Introduction

There is potential in Tasmania to create new dairy farms by converting current grazing or cropping farms into dairy units.

Ideally a potential dairy conversion property will have the potential to milk 500 or more cows. It will be in either the traditional higher-rainfall areas, or in lower-rainfall areas with access to a plentiful supply of irrigation water at a reasonable cost.

The advantage of dairy conversions over existing farms is that there is more scope to have a fully functional farm with new infrastructure, situated in the right place. In addition to this, the scope to grow over time can be built-in up front, rather than hoping that adjoining properties come onto the market over time.

There is a substantial amount of land available in Tasmania that is suitable for conversion to dairying. Also, Tasmania is one of the few states which has a government water development strategy in place and is encouraging farmers to develop water resources for agricultural purposes. New irrigation schemes currently being developed by Tasmanian Irrigation have the potential to open up new land for dairying.

Subject to water management plans and maintenance of environmental flow requirements, it is also possible to obtain new water rights for winter-take into storage. Alternatively it is possible to buy or lease existing water rights from other farmers or buy water from them directly.


Opportunities in Tasmania’s dairy regions

King Island

There are large tracts of land suitable for conversion to dairying on King Island. There are variations in soil type and rainfall across the island that need to be taken into account. Drainage, soil fertility and a few pockets of salinity are potential issues.

There is only one milk company on the Island, which is King Island Dairies, owned by Lion (previously National Foods) and its requirement for additional milk will be a key factor in any proposed investment.

Far North West

There is reasonable scope for new dairy conversions in the Far North West.

While there are large scale properties suitable for new dairy conversions, future developments might also involve combining several adjoining properties. Some of the land in the district, particularly on swamp ground, would require drainage as part of the conversion process. Compared to established farms, green field sites can provide efficiencies for irrigation and labour. But with the downside being the time required to reach full production.

Recent and proposed conversions in this region have seen land previously used as dairy support converted to dairy and some cleared swamp country at Togari is proposed for dairy conversion. In general terms total investment, including plant and machinery and stock, should be no more than $10,000 to $12,500 per cow.

North West

This area has limited scope for new dairy conversions because of the small size of many of the properties and the competition for land from intensive cropping on the better land. Base land prices are generally higher than in other prospective areas.

Central North

There is a significant area of land suitable for converting to dairy in the Central North. Many large properties currently running extensive cropping and livestock are well suited to dairying. Rainfall in this region varies considerably and will need to be taken into account when selecting a potential dairy farm. Many of the farms have large historical water rights. Irrigation requirements are also relatively high due to lower summer rainfall (in some areas) and high evapotranspiration rates.

The Meander Dam was completed in 2008 and has the capacity to provide an additional 23,900 megalitres in the Deloraine area - to properties along the Meander River and via four pipelines installed in 2010 (Caveside, Rubicon, Quamby & Hagley).

The Northern Midlands is also reasonably prospective with larger properties, relatively flat topography and with the current and on-going irrigation development in the area. Several dairy conversions have already been undertaken in recent years.

The availability of irrigation water from new schemes being developed by Tasmanian Irrigation will open up additional potential in the Midlands and Northern Midlands over the next few years.

North East

While the North East is already one of the main dairying areas in the state, there are opportunities for further development, particularly along the northern coastal strip from Bridport to Cape Portland – subject to irrigation water availability.

Opportunities also exist in the Fingal valley to convert grazing and cropping land to dairy. Properties in this area provide good scale and relatively low land prices. Due to the low summer rainfall, irrigation would be required. Some potential dairy conversion properties already have suitable irrigation infrastructure already in place.

As well as the traditional inland dairy areas on the better-class clay loam soils there is also potential for large-scale dairy development on some of the sandy and sandy loam soils closer to the coast. While the soils are not as naturally productive, winter temperatures are higher with very few frosts. In recent times many of these properties have installed irrigation (usually pivots) to grow crops such as potatoes and poppies. Some of the soils are not robust enough to withstand continuous cropping but are well suited to grazing and hence dairy farming. In some instances there may be the need to combine farms to get to commercially viable sizes; however there are also many larger farms in the area.

The South

There are large properties along the Derwent River with significant water rights that could be suitable for conversion to dairying. The area has some of the warmest summer temperatures in Tasmania and with the aid of irrigation and increased soil fertility is capable of excellent pasture production. Local sources suggest that some of the better land lies away from the river and therefore water may need to be pumped or transferred over some distance. There are also good alluvial soils along the river itself. Lion and Fonterra currently buy milk in this region and would need to be agreeable to sourcing further supplies from this area.

There are also further opportunities in the southern midlands on the back of current water supplies plus the recently completed Midlands Irrigation Scheme. Some farms in this area already have irrigation infrastructure developed for poppy and cereal cropping and are looking to diversify into dairying.

Refer to the Tasmanian Dairy Regions publication for more information.


Potential Returns from Dairy Conversions

The tables below provide some indicative figures as a guide to investment. There are a large number of variables to consider in undertaking a dairy conversion so potential investors wishing to go further should consult widely. A list of useful industry contacts has been provided in "Contacts" section.

Assumptions

The financial models used to assess the financial viability of dairy conversions uses a number of assumptions that underlie the results shown.

The key factor in achieving a good result is the ability of the manager. Important profit drivers include:

  • Initial capital cost;
  • Pasture utilisation per hectare (and stocking rate);
  • Labour efficiency; and
  • Milk price.

The financial models assume that the management deployed within the system is average or above and hence so too is financial performance. Significant capital expenditure is included in the models to provide a solid platform for good performance.

The conversion farm is assumed to be in a lower-rainfall non-traditional area of the state and conversion requires purchase of water rights at a capital cost of $1,300/ML and sufficient to irrigate around 50 per cent of the total effective area. Alternatively, if the farm already has water and irrigation infrastructure the base price will be higher and the conversion cost will be lower. Replacements are assumed to be run off-farm and limited grain input (around 0.7 t/cow) is used.

At $6.00 per kg milk solids the assumed milk price is well below the price for 2013-14 which is expected to approach $7.00 per kg milk solids. However, it is in line with the longer term trend.

The main assumptions are outlined in the table and explained below

Farm Conversion Assumptions

Cows Milked      
Cow No.   700 (Replacements off-farm) 1,000 (Replacements off-farm)
Farm Area      
Total Farm Area ha 330 475
Total Effective Area ha 297 428
Irrigation Area (50%) ha 149 214
Milk Production      
Per Cow kgMS 375 375
Total kgMS 262,500 375,000
Pasture Consumed1      
Irrigation Area KgDM/ha 12.0 12.0
Dryland Area KgDM/ha 6.0 6.0
Average KgDM/ha 9.0 9.0
Grain Fed per Cow t/cow 0.7 0.7
Labour Required      
Total Units FTE 6.4 7.7
Cows per Labour Unit Cows/FTE 110 130
Cost per kg Milk Solids $/KgMS $1.26 $1.09
Bare Land Value      
Dryland $ per ha $6,000 $6,000
Irrigated2 $ per ha - -
Capital Investment      
Land & Improvements - Initial $ million $2.12m $3.11m
Water Purchase $ million $1.06m $1.53m
Irrigation Development $ million $0.67m $0.96m
Rotary Dairy3 $ million $1.15m $1.45m
Other Farm Improvements4 $ million $0.70m $0.97m
Stock $ million $1.38m $1.98m
Plant & Machinery $ million $0.25m $0.27m
Working Capital $ million $0.26m $0.35m
Total Capital $ million $7.60m $10.61m
Per Total Hectare $ per ha $23,000 $22,300
Per Effective Hectare $ per ha $25,600 $24,800
Per Cow $ per cow $10,900 $10,600
Per kg Milk Solids $ per kgMS $28.95 $28.30
Milk Price      
Average for Season $/kgMS $6.00 $6.00

1. Overall pasture utilisation here is assumed to be slightly less than for a current farm in a more traditional area. Higher figures are achievable.
2. None purchased. Water purchase and irrigation development are assumed to be part of the conversion process.
3. Includes all equipment, milk silo, grain silos and feeding system, power installation, effluent system, and tanker access road.
4. Includes extra house, calf shed, fencing, laneways, water supply, capital fertiliser and pasture renovation.

Source: Macquarie Franklin, March 2014.

Investment Indicator

On a per cow basis, the total capital investment indicated here is similar to that required to buy an equivalent currently operating dairy farm on a walk-in-walk-out basis. For example, the Tasmanian Dairy Business of the Year results for 2012-13 show an average farm assets of $10,545 per cow over 35 farms. For the top 25% the figure was $9,587. Also, see section on "buying a farm" below with above average farms with total assets of $11,000 to $12,000 per cow with all replacements reared on-farm (this increases the per cow figure).

In addition, a fully set-up new dairy conversion farm should be "state of the art" and therefore perform better than an average farm - especially from a labour point of view. However, it should also be borne in mind that a new dairy farm conversion might take two or three years to reach its potential. In order to give a better reflection of the longer-term situation, the financial returns outlined below assume that three years have passed since the conversion took place. Income may be less and costs higher in the earlier years.

Pasture Utilisation

Pasture utilisation is the most significant driver of profit in Tasmanian pasture based dairy systems.

Typically the best results are achieved by paying close attention to the pasture supply and demand situation and making astute decisions about grazing management and supplementary feeding.

Training in grazing management is available through the Tasmanian Institute of Agriculture (TIA) and private providers.

Milk Price

Milk price is also a key driver of dairy profitability. The $6.00 per kg milk solids price here is in line with the longer term trend. There has been significant variation in milk prices from year to year. Farming systems that have a reasonable stocking rate and typically feed up to one tonne of grain or pellets per cow can generally respond well to annual milk price variations. Farms with a heavy dependence on grain feeding can have more trouble coping when milk prices are low and/or grain prices are high.

Labour Use

Labour is the second most significant cost in Tasmanian production systems after feed costs. Within the model farms, full time equivalents (FTE’s) have been used to define labour requirement. This is the number of employees (including the manager) required to run the farm - based on a 38-hour week. In most instances significant increases in disposable income can be achieved if owners or share-farmers elect to take on a greater proportion of the work.

Labour use efficiency is generally measured as the number of cows milked per FTE. The average is around 80 to 100 cows per FTE but there are farms that exceed 150 cows per FTE. Generally as farm size increases there are labour efficiencies. These may continue to increase with herd sizes up to 1,200 cows. The models assume that all labour (including the owner/manager) is fully paid for.

Dairy Conversions Return on Capital

The financial performance of the model conversion farms is summarised below. For a 700-cow conversion the model suggests an 8.2% return on capital before interest and tax (EBIT) and before any capital gain. For the 1,000-cow conversion the model shows a 9.2% per cent return.

Dairy Conversion Investment – Indicative Returns

Cows Milked    
Cow No. 700 1,000
Capital Invested    
Total $7.60m $10.61m
Per Effective Hectare $25,600 $24,800
Per Cow $10,900 $10,600
Per Kg Milk Solids $28.95 $28.30
Income $’000 $’000
Milk Sales 1,575 2,250
Stock Trading 74 107
Total Income 1,649 2,357
Expenses $’000 $’000
Shed & Cow Costs 128 183
Pasture & Feed Costs 444 626
Tractor & Plant Operating 30 40
Wages 330 409
Repairs to Structures & Improvements 35 50
General Overheads & Insurance 35 50
Capital Replacement (depreciation) 25 27
Total Expenses 1,027 1,384
Profit (EBIT)1 623 972
Return on Total Capital (ROC) 8.2% 9.2%

Earnings before Interest & Tax.

Source: Macquarie Franklin, March 2014.

The indicative budgets suggest some economies of scale associated with the larger farm. This is associated with better utilisation of expensive farm infrastructure and an assumed higher labour efficiency with the larger farm – 130 cows per FTE for the 1,000 cow farm versus 110 cows per FTE for the 700-cow farm. However, managerial requirements are higher for a 1,000-cow farm.

The costs and returns outlined above are intended as indicative examples only. All potential dairy conversions have individual circumstances and should be fully assessed on an individual basis.