Farming in the sweet spot

When dairy farmers face tighter times, they look at the farm system and ask, “is this the sweet spot?” As a farm consultant I am constantly engaged to diagnose if the farm is performing at its optimum. And the clients open to change will say, “If it isn’t then tell me what I need to do!”

Here is the challenge. As an industry we have not done enough to define the sweet spot. We use the term readily, but do not know what it looks like. Let’s address what the sweet spot looks like?

At BakerAg we source a huge amount of onfarm data, and gain insights into those farms which consistently deliver top economic returns. The ability to do this year-in year-out, payout up, payout down, good season, bad season is the trait of a farm in the sweet spot.

This is what we see in those farms.

• Consistent upper quartile financial performance
• Resilience to fluctuating milk price
• Good feed conversion efficiency
• Low livestock wastage
• Low staff turnover.

As I expand on these traits keep in mind that to do this level of analysis you need good data. For farmers reading this and self-evaluating, if the on-farm information is patchy or insufficient your data capture process will need to be fixed first.

CONSISTENT FINANCIAL PERFORMANCE

A switched-on farmer will have benchmarked their financial performance. Tools like Dairybase or the Farmax Dairy System Monitoring service are perfect for this. Some accountants and most farm advisers will also have tools or services to enable peer review of farm performance.

If you are not consistently in the top 25% then there is work to be done.

BakerAg uses the Farmax DSM service to capture and report farm performance. Each year we analyse the group of farms we service. A favourite analytical tool developed out of this service is a graph that shows where each farm is spending its money.

This is broken down into two simple categories. The costs directly related to the supply of feed. Which include supplements made onfarm, brought in feed, forage crops, grazing, support land lease and nitrogen.

Then there are the non-feed costs. Which is everything else including wages, animal health, breeding, shed, electricity, repairs and maintenance (R&M), vehicle, administration etc.

Each farm is then graphed for its feed cost per kg of milksolids (MS) and non-feed cost per kgMS, (see figure one).

With this graph we can identify four quadrants which are framed up by the average for feed cost per kgMS and the average non-feed cost per kgMS.

If we start at the Sweet Spot, the bottom left quadrant. Farms in this space have a low-cost structure for both feed and non-feed costs. The large green dots are the top five for operating profit in BakerAg DSM YE2023. Like past years we see most of the top five farms in or near this quadrant. Very often the same farms fill this quadrant season to season.

This quadrant is where farm costs are in synch with the farm production. When a business gets into this space it has created a farm system that can and should be replicated year to year. Once in this space be very careful about making any policy changes. The farm system is right and should serve you well in good and bad times.

In the bottom right corner these farms have a low non-feed cost, great. But they do have a high feed cost per kgMS. There is a high probability that the high feed cost relative to milk production will be a limiting factor for operating profit. Farms in this quadrant should look at feed sourcing costs and/or the efficiency of feed conversion into milk. (see later)

Farms in the top left quadrant have a low feed cost. Again, that’s great. These farms do have a high non-feed cost, and this is likely to be limiting their operating profit. Farmers with a business in this quadrant most often need to look at their operational costs for animal health, breeding, R&M, vehicles, insurance and administration.

Then there is the top right quadrant. Farms in this space have got a cost structure totally out of sync with production. It would be nice if these farms could simply produce more milksolids to dilute their costs, but this is often a lot easier said than done.

For farms in the top right it is a return to the drawing board. Looking at “why” costs and production are not in sync and consideration of a total redesign of the farm system.

MILK PRICE RESILIENCE

As farmers are producing commodities and international commodity prices always fluctuate, a farm in the sweet spot can cope with a drop in milk production, remain in the upper quartile for financial returns and continue to perform well when better times return.

For example, the BakerAg Farmax DSM data was analysed for the last two seasons comparing milk production and operating profit or earnings before interest and tax (EBIT).

In periods of strong returns relative to input cost, increased production typically gives an increased trading result. In this situation the theory of increased production diluting fixed cost can work.

In tougher times the rules change.

Figures two and three demonstrate what happens when you shift from strong returns to tighter economic times.

In the 2021/22 season, there was a strong relationship, R² = 0.781, between productivity and EBIT. For largely the same client base in 2022/23 that relationship weakened considerably to R² = 0.0095.

In the 2021/22 season a good milk price relative to cost meant higher productivity drove up net operating returns. For this same set of farmers in tighter economic times (2022/23), higher productivity did not mean higher EBIT.

What we found here was that the farms performing well financially in good times with medium production, remained good financially in tighter times. This doesn’t mean higher milk production per hectare is wrong. But farms doing this on the back of a high proportion of brought in feed need to be aware of the risk should milk price drop and input costs remain high.

GOOD FEED CONVERSION

The sweet spot is where feed is well used. Wastage or supplements not turned accurately into milk will undermine profit. In this case DSM Farmax participants have a very good measure of pasture grown, off-farm grazing and supplements used. If this is compared against operating profit we can identify sweet spot traits. (See figure four)

Farms in the top left-hand quadrant have very good feed conversion and very good operating profit. This is the sweet spot and suggests good operational management, good farm system design and good financial management.

In the top right quadrant, the EBIT is good but the feed conversion is poor. These farms probably have good fiscal management, but their low hanging fruit is in farm operations and either using less feed for the same result or improving how feed is used to get a better physical result.

In the bottom left quadrant, the feed efficiency is good. So, the farm operationally is doing its thing. However, the operating profit is not good. These farms need to look at their cost structure first. If this is acceptable then it could be the farm system design that needs a tweak.

The bottom right quadrant is the area of concern. Feed conversion efficiency is poor and operating profit is poor. These two things could be totally connected. In which case the farm must improve its feed conversion to increase profitability. It is possible that the conversion efficiency and operating profit are unrelated issues in which case the farmer must address these profit-limiting factors separately.

LOW LIVESTOCK WASTAGE

There are often clear signals that all is not well in a farm system when you see high wastage. This will typically look like high empty rates, high losses, cows culled prematurely in the season, a proportionately high replacement rate, failure to cull for age and production.

A healthy farm system in the sweet spot has good general animal health and good reproductive performance. A farm spending large amounts of money to try and fix a problem in this space is not in the sweet spot.

Fixing high livestock wastage

requires good information and honesty. Being able to accept you have a problem when the data confronts you. When this is happening, farmers are fixing the cause rather than putting a band aid over the symptom.

LOW STAFF TURNOVER

Dairy industry specialists and non-farming human resource experts have generated some very good information that tells the same story. High staff turnover equals an unhealthy work environment and a significant negative impact on economic performance.

Staff turnover typically costs the business 1.5x the salary of the team member that leaves. This is not just the cost of recruitment, but lost productivity ahead of the resignation, downtime during recruitment, cost of recruiting the new team member, training and stress/impact on the employer and other employees.

From experience, the writer has seen high turnover driven by a huge number of factors. In the context of the “sweet spot”, it is the farm that minimises stress to animal and team members that is more likely to have consistent performance.

Less stress, better relationships from a farm that is performing in an optimal manner go together. Neither farm design nor HR skills of the boss will generate excellence on their own.

In review, the sweet spot is where farmers largely want to be. The industry talks to this but has possibly been slow to define what it looks like.

It would be good to see a researcher pick up the ball and run with this. From the experience and information available to the writer we have a number of farmers who actually perform well and don’t even realise they are in the sweet spot. But when we run the ruler over them these five traits invariably become the marker.

• Operating profit consistently in the upper quartile.
• Farm expenditure is in sync with the farm production.
• The feed system is efficient with low wastage.
• Livestock metrics for health and reproduction are upper quartile.
• The people in the business are not stressed and enjoy what they are doing.

As a closing comment, if you are in the sweet spot remember: “If isn’t broke, don’t try to fix it”. Get into the right quadrant and stay there.

• Chris Lewis is BakerAg Senior Dairy Consultant