Wednesday, October 17, 2012

Sheep & Beef Farmers Can Diversify Into Dairy

In my last post I outlined how farmers around the world have been using mobile cowsheds for a number of years.

There are three main issues that I feel the mobile cowshed can help solve.

1.       Allows farmers to diversify into dairy
Figures obtained from accountant’s client data show that the average sheep and beef farmer in New Zealand makes an operating profit of $500/ha. The average dairy farmer makes over $3,000/ha in operating profit.
These two figures are the reason we have seen such a dramatic change in land use over the last 20 years.
These graphs by Beef & Lamb NZ gives a clear picture. 

Its clear to see that farmers are converting from sheep & beef to dairy. 

In the past the only way a sheep/beef farmer could milk cows is to undergo a full scale dairy conversion. This is an irreversible decision and a major financial commitment, so the decision to convert is not taken lightly.

The mobile system allows sheep/beef farmers to access the $3,000/ha operating profit, without having to complete a traditional conversion.

They simply buy some cows, Fonterra shares and a mobile cowshed. They just drive the cowshed into the paddock and start milking cows. The only permanent infrastructure that is required is a tanker track and maybe a stock water system. You could say it enables farmers to "soft" convert their farm. The conversion is easily reversible. 

Using the operating profit figures outlined above, we can look at a 200 ha sheep/beef property as an example of how diversifying into dairy can be of benefit.

200 Ha * $500/ha =$100,000 operating profit as a 100% sheep/beef farm.

If this farmer decided to milk 100 cows and they had a stocking rate of 3 cows per ha, they would require 33 ha.

33 ha * $3,000/ha =$99,000
167 ha * $500/ha = $83,500
                    Total    $182,500

By milking just 100 cows this farmer could increase their operating profit by $82,500/year, this is an 82% increase in profitability.
We have to be careful when dealing with averages, but our modelling shows that these figures are about right. Even if they are totally wrong and we half the profit from $82,500 to $41,250. That's still a great return.

I believe the ability to diversify into dairy can help with the difficult issue of farm succession, that so many sheep/beef & arable farmers are facing. The statistics tell us that the average age of a farmer is 58 years old. This Beef & Lamb NZ graph shows that average income of a sheep/beef farmer is $64,000/year. But in the last five years it has been much lower than that.

It’s difficult for these farmers, who are reaching retirement age to bring a son or daughter onto the farm with such a low level of cashflow. The addition of cashflow generated from a small herd of cows creates options for farmers who are struggling with this issue.

It's easy for a farmer to diversify into most farming classes. A sheep farmer can simply plant a few crops on his land or buy some beef cows and he is now diversified into three farming classes. He can increase and decrease the percentage of each class as he pleases, by simply selling one class of stock and buying more of the other.
The option of diversifying into dairy has never been an option because of the large amount of capital required to set up a dairy shed. It has always been a all or nothing type option.

The mobile cowshed changes this.


Just to clarify; Operating Profit is before interest costs, depreciation, and tax. So in this example this farmer would need to spend $180,000 on 100 cows (@$1,800) and about $180,000 for 38,000 Fonterra shares(@ $4.52/share). So the farmer would need to invest about $360,000 and that is not including the cowshed. I haven’t put a cost for the cowshed because I don’t know how much that will cost yet. Let’s say that this farmer will need to invest $500,000 to set up their 100 cow operation. And let’s assume that they borrow 100% of the set up costs against the equity that they have in the farm land.

The interest bill at 7% interest will be approximately $35,000. So this will need to be deducted from the $82,500 figure that I used before.

The reason I used Operating Profit is because that is a more reliable figure to compare the profitability of farming operations, as it does not take into account individual farmers debt levels as these vary wildly. People can simply do a quick calculation like the one above to work out their own borrowing requirements.

As a comparison a new traditional 15 aside herringbone cowshed costs about $400,000. The farmer will then need to buy cows and shares on top of that.

In the example above, the farmer can simply unconvert the farm by selling the cows, Fonterra shares and drive the cowshed to a new buyers farm. You can't do that will a traditional cowshed.



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