Economics
A compelling business case for investment in the WA dairy industry
Industry leaders are actively investing in the WA dairy industry.
The climate is repeatable and predictable.
Pasture, irrigated pasture and supplementary feeding are common methods of production.
Farm economics are world standard.
Investment Opportunities exist with existing processors.
Sources of information are available for interested parties.
The WA dairy industry is undergoing rapid change in response to an increased domestic demand for milk, coupled with increased export opportunities for value-added products to SE Asia. The droughts in major dairying regions of Eastern Australia have clearly highlighted the state’s climatic advantages of low rainfall variability.
Significant changes at both a processor and farm level in this formerly market milk regulated state occurred when the Australian dairy industry deregulated in 2000. Changes at a farm level resulted in increased herd sizes and efficiency gains resulting in competitive costs of milk production relative to Victoria and Tasmania.
At a processor level changes have occurred in ownership with additional capital invested to switch manufacturing from commodity to value-added products. This has resulted in significant increases in farm gate milk prices in the last two years. The shift in focus to milk production growth rather than maintaining the status quo has resulted in the introduction of growth incentives in the last 12 months, which has further increased farm gate prices.
Growing domestic and competitive and sustainable export markets, competitive costs of production, the impact of climate change on other dairy regions of Australia, the concept of ‘food miles’, and the availability of suitable resources have contributed to a change in the way this small but dynamic industry is viewed, as indicated by an increasing interest in dairy farm investment in the state.
Benchmarking
Benchmarking figures for WA are available for a number of sources including:
International Farm Comparison Network (www.ifcndairy.org)
Australian Bureau of Agriculture and Resource Economics (www.abareconomics.com)
Red Sky (www.redskyagri.com )
In the International Farm Comparison Network study covering around 120 farms from 40 countries a farm in Western Australia was ranked as one of the top low cost potential countries or farms with costs of $25 – $30 US or less/100 kg milk (ECM).
This was compared to:
The competitiveness of the dairy industry on a broader scale was demonstrated in an analysis of 37 farms in Western Australia Final Report:Analysis of Business Performance on Western Australia Dairy Farm” 2007. Red Sky Agricultural P/L 
). In 2005/06, the WA dairy industry had similar costs of production ($3.36 kg/MS) to South West Victoria ($3.31/kgMS) and Gippsland (VIC, $3.20/kgMS) while being higher than Tasmania ($3.04) or New Zealand ($3.08/kgMS).
If WA farmers received the same milk price received as their Victorian counterparts, and if all other farming practices had been unchanged, return on assets for these farms would have been 5% – only marginally behind Victoria and Tasmania but more than twice that of New Zealand.
Given that WA has a flatter supply curve than Victoria, Tasmania or New Zealand it is reasonable to expect the some of this higher cost of production and lower return on assets would be associated with supply pattern.
The strengths of WA dairy farming identified in the Red Sky report included farm size, production per cow, and concentrate and forage costs (see below). Its weaknesses, and hence opportunities, included: pasture harvest (5.7 t DM/ha average), stocking rate and milk production per hectare.
A summary of the physical features of Western Australian dairy farms for 2005/06 is presented below.
Studies that relate to specific areas in Western Australia have been commissioned.
These include Developments in areas north of Perth which is not currently a dairying area.
Dandaragan is 2 hours drive North of Perth, it is a well known agricultural region which produces significant volumes of cattle fodder and grain crops. dairying-in-dandaragan-final.
There have also been studies done on areas south of Perth near Harvey. This town is 1.5 hours drive south of Perth city and the soil type that has been targeted is what is known in Western Australia as Bassendean sands.
Bassendean Sands Study part 1
bassendean-sands-dairy-study-part-1-2008
Bassendean Sands Study part 2
bassendean-sands-dairy-study-part-2-2008
Milk Prices
Since deregulation in 2000 there is no State intervention in the setting of milk prices. Continuous improvement in product mix, markets and growth opportunities have resulted in significant increases in farmgate price over the last 3 years with parity to prices paid elsewhere in Australia achieved in 2006/7. Ongoing developement of high value, sustainable markets and significantly less exposure to the commodity sector will protect against commodity price cycles going forward. Processors pay what is required in order to meet their on-going supply requirements in terms of volume and preferred product mix.
Post deregulation, milk prices were inadequate to provide for year-round production or its associated costs and many producers changed calving pattern in order to increase profitability by producing more milk from rainfed pastures. This has resulted in a decline in milk production in the period January to June (see Figure below).
A shortage of milk overall saw the introduction of growth incentives for increased production in 2006/07.
Prices paid by processors vary and price comparisons should be calculated on an individual farm basis due to variation in the prices paid for fat and protein; methods of expressing milk components (mass/mass versus mass/volume); milk quality payments and penalties; growth incentives and deductions for either volume and/or stop charges and in the case of Challenge Dairy Co-Operative, purchase of delivery right units.
Quotas relating to milk volumes, cow numbers or other limits on land use do not apply.
Land Prices
Land prices vary throughout the region and are affected by proximity to urban centres and competition from horticulture, viticulture and forestry.
Stock Prices
Stock prices vary significantly depending on:
Availability of export (overseas and interstate) orders
Time of calving
Production per cow and availability of production history
‘Individual’ versus ‘whole of herd’ sale,
Sire of calf
Breed.
Traditionally, export orders for stock have a bigger impact on the price of cattle in WA than the price of milk. Due to the level of herd recording in the state, the use of AI sires, and disease-free status of stock, the export market for cattle has underpinned the price of dairy livestock. Export cattle provide and important income stream for some producers.
Higher prices are generally paid for Holstein-Friesians cows that are herd recorded as opposed to Jerseys or Jersey/Friesian cows. Spring calving cattle (Aug-Oct) for irrigation production systems are generally more difficult to source than cattle calving at other times of the year.
The importation of stock into the state from overseas is restricted due to the disease free status of the Australian herd for Foot and Mouth and Bovine Spongiform Encephalitis. Importation from interstate is also restricted due to the disease free status of the Western Australia herd for Enzootic Bovine Leucosis, Bovine Johnes Disease, Brucellosis, Liver Fluke and Tuberculosis.
Historically strong beef prices have resulted in the widespread use of beef sires over dairy heifers. However a weaker beef market and the increasing profitability of the dairy industry have resulted in the use of sexed dairy semen over dairy heifers.
Agistment Rates
Agistment rates for cattle vary depending on the availability of suitable land. Agistment rates for in-calf heifers and dry cows vary from $5-7/hd/wk and for young stock (6-8 months of age) around $3/hd/week.
Investment options
Eg: types of loans common & available (interest only, fixed/variable rate loans (mix of) stock financing,
Level of deposits required, equity requirements, stamp duty
Vendor finance
Risk ratings
HP & Lease arrangements available for machinery purchases etc
The information in this prospectus is intended as a first step to assist investors make an informed assessment of the potential of the dairy industry in Western Australia.
Prepared by Western Dairy Inc in partnership with Dairy Australia, Challenge Dairy Co-operative, Harvey Fresh, Fonterra Australia Pty Ltd, National Foods Ltd and the Department of Agriculture & Food WA
Disclaimer: Western Dairy has contracted the services of Glenys Hough Consulting to prepare the contents of this prospectus. The prospectus contains input from a range of industry service providers. Whilst every effort has been made to ensure the accuracy of the contents of this document, Western Dairy nor its contractors or partners accept liability for the contents.
More than 6 m tonnes of grain, growing domestic market, access to high value SE asian markets, cost effective milk production, climate, land, water. WA is a great location to invest in dairy