Farmers grow income

The Malloch McClean client farm statistics survey gives us a small snapshot of a working farms profitability,  and the areas where farm costs and prices pressure profits.

Per stock unit profitability was much better on smaller farms showing the efficencies of a owner operator unit, and dispels the theory that big is always better.

Economies of scale do reduce farm working expenses of the larger unit but not enough to improve the net position in the farm surplus.

Dairy figures reinforced the fact that debt in that sector was the biggest restraint in farm growth, with a significant rise in interest costs in that 2009/2010 financial year. However it is interesting to see that dairy farmers use restraint on their farm working expenses to manipulate their budgets with a large variation in money spent in this area in the two preceding years.

The question arises why are famers driven to increase their size when net profits often fall with larger operations. Is this a sign that it's not the profits they are after, but really just the capital growth?  Fertile ground for exponents of a capital gains tax.

Your view??

Statistics collated by Invercargill accountancy firm Malloch McClean's client data for the year to June 30, 2010, show figures were almost on a par with the 2008-09 season. Beef and lamb farmers reported an average 2 per cent increase in net surplus per hectare compared with the previous year. Revenue was up about 1 per cent and expenses down 1 per cent. The figures suggest an average Southland farm with 478.45 hectares carried 4033 stock units at a rate of 11.2 per hectare, and had gross income of about $1133, with working expenses of about $596 per hectare. They reported a surplus of about $537 per hectare before debt servicing, tax, personal expenses, and was reinvested on the farm  on repairs and maintenance costs, and capital spending .

Malloch McClean partner Campbell Hay said the figures also showed a significant difference in profitability between smaller and larger stock-unit farms. Farms with low stock-unit levels (under 2500) reported a higher surplus of $48.07 per stock unit compared with those with higher stock numbers (more than 10,000 stock units), which averaged a surplus of $29.58 per stock unit. This was reflected in the overall gross income per stock unit being $28/su more profitable in smaller farms than the bigger ones, although economies of scale saw a 20% lower working expenses in the larger units.

McCulloch McClean figures for Southland dairying show debt remains one of the biggest costs and a significant restraint on growth. Dairy figures for the year to June 30, 2010, show the cost of servicing debt per kilogram of milksolids (kgMS) rose about 5 per cent on the previous year because of higher debt. Because the payout can change during a season, dairy farmers do not have a guaranteed monthly cashflow so need to borrow more to cover regular outgoings, which drives up interest costs.

 An average Malloch McClean client, milking 630 cows, had a gross income of $1.6 million and farm working expenses of $794,000. But it was the cost of servicing debt that hit the hardest, likely to be about $421,000. Once taxation, personal expenses, depreciation and capital expenditure were deducted, the average farmer had a cash surplus of $253,000 in the year to June 2010 compared with a cash deficit of $368,000 in the year to 2009.

Working expenses accounted for about half of gross income, compared with 72 per cent and 43 per cent in the previous years, because of variable payout.The figures show the challenges dairy farmers face to juggle their finances and the extra interest costs they can incur by having a fluctuating income. The figures show the biggest costs on a dairy farm were stock, feed, fertiliser, lime, wages and maintenance.