Operating Profit
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2 min read
Dairy operating profit is a crucial indicator of profitability in the dairy sector. Expressed per hectare, per kgMS, or as a percentage of Gross Farm Revenue, it allows farmers to compare their performance with others through benchmarking. This helps identify areas for improvement and assess business trends over time. To calculate operating profit accurately, non-cash adjustments must be made, accounting for differences between farms. Increasing gross farm revenue and reducing operating expenses are the key drivers to boost operating profit. This involves strategies like improving feed intake, optimizing herd genetics, and managing expenses efficiently through benchmarking and policy changes.
The more profitable the farm business the more opportunity for financial progress. Dairy operating profit is the primary profitability measure used in the dairy sector.
Dairy operating profit can be expressed per hectare, per kgMS or as a percentage of Gross Farm Revenue and is used for comparison between dairy farms (benchmarking). Benchmarking gives farmers clarity on their business performance and shows the development of trends within a business over time. Farmers benchmark to identify areas for improvement.
Dairy operating profit is a similar calculation to Earnings Before Interest and Tax (EBIT).
Dairy Operating Profit calculation
Dairy operating profit is calculated by starting with cash income and expenses (left hand column) and then making non-cash adjustments to calculate operating profit (right hand side).
Using the cash performance of the business alone can lead to inaccurate conclusions; non-cash adjustments need to be made. Non-cash adjustments account for situations such as one farm employing a manager while another has family labour, or a farm growing their stock numbers and having higher associated costs with those extra animals.
To compare farm businesses, we do not include expenses such as interest, capital expenditure, drawings and tax; these are important but not closely related to farm efficiency.
How to increase operating profit
To increase operating profit increase gross farm revenue and/or decrease operating expenses.
Increase Gross Farm Revenue
Increase gross farm revenue by increasing milk and stock revenue.
Milk revenue
- Increase feed intake by increasing cow numbers or more production per cow through:
- increasing pasture utilisation
- economic use of supplement (supplement must be purchased at a price that generates profit while considering any environmental impact)
- Improve herd genetics
- Increase income per kg milksolids through:
- dairy company premium milk schemes
- specialty milk supply, e.g. organic, A2
- dairy company choice
Stock revenue
- Increase stock, cull cow and calf income by:
- reducing stock wastage through increasing herd fertility
- increasing value of surplus animals through genetics or extra weight gain.
Reduce Operating Expenses
Compare each expense item to a benchmark (e.g. using DairyBase) to identify potential focus areas for expense reduction.
- Reduce expenditure by focusing on inefficient management practices. For example, reduce supplements during peak grass growth periods, implement Max T milking efficiency to save time and running costs; review farm bike and vehicle usage and needs; review tools, products and machinery annual inventory.
- Remove expense items by implementing farm system or policy changes
- Pay less per expense unit (per kg, per hour, per item) through bulk purchases or negotiating with service providers and suppliers.
DairyBase
Get a DairyBase full financial analysis which includes your dairy operating profit and access to benchmark data.
Get support
For support with calculating your dairy operating profit, contact your local consulting officer who knows how.