Intensive Dairying - Profitability and Risk Insights

This month’s episode focuses on a project looking at intensive dairy systems in Inland NSW and Northern Victoria over the last 7 years. This has provided the industry with quality foundational information on the profitability, cost structures and risks of these systems. Claire Waterman from Agriculture Victoria and Sheena Carter (NSW DPI) led the project for their respective regions and were recently interviewed for a Rural Bank podcast called “Beyond the Farm Gate”. A big thank you to Rural Bank who have kindly allowed us to use the recording to share the project findings via this podcast.

Links to useful resources related to this podcast:

Project Report and Case Studies Intensive Farm Systems Economics | Dairy Australia

This podcast is an initiative of the NSW DPI Dairy Business Advisory Unit

It is brought to you in partnership the Hunter Local Land Services

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NSW DPI Dairy Newsletter

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The information discussed in this podcast are for informative and educational purposes only and do not constitute advice. 

Transcript

The Business of Dairy 

Episode #39 Transcript – “Intensive Dairying - Profitability and Risk Insights”

Sheena Carter: Welcome to the Business of Dairy podcast. I'm your host, Sheena Carter, Development Officer with the NSW Department of Primary Industries Dairy Team. This month's episode is a little different to all previous episodes. It focuses on a project looking at intensive dairy systems in inland NSW and northern Victoria over the last seven years. This has provided the industry with quality, foundational information on the profitability, cost structures and risks of these systems. Clare Waterman from Agriculture Victoria and I led the project for our respective regions and we were recently interviewed for a Rural Bank podcast called Beyond the Farm Gate. A big thank you to Rural Bank who have kindly allowed us to use the recording to share the project findings via this podcast, which we will now launch into.

Bec Wren: So welcome to the show, Sheena and Claire. 

Sheena Carter: Thanks for having us, Bec. 

Claire Waterman: Yeah, thanks Bec. 

Bec Wren: So to kick us off, Claire, what initially drew you to working in the dairy industry? 

Claire Waterman: Yeah, I've been working in the dairy industry for a bit over 10 years with the Department and I was driven because of the growth and innovation that happens in the dairy industry. I get very energised when I speak with farmers who are very excited about their future and see innovation that occurs at the farm level and how that contributes to, not only their growth and aspirations, but to the agriculture sector more broadly. 

Bec Wren: And before this, like, what's your connection to ag more broadly? 

Claire Waterman: Yeah, I grew up on a broadacre farm in southern New South Wales and I really enjoyed my childhood working on the farm. I remember being in the sheep yards, raising potty calves and yeah, also being on the tractor. Still enjoy visiting the family farm where my family and brothers still work. 

Bec Wren: Yeah, I feel like every single time I have a guest that says they grew up on a farm, we're constantly like, yep, that was the best childhood we could’ve had. So I think that that's a… I do agree, it's a good way to grow up. So Sheena, I'll ask you the same question as Claire. What initially drew you to working in dairy? 

Sheena Carter: I am originally from a small beef operation in the north of New South Wales, and when I went to uni to study ag, I thought I would end up in the beef industry, but when we covered the topic of dairy and the dairy production system and management aspects of that, that really piqued my interest in the dairy industry because of the complexities within dairy systems. There's so many different aspects to the management of a dairy farm. And so you've got so many different levers to pull within a dairy farm system to make them work really effectively. So that was really where my interest came from, and like Claire, my career has predominantly been within the dairy industry since my uni days. And it is full of, as Claire says, very innovative, but interesting and fantastic people – good operators.

Bec Wren: Amazing. So you've both co-authored a study called Economics of Total Mixed Ration Feeding Systems. Where are the risks? Claire, can you please explain what a total mixed ration feeding system is?

Claire Waterman: So a total mixed ration feeding system is where, on a dairy farm, all the feed is effectively cut and carried and brought into the milking herd or into the herd that's fed in a contained area. In the Australian dairy industry, it has historically been, and will remain, predominantly pasture-based grazing industry. And with varying levels of supplementary feeding, we're seeing some parts of the industry intensify, so moving towards a total mixed ration feeding system. In the Australian dairy industry, we have different feeding systems in terms of low input, so predominantly pasture-based with some levels of feeding, so feedstock, such as grain, hay, silage and other by-products. And as farm systems intensify, more supplementary feeding is part of the diet. And under these intensive systems, as I mentioned, total mixed ration, all the feed is conserved and fed back into the herd that's in a contained system. In terms of the farms in our study, in the TMR, they had a large capital investment in a feeding infrastructure system and they're classified as either being a free stall, a loose housing facility or a dairy dry lot. 

Bec Wren: How long have TMR systems been around for? Have they been around for a while? 

Claire Waterman: Yeah, we have had feeding systems for a while. There has been a few number of farms that have operated these systems. So, Bec, there have been farms in Australia for over a decade operating as a total mixed ration. We know that it's quite common in the Northern Hemisphere, particularly in areas where there's snow for part of the year and so they house their cows. But in terms of Australia and what we're seeing here, there is an increasing trend of farmers investigating what the future looks like for them and intensification is part of what they see as their future.

Bec Wren: Yeah, and what's driving the intensification of dairy feeding systems? 

Claire Waterman: Yeah, so both Victoria and New South Wales have undertaken a social study that looked at the experiences of those farmers who have intensified, as well as those that haven't. But some of the key things that we found as part of farmers' experience or motivations to change was around a desire for business growth and expansion, as well as cow comfort and animal welfare outcomes for their herd. We also heard that farmers were responding to the effects of climate change and so extreme weather events was a motivator for farms, either really extreme wet conditions as well as periods of extreme dry and hot conditions, whereas other farmers were looking at workforce efficiencies and seeing they could improve the way they manage their labour force and as well as farm succession and growth for the individual farm. 

Bec Wren: Yeah. Sheena, do you have anything to add, that you're seeing for the intensification part? 

Sheena Carter: No, I think Claire's captured similar findings to what we had in New South Wales with our social science piece. 

Bec Wren: Amazing. And Claire, what was the driver behind conducting this study?

Claire Waterman: Yeah, so there's been a gap in our understanding of the performance of intensive systems in Australia. We have this gap in our limited, local understanding of how these farm systems have been performing. So as a result of this study, our purpose, or what we were trying to look at, was to improve our understanding of how they performed over time, as well as what risk management strategies they had identified and were putting in place as a result of the work. 

Bec Wren: Sheena, could you take us through the method of this study?

Sheena Carter: Yeah, sure. I guess we're fortunate in Australia that we have a national project called Dairy Farm Monitor. So Dairy Farm Monitor enables us to analyse businesses around the country using a standard methodology and template. And that is what we used to analyse the TMR businesses. So the benefit of that is, it is all standard terminology, but it has also enabled us to compare the performance of the TMR systems to the pasture-based systems in the same location as these TMR farms. So, it's a good, rigorous comparison to draw conclusions from. And we surveyed a number of farms over a seven-year period. So there were eight northern Victorian farms and seven inland New South Wales farms. So a total of 15 farms across those seven years. I guess it's important to mention also that with those 15 farms, some had been operating as a TMR farm for the whole seven-year period of analysis, whereas others have been, what we would call, in transition. So they've been moving, or intensifying, their system over that seven-year period. But by that seventh year, we've effectively classified each farm as a TMR farm. So they were all bringing the feed to the cows within some housing facility. So yeah, that was how we've undertaken the analysis, which is, as Claire said, an absence of that information before, you know, we have a very good understanding about how pasture-based farms perform across Australia, but not so much the TMR farms.

Bec Wren: Was there a particular reason that the locations of those farms were chosen, like the inland and, sort of, like where they're from? 

Sheena Carter: Predominantly, this is where we've seen intensification take place – mostly within Victoria and New South Wales, or where we've got concentration of TMR farms, because the number of them are growing. So within New South Wales, the inland farms, well, and I guess within Victoria too, the farms that participated in the study are anonymous. So when approaching the farm, needed to have the farmer on board and quite happy to share their information, because they do share all their information with us, which we're very appreciative of because we couldn't tell these stories and gain these insights without the generosity of the farmers. 

Bec Wren: And Sheena, what were the key findings? 

Sheena Carter: In terms of a high-level finding, or a high-level question, people wanting to know, are these systems profitable? And the results have shown that, yes, they are profitable. Their profitability is comparable to that of pasture-based systems. So each business will have a different profitability to another and there's a wide range between farms within the data set. But TMR farms are just as profitable as the pasture-based farms with a return on total assets over that seven-year period that sort of ranged between 2% to 9%. So, they are profitable, but they've come with additional risks because of this intensification and that has increased their cost of production. So, aspects such as particularly, you know, feed costs have increased due to the intensification of the system. 

Bec Wren: Yeah. So, Sheena, were there any findings that you didn't expect or anything you expected that didn't roll out that way? 

Sheena Carter: There weren't necessarily unexpected findings, it's just been able to quantify suspicions or, you know, thoughts that the industry might have had about these systems. And I think one of the things, I guess, we could mention in this regard is labour – so labour cost. With these systems where… well, you tend to see higher total labour costs because on average these farms are larger and therefore, they're milking more cows, looking after more cows, all the associated activities that you don't have in a pasture-based system with housed cows. However, despite total labour costs being higher, the businesses on average, and there is variation, but on average, they've managed to be much more labour efficient than some other businesses. So when we're talking about labour efficiency, we're looking at – a bit of dairy terminology – it's kilograms of milk solids produced per labour equivalent, and we do see some very efficient TMR farms in this space. So despite having higher total labour costs, the efficiency of the business means that when we look at labour costs in terms of dollars per kilo milk solids, they've been able to manage that cost and control it. 

Bec Wren: And Claire, what about you? What surprised you? 

Claire Waterman: Thanks, Bec. I think the comment that Sheena made about, this study allowed us to quantify some of those suspicions, certainly rings true. One of those things, I'll talk about the income side, was around milk price. So we were wanting to investigate the milk price for the TMR farms and the data supports that the last couple of years has been… a characteristic of both groups have been a strong and stable milk price. But when we were looking at the average results for both of the groups we saw that there wasn't a premium between them. We had heard some people were looking for that but in terms of the data that we had, in this rising milk price market that we have had in recent years, the TMR farms were on multiple year milk supply contracts, so the challenge of looking at one year in isolation doesn't quite give us the full look across the three-year, multiple-year milk supply contract. And that has meant that farmers, the TMR farms who have entered into that, contracts were managing some downside price risk. And so when looking at one year, and other farmers able to capitalise on that rising milk price market, we didn't quite see that premium that we had been looking at. But also it talks about the comparison data that the dairy farm monitor farms were also looking at some form of intensification and were milking year-round, so had also had strong milk prices similar to the TMR farms. So I think that was something that came of interest to us. But just to reiterate around managing those risks for the TMR farms, they saw that those milks multiple year contracts as a way to manage that risk, particularly that downside price risk.

Bec Wren: Yeah, and speaking of risks, on risks, other than the price, what were the other risks that you guys found that they had to manage in a TMR system maybe differently to the more pasture systems?

Sheena Carter: I guess we could talk about feed risks here, Claire. So Bec, with the intensification of these systems, we've seen the feed costs increase within these businesses. So when we look at feed costs within a dairy business we've got homegrown feed and we've got purchased feed costs. Fully feeding the cows a ration means that they've got higher feed costs for multiple reasons, I mean, a small part of that is that directly grazing grass is cheaper than actually, you know, mechanically harvesting it and bringing it back – you've got associated equipment costs, labour costs, etc. So that's one aspect. They're feeding more per cow in general, and as a result, aiming to get higher production per cow. So higher feed costs is a risk that needs to be managed, and also limiting exposure to the purchased feed market, because often when people are reliant on the purchased feed market, when you've got challenging conditions, whether that's drought or flood or whatever, we tend to see an increase in the purchase price of feed. So what farmers in these TMR systems tend to try to do is to build up what we call their feed inventory. So they're on-farm store of hay and silage. And some farms are trying to build this inventory up so that they've got, you know, two to three years’ worth of stored feed in front of them to manage that exposure to higher purchased feed costs. And the data has shown that a lot of farms will do that regardless of systems. So pasture-based farms, when the opportunity arises, will also do that, but not to the scale that we've seen within the TMR farms. So that is a key strategy that we've seen within these businesses. 

Bec Wren: Yeah, makes sense. Claire, anything to add? 

Claire Waterman: I do have one. That was well explained too, Sheena. For some farms to manage some of the risk was around sourcing income from different enterprises on their farm. So one of those, around business diversification for individual farms was around other livestock, so raising dairy beef crosses or other young stock within the business as a way to source income from other streams than just milk income, as well as sales of feed. So grain sales was another way that farmers were trying to manage some of that risk, in terms of the income from milk, within a business. But it certainly was an individual decision for some farmers. There was quite a range within the small number of farms that we had in our study.

Bec Wren: So next, I want to talk about the future of the dairy industry. And I know that we've, sort of, discussed what a dairy farm does is case by case – it depends on what works for them, their size, their scale, their business structure. But Claire, how can the findings from this study be utilised by dairy farmers within the study area to make decisions and potentially improve their farming systems?

Claire Waterman: Yeah, absolutely. This information we've heard is of use for those farmers considering a change to their production system, their feeding system, so they can use this information to look at other farms who have made that transition and see how their costs and income have changed as well as those areas for managing risk. We do know that also the information is used within other industry tools, such as the Farm System Evaluator, which is available on the Dairy Australia website as another way to help farmers make their decisions around selecting and choosing different feeding systems that will meet their business objectives into the future.

Bec Wren: Yeah, amazing. And Sheena, anything to add to that? 

Sheena Carter: No, I think the project has been valuable. It's provided the industry with really good baseline data to help, as Claire said, help farmers understand cost structures and risks within these systems. So that means that farmers are now aware of some of these things and can therefore, you know, plan and think about how they would manage them if they're going to adopt this system on their own farm. 

Claire Waterman: And I'll jump in there, Bec, and our work is never done, I mean, the farms in our study had been in transition during the time… they transitioned during the time that they were in our study. So with further monitoring and tracking of their performance over time will help continue to improve our understanding of their resilience and their risk management over the longer term. 

Bec Wren: And to wrap up, I want to ask you both what your vision is for the dairy industry over the next five to ten years. Where do you think we are headed? Let's start with you, Sheena.

Sheena Carter: Gosh, where are we headed? I think to me there's lots of positivity within the industry at the moment and I would explain that by saying the next generation, or the younger generation, moving into the family business and, you know, there's also non-generational farmers entering the dairy industry as well. We always hear about farms leaving the industry but that's across all agricultural sectors, it's not just specific to the dairy industry. But I think that we tend to see, while we might see a decline in farm numbers, we tend to see the remaining farms grow and adapt. For New South Wales, I don't know if it's a vision, it's a curiosity on my part, as to where we see the dairy industry within the next 10 years in terms of geographical location. I think we have immense challenges in our, historically, coastal located farms where we've got exceptionally high land values and that makes it very hard for farmers to expand their businesses and make a good return on total assets because of that. So to me there is opportunity for the New South Wales industry to perhaps start to relocate to some of these more inland areas where we've got good water security, still expensive land prices, but not as expensive as that coastal land. And I acknowledge that there's challenges with people moving from one location to another. People get very tied to the communities that they're part of and the farm, if it's been in the family for a long time, but I certainly do think there's great opportunity within the inland regions of New South Wales for dairying in the future. 

Bec Wren: Yeah, amazing. And Claire, same question. Where is the dairy industry headed in the next five to ten years?

Claire Waterman: Oh, what a question, Bec, and what a way to conclude. So I'm going to go back to the start where you asked me about what drew me to the dairy industry and I talked about the innovation that occurs, and I think for the future, that's where I see that the dairy farming community will continue to find innovation. We will need that in terms of the challenges that are upon us and will continue to be in front of us. So like Sheena said, there's opportunities and we have just finished the Raising the Roof event in the Hunter Valley late February and saw the enthusiasm, motivation for the industry, and yeah, I think that innovation will be part of that story. 

Bec Wren: Definitely. I think innovation's important in all areas of ag at the moment. I think it always will be. So it'll be great to see how everything pans out. Beautiful. So now it's time for our quick fire round. I've got a few questions that I'm going to ask you in rapid succession. I'll go with Claire first and then ask the same questions to Sheena just to make it a bit easier. So there's two rules. The first one is just keeping the answers to a max of one sentence. And secondly, you have to answer with the first thing that comes to your mind. So, Claire, what is the best lesson you have learnt from a mistake, a stuff-up or a failure? 

Claire Waterman: Oh, never give up. Keep trying. You'll work it out. 

Bec Wren: Love it. If you had to eat one meal for the rest of your life, what would it be? 

Claire Waterman: Oh, chocolate pudding.

Bec Wren: What phrase or cliche do you live by? 

Claire Waterman: You can do it. 

Bec Wren: Love it. Sunrise or sunset? 

Claire Waterman: Oh, I love the sunset. I have memories I talked about, the sheep work that I did as a child, I just love that dusk period over the plains. Yeah, beautiful.

Bec Wren: And finally, when you're out on farm, what brand of work boots do you wear?

Claire Waterman: I wear Blundstones. 

Bec Wren: Love it, alright. Sheena, your turn. Okay, what is the best lesson you have learnt from a mistake, a stuff up or a failure? 

Sheena Carter: Ah, the mistake. It's an opportunity to learn from really, it happened for a reason so learn from it. 

Bec Wren: If you had to eat one meal for the rest of your life what would it be? 

Sheena Carter: Prawns.

Bec Wren: Well, that's just such a such a random one, I wasn't ready for that. What phrase or cliche do you live by? 

Sheena Carter: You can do anything, but not everything. 

Bec Wren: That's a good one. Sunrise or sunset? 

Sheena Carter: Well honestly, both, but let's go with sunrise, I think. Most dairy farmers would see lots of sunrises, but a lot of the general population is probably still in bed and I think we miss some spectacular sunrises. 

Bec Wren: I agree. And finally, when you're out on farm, what brand of work boots do you wear? 

Sheena Carter: I will go with the Blundstones as well. 

Bec Wren: Thank you both so much for joining us on the show. 

Sheena Carter: Thanks, Bec, and I would also just like to take this opportunity to thank the funders and supporters of this project, namely Agriculture Victoria, Dairy Australia, the New South Wales Department of Primary Industries and Dairy Up, which is a large RD&E project within New South Wales, and particularly the farmers that have contributed their data and knowledge to the project.

Sheena Carter: I hope you enjoyed this episode with a difference. The show notes contain a link to the full project report and four TMR case study farms if you're interested. That's all for today's episode of The Business of Dairy. We hope you enjoyed diving into the fascinating world of dairy farming and industry insights. As we continue to expand and evolve, we greatly appreciate your support. Our show is thriving, attracting new listeners each week, but we believe there's always room to grow and we need your help to make it happen. If you've found value in our discussions, we kindly ask you to take a moment to rate and leave a comment about the podcast on your preferred platform. Your feedback not only lets us know what you enjoy, but also helps boost our visibility to others who might benefit from our content. I sincerely thank you for being part of our community, and we look forward to bringing you more engaging episodes in the future with the continued funding and support of the Hunter Local Land Services. Until next time, stay curious and keep milking those opportunities.