PR - Evaluating Options To Increase Profitability On A Dairy Farm In Southwest Victoria, Australia (p214-223)

A simulation study was conducted to examine the profitability of three ‘alternative futures’ for a dairy farm facing declining terms of trade. The approach involved a case study farm, input from a steering committee and whole farm analysis involving modelling the systems over time. This provided the necessary insight into the complexity of the system, its management and effects of change on profit, liquidity, wealth and risk. The objective of the study was to compare the performance of a dairy farm business where the farm management system remained largely unchanged over a medium-term planning period (10 years) with ‘alternative futures’ that involved modest changes to the farm management system. It was expected that the farm needed to change to remain viable. The results showed that if the farm remained operating under status quo conditions, it would not be profitable, liquidity would deteriorate and equity would decline. The two options explored to maintain or increase profitability and liquidity in the face of a continuing cost-price squeeze produced better outcomes and resulted in greater wealth accumulation than the ‘do nothing different’ case. The ‘change’ options involved improving pasture consumption by the milking herd and expanding the pastured milking area to reduce the need to purchase feed. The key measures used to assess business performance were annual operating profit, nominal internal rate of return (IRR), annual net cash flow and the value of the owners’ capital in year 10. With change to the system, annual operating profit increased, on average, by at least 3 times, the nominal IRR increased 2.3 percentage units, annual net cash flow increased $238,000 and owners wealth increased $3 million for the alternative futures investigated. Furthermore, these improved performances were achieved without markedly increasing overall risk.