm based in Canterbury and the second is your typical Waikato farm.

The Canterbury figures have been sourced from Brown Glasford and Co. The Waikato figures have come from Cooper Aitken Accountants based in Matamata (my old home town). The figures are from their 2011 farm survey for "owner operators".

Key points:

SI farms produce 60 kgms more per cow

Canterbury farms are nearly 3 times bigger than the waikato average.

Both regions have a similar income

Farm working expenses are higher in the Waikato. (Please note, this may be due in some part, to the data from different accountants being presented slightly differently)

Interest & Rent are the same amounts based on a per kgms at $1.48/kgms.

Farm surplus in Canterbury appears to be much higher

The total asset amount in Canterbury is a massive $14 Million dollars!

It appears on the surface that the combination of an extra 50 kgms/cow and economies of scale of the new modern Canterbury dairy farms results in greater profitability

The Waikato return seems unsustainably low, to the point where I am doubting the figures.

So back to the original question, how much money do dairy farmers make?

Personal drawings is one part of the answer. The drawings of both regions seem to be very similar at $80,000 to $90,000 per year.

I would think that if some one was running a business in town valued at over $5 million dollars, then they would be worth a package of over $100,000.

I read an article a year ago, where some accounting firm had worked out that an owner operator drawing $40,000/year is equivalent to a person in town earning $90,000/year. This article makes reference to these findings. 

Personal expenditure is about affordability, but Cooke says he often reminds farmers that drawings of $40,000, once everything else is paid, is equivalent to a town wage of around $90,000.

I assume this is because the farmer is able to claim or use the farm assets for personal use. For instance the farmer does not have to have a house mortgage as that expense will be included in the farm mortgage. (I know the personal residence is not tax deductible, but in real terms the house is included with the farm). Another area is vehicle use and fuel, if a car is used to get supplies for the farm then it is tax deductible. Its easy to buy some drench or pick up a few bolts on your way to the movies or dinner.

So there are tax advantages to being a farmer, but the same principles apply to any business owner not just farmers.

So if we assume that a farmer drawing $40,000/year is the same as a townie earning $90,000/year, then we could assume that a farmer drawing $90,000 is equivalent to townie earning over $190,000/year.

If you accept that logic (& you may not) then you could conclude that owner operator farmers are not doing too badly!

The remaining farm surplus of $726,614 for Canterbury farmers and $46,172 for the Waikato farmers will most likely go to the bank in the form of principle to pay down their loans. While this money doesn't end up in the farmers pocket, its still paying down debt.

The return on asset of 5% and just under 1% would suggest that farms make a very poor return. But the cashflow is only part of the profitability equation.

Capital gain is the other major aspect that determines how much money dairy farmers make.

I often hear that farm land has historically appreciated by an average of 10% per year for the last 30 years. This article written by the director of Gareth Morgan Investments says

The value of farmland has risen even faster (10.7 per cent a year) than housing over the past 20 years. That's a very healthy return given there's no tax to pay.
We're talking about a real after-tax return of something in the order of 7 per cent to 8 per cent a year.
A portfolio of world shares over much the same period would have yielded a real post-tax return of between 4 per cent and 5 per cent a year.

This article is a little more in depth and questions the true appreciation rate. But it does include this quote

Nartea and Basanta stated on Table 1 of their paper that the mean rate of
capital gain was 12.90% for dairy farms and 11.84% for farm real estate. The
period was 1966 to 1996.

So if a dairy farmers land is appreciating at a after tax rate of at least 8% (NZ has no capital gains tax) and is making a cash return of 5%, then the farmer is making a return of around 13%, which is quite reasonable. 

If your average Canterbury farm land is valued at $32,000/ha, then 270ha*32,000=$8,640,000 total land value. If this land appreciates by 8% then it gains $691,200 in one year!

Relying on capital gain is a risky proposition, but then again its worked for the past 30 years.

These figures are for owner operator farmers, these are the people who have "made it". They have either reached their goals of farm ownership through years of hard work and hard saving or they were able to inherit or "buy" into the family farm. The owner operator is becoming a rear breed in the South Island as the larger South Island farms are more likely to be in a corporate structure or some kind of syndicate. 

So to conclude, if I was sitting on an asset of over $5,000,000 and I was drawing in real terms, well over $150,000 per year and my business was paying off debt every year and my farm was increasing in value consistently. 

Then I would be pretty happy 

Wednesday, January 16, 2013

My Top Posts Of 2012

I've only been blogging since mid 2012 and I seem to have a reasonable number of followers now. I didn't realise that matters relating to dairy farming are relatively popular!

I had a quick look to see what were my most popular blog posts so far.

1.  The Mobile Milking System
It's not surprising that this post is the most popular, it just so different. It's about how we can milk cows with a cowshed that is mobile. It's a different concept that offers a range of farming possibilities. 
There will be a lot more posts about this in 2013.
This post was about how sheep and beef farmers can increase their profitability by milking a small herd of cows. The option to cheaply diversify into dairy is made possible by the mobile cowshed.

Here I had a brief look at the Apple business model. We find that Apple control every aspect of the value chain which helps them to maximise their profitability. I ask why do New Zealand agribusinesses not try an capture more of the value of their products.

The changes to environmental policy has many farmers worried about how they will stay profitable. In this post I argue that all businesses have to adapt to changes in business conditions. I use small retailers as an example of how the successful ones have adapted to  big box stores and internet shopping.
I think farmers can adapt to the new environmental conditions and still be profitable.

5.  How much money do dairy farmers make?

This post was one of my first and it consistently gets visited every week mainly from google searches for "how much money do dairy farmers make". I have found it difficult to get a simple answer to that question and it appears lots of people are after the same information. I will write a more comprehensive post on dairy farmers income shortly.

Saturday, January 12, 2013

I Tried To Resist But I've Been Seduced By Apple

Wow where has the last month gone? It's been a month since my last post!

I had planned to have a Christmas break where I could relax and write a heap of blog posts, but both the laptops in my household met an unfortunate end and the vomiting flu spread through the entire extended family over the Christmas break. 

My dear wife spent Christmas day & Boxing day in hospital due to the flu.

I received a copy of the Steve Jobs biography by Walter Issacson for Christmas and have thoroughly enjoyed reading it. It paints Steve Jobs as a manipulative control freak who was embarrassingly obnoxious & very difficult to work with. But at the same time a genius who understood design, he knew what he wanted and never compromised.

The book records how Steve was very hands on with product development, which I suspect is in contrast to many CEOs who will be much more hands off.

With the stories of Apple and Steve Jobs in my head I ventured out to purchase a new laptop. I was determined to buy a new Windows 8 touchscreen laptop. The idea of controlling the screen with your fingers like a tablet or smart phone appealed to me.

After feeling up the Windows 8 touchscreen ultrabooks that were on display, I wasn't totally happy with the models on display.

I looked up and the Apple display caught my eye, I said "no" to myself. "You're not changing over to mac", it will be a nightmare, compatibility issues with my current hard drives, I'll have to buy a new version of MS Office, my wife will have to learn new shortcuts for Archicad (her CAD program), it's not a touch screen and we all know that Apple products are so expensive and the accessories are a ripoff too.

I'll wonder over and have a quick look, I thought to my self.

Like all Apple products, they are so beautiful, so sleek and elegant. They felt sold and refined, the hinge on the mac books were firm and smooth. The track pad was just so easy to use and accurate and the keys had a wonderful feel to them. The whole package was so well designed.

I was losing the battle with my self. I started to justify why i should buy the mac book. When you start doing that you know its all over. 

Then I came across the display model that was for sale with $400 off! 

I couldn't resist, I walked out the store with my shiny new 13" Macbook Pro. I was expecting to suffer some serious buyers remorse when i got home, but I don't have any remorse. I'm totally chuffed with my purchase. I could have bought 2 windows 8 laptops for the price of my macbook Pro, but I have no regrets.

I was determined not to support Apple, because Steve Jobs style goes against what I believe in. The companies actions are often arrogant and they milk every last cent out of their customers.

But in the end I was won over by design.

They way things look are important, the small things matter. The trackpad is only slightly better, the back light keyboard is only slightly more appealing, the body feel slightly more robust and the internal components are just slightly better specs than the Windows 8 equivalents. But when you add all those small things up it equals a much better final product and I was prepared to pay more for it.