6 Owner Operator: Equity and Capital Financial Analysis
6.1 Introduction
This section considers the equity and capital position of dairy farms, with additional information about trends over time in these positions.
Following a large capital expenditure, changes in debt and drawings, a cash deficit of $14,958 was recorded. The operating return on dairy assets decreased to 4.0 percent in 2018-19 and the total return on assets was 0.5 percent. Total return on equity decreased was -3.4 percent. Equity levels decreased 8.7 percent (-$363,884), with the positive growth in equity from profit more than offset by the decrease in asset values and small increase in liabilities. Total liabilities as a percentage of total assets (loan to value ratio) increased to 53.4 percent at the end of the season. Closing term liabilities per kilogram milksolids decreased to $24.92.
6.2 Dairy Assets
The number of dairy farms sold in 2018-19 was down 78 farms (-34.5%), to 148. The REINZ average sales price per kilogram milksolids and per hectare for the last five seasons is shown in Table 6.1. Hectares are measured as total, rather than effective area which is generally used in this publication. Raw data from REINZ was weighted by the number of farms in each region and the analysis only includes farms considered to be economic units. Dairy land prices have remained reasonably static over the last three seasons at around $40 per kilogram milksolids and around $38,000 per hectare. In 2018-19 the land price decreased to $38 per kilogram milksolids and $36,846 per hectare.
| 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | |
|---|---|---|---|---|---|---|---|---|
| FARM SALES: | ||||||||
| Farms sold | 157 | 197 | 312 | 244 | 192 | 217 | 226 | 148 |
| Average $ sale price/kg MS | 40 | 36 | 42 | 45 | 39 | 40 | 40 | 38 |
| Average $ sale price/ha | 32,376 | 33,557 | 36,369 | 39,577 | 36,557 | 37,835 | 38,015 | 36,846 |
| Average $ sale price/ha (real 2018-19 dollars) | 35,060 | 36,111 | 38,495 | 41,720 | 38,379 | 39,046 | 38,652 | 36,846 |
6.3 Liabilities and Debt Servicing
Interest is the cash cost of borrowing funds, while rent is the cost of borrowing assets. Interest and rent totalled $1.24 per kilogram milksolids. The lower interest expenditure was due to a reduction in interest rates. Borrowing costs represented 17.7 percent of gross farm revenue (Table 6.2). Therefore, for every dollar of gross income earned, 17.7 cents is required to pay interest and rent.
| 2009-10 | 2010-11 | 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | |
|---|---|---|---|---|---|---|---|---|---|---|
| DEBT SERVICING: | ||||||||||
| Interest & rent $/kg MS | 1.67 | 1.54 | 1.31 | 1.39 | 1.28 | 1.36 | 1.36 | 1.35 | 1.31 | 1.24 |
| Interest & rent % GFR | 25.5% | 19.6% | 18.1% | 20.3% | 15.5% | 21.5% | 30.5% | 21.2% | 18.2% | 17.7% |
| Term liabilities $/kg MS | 21.65 | 20.44 | 19.24 | 20.82 | 20.14 | 21.26 | 22.49 | 25.00 | 25.31 | 24.92 |
The debt to asset ratio increased from 50.7 percent at the close of 2017-18 to 53.4 percent in 2018-19 (Table 12.6). Debt to asset values had been around 50 percent for the past four seasons but were at lower levels prior to that.
Figure 6.1 shows the debt to asset distribution in 2018-19, with an average of 53.4 percent. Twenty-six percent of farms have debt to asset ratios below 40 percent. Twenty-four percent of the farms had debt to asset ratios over 70 percent, with approximately six percent sitting in the high-risk area of over 90 percent debt.
Figure 6.1: Debt to Asset Distributions 2018-19
Over the last 10 years, the average farm has increased its milksolids production by 33 percent, while term liabilities have increased twice as fast (+69%) to $4.2 million per farm. Therefore, term liabilities per kilogram milksolids have increased during this period, increasing liquidity pressure on some farms through higher interest payments.
6.4 Liquidity
Despite the high profitability and cash available for living and growth, a cash deficit of $101,147 was recorded in 2018-19. Table 6.3 shows a breakdown of the change in working capital including the source and application of cash funds. The majority of the source of funds in 2018-19 was from the current year’s farming operations. The other major source of funds this season was increased debt (16.7% of total source of funds). Cash from the income equalisation scheme was at $307 per farm in 2018-19. After farming operations, thirty-eight percent of the cash was spent on interest and rent payments for borrowing, while capital development and purchases (38%) was the other large cash expenditure area in 2018-19. Drawings for farm family living (17.4%) and tax payments (7%), was where the remainder of the cash was spent.
| 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | |
|---|---|---|---|---|---|---|---|---|
| WORKING CAPITAL: | ||||||||
| Change in Current Assets | -33,122 | 17,733 | 58,063 | -99,057 | -24,651 | 56,493 | -12,326 | -17,418 |
| - Change in Current Liabilities | 5,959 | -25,702 | 24,417 | -20,779 | -2,678 | -9,780 | 29,949 | -5,362 |
| Change in Working Capital | -39,081 | 43,435 | 33,646 | -78,278 | -21,973 | 66,273 | -42,275 | -12,056 |
| SOURCE OF FUNDS: | ||||||||
| Cash Operating Surplus | 464,654 | 375,176 | 572,586 | 361,272 | 141,757 | 415,410 | 478,511 | 446,701 |
| + non-dairy cash income | 790 | 1,125 | 2,355 | 486 | 904 | 3,371 | 6,064 | 7,040 |
| + net off-farm income | 11,018 | 12,427 | 9,991 | 12,078 | 9,238 | 19,811 | 18,114 | 6,670 |
| + introduced funds | -2,871 | 40,918 | -44,275 | 28,307 | 77,696 | -24,004 | -40,908 | -2,774 |
| + income equalisation | -2,004 | 1,178 | -4,756 | -9,579 | 16,765 | 1,307 | 40 | 307 |
| + increase in term debt | -22,153 | 123,346 | 10,790 | 93,026 | 111,778 | 75,868 | 92,523 | 74,554 |
| = Total source of funds | 449,434 | 554,170 | 546,691 | 485,590 | 358,138 | 491,763 | 554,344 | 520,442 |
| APPLICATION OF FUNDS: | ||||||||
| rent | 19,374 | 22,812 | 23,366 | 22,250 | 20,047 | 19,582 | 20,703 | 12,499 |
| + interest | 174,518 | 174,136 | 171,597 | 195,984 | 197,277 | 197,343 | 191,459 | 194,022 |
| + tax | 46,816 | 35,383 | 58,155 | 34,078 | 7,939 | 16,773 | 41,532 | 38,315 |
| + capital transactions | 164,026 | 185,532 | 143,703 | 201,119 | 76,697 | 109,749 | 238,591 | 207,027 |
| + drawings | 83,781 | 92,872 | 116,224 | 110,437 | 78,151 | 82,043 | 104,334 | 95,173 |
| = Total application of funds | 488,515 | 510,735 | 513,045 | 563,868 | 380,111 | 425,490 | 596,619 | 547,036 |
| Source less Application of funds | -39,081 | 43,435 | 33,646 | -78,278 | -21,973 | 66,273 | -42,275 | -26,593 |
6.5 Equity
Equity (shareholders’ funds or net worth) is the net value of the assets owned by the farm business (i.e. total assets less total liabilities at open and close of each year). At the opening of the 2018-19 season, dairy farm businesses had an average equity of $4.16 million or 49 percent of total assets. This decreased to $3.8 million at the end of the season or 47 percent of total closing asset values.
The equity value of the average dairy farm business increased -$576,870 between 2014 and 2019 (Figure 6.2). Over the past five years, growth has been driven by increases in land and buildings (+$300,160), offset by the decline in value of investments (-$189,020) and other assets (-$248,880). Liabilities have increased $439,100 over the past five years.
Figure 6.2: Components of Equity Change ($000) 2014 - 2019
6.6 Returns
The return on dairy assets is discussed under farm profitability (Section 5.5). The total return on assets takes into account operating profit from both dairy and non-dairy farming operations, plus the change in value of capital assets. The total return on assets in 2018-19 was 0.5 percent. The 2018-19 total return on assets comprised 3.8 percent net return from all farming operations with -3.4 percent net return from capital. For the past decade the total return on assets has ranged between -4.1 percent and 9.5 percent, driven by changes in the value of land and buildings, dairy company share values, livestock values and profits (Table 12.7).
Figure 6.3: Owner Operator Total Return on Assets
The percentage return on equity is the return on owner’s funds, including capital changes after interest is paid (Table 12.7). The return on equity will be higher than the total return on assets when the latter is greater than the cost of debt and vice versa. In 2018-19 the total return on equity was -3.4 percent compared to 0.5 percent total return on assets. Both 2014-15 and 2015-16 realised negative returns on equity due to low profitability, but in 2017-18 and 2018-19 the negative return was due to reduced capital values. Ideally, the return on assets should be above the returns for alternative investments of similar risk, such as shares or other forms of property investment.