A new research project to improve the understanding of dairy farm productivity and its relationship to profitability has been undertaken by Dairy Australia.
Gavan Dwyer and a team of agricultural economists from Marsden Jacobs Associates and other organisations were commissioned to explore the change in dairy industry productivity and its key determinants over the past two decades and the implications for industry research, development and extension in order to improve farm performance across Australia.
Drawing on detailed Dairy Farm Monitor Project data, economic modelling expertise from Professor Chris O'Donnell from the Centre of Efficiency and Productivity Analysis (CEPA) at the University of Queensland and Professor Glyn Wittwer from the Centre of Policy Studies (CoPS) and Victoria University, the project investigates farm performance in finer detail, aiming to better understand industry drivers of farm productivity.
Dairy Australia's farm business data lead Helen Quinn said: "This is an economic research project that we've undertaken to progress the Australian dairy plan profitability discussion that highlighted that dairy farm productivity has been flat over the last decade.
"The work aims to improve our understanding of productivity at a regional and state level, understand the impact of climate, and understand how dairy competes with other agriculture sectors for land, water and other farm inputs."
Gaining these insights will enable the dairy industry to be better placed to shape and influence productivity drivers and reveal implications for competitiveness under different scenarios.
"The project aims to provide the dairy industry with an improved understanding of productivity growth on Australian dairy farms," she said.
"This is important, because in the long run, productivity and profitability are closely related.
"Productivity is focused on the aspects of profitability that a farm manager has more control over.
"Specifically, how efficiently resources and inputs are used to produce milk.
"Generally, a more productive farm is a more profitable farm."
The modelling techniques used in the study have not been used to measure productivity in the dairy industry before.
One of the key differences with the approach used here is that this study analyses the link between farm productivity and profitability.
The great advantage of these techniques is that they reveal the determinants of profit change (such as technical efficiency or technical progress) rather than the consequences of profit change (for example return on total assets or return in investment).
Why is this significant - because it will reveal to industry in terms of strategic importance, areas to improve future productivity that will lead to improved farm profitability across the industry.
Related reading: Profitability to be key plank of dairy industry reform
Recent analysis of the relationship between dairy farm profitability and productivity as part of the Australian Dairy Plan revealed that while productivity has been increasing on average by 1.6 per cent per year for the 40 years to 2017-18, the rate of growth has been slowing over this time.
For example, in the decade preceding dairy industry deregulation, farm productivity growth was robust at 2pc per year.
However, in the period following deregulation (2000-01 to 2017-18), growth in productivity slowed to a rate of around 0.7pc per year.
Over the most recent decade calculated (2009-10 to 2017-18), productivity on Australian dairy farms has not grown.
The Dairy Productivity report found that dairy productivity growth has been weak in the past two decades.
An analysis of this growth using sophisticated statistical techniques reveals that while technical progress and technical efficiency have been stagnant, farmers are already highly technically efficient using existing technologies.
The report found that dairy farmers are on average 91pc to 93pc technically efficient across Australia.
With evidence of constant return to scale over the period of analysis, this means that productivity is being shaped mostly by farmers changing their mix of inputs and outputs in response to changing circumstances.
There are indications that farmers are incrementally adapting over time to weather and climate variability.
In the period of analysis, changes in dairy profitability have been driven by changes in the terms of trade (ratio of output prices to input prices) rather than changes in productivity and, when terms of trade have weakened, productivity change has not compensated for that weakness.
The data in Figure 1 shows little change in Total Factor Productivity (TFP) for the Australian dairy industry since 2013/14. There is some difference between states with Tasmania and South Australia showing a slight increase in TFP over that period while the other states showed little change over that period.
Presenting initial findings
For three weeks in May 2021, the initial findings of the project were presented to hundreds of dairy farmers across Australia in an online Dairy Productivity Forum.
Gavan Dwyer was on hand to expand on the concepts involved in productivity analysis, showcase data and elaborate on the long-term trends.
While the first session focused on presenting the report itself, the two subsequent sessions allowed industry experts and insiders to discuss their responses to its findings.
After showcasing the report's findings, industry experts such as Dairy Australia chair James Mann, University of Melbourne agricultural economics Professor Bill Malcolm and dairy farmers from across Australia were invited to discuss the analysis of the report and how it reflects their understanding of productivity, as well as ask questions.
Those attending the forums were also invited to ask any questions they had on the report.
While the report may have presented stark findings on the status of productivity in the dairy industry, the industry experts at the forum saw the potential for opportunity.
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Australian Dairy Farmers director Colin Thompson said: "I feel that productivity growth will come from understanding and unlocking the potential of our resources: Our land, our water, our cows, our people and the modern technologies and knowledge that has been developed over recent years.
"The key is investing in skills and opportunities that create greater efficiencies and better returns on our assets. It's not about reducing inputs, it's about making them work better."
Western Australia dairy farmer Jacqui Biddulph said during the forum that "the things that stood out in the report for me were that the vast majority of Australian dairy farmers have taken up the technologies that have been available to use over the last 20 years, and they're implementing them, and implementing them well.
"However, we have been living with enormous volatility. We've had droughts, floods, fires, high grain prices, high water prices, you name it, we've had it. But it's also those technologies that have helped farmers stay in their businesses."
To watch all three sessions of the Dairy Productivity Forum, and to download the final Dairy Productivity Report that was presented, visit www.dairyaustralia.com.au/productivityreport. It also contains a list of questions that participants submitted and answers to those questions.
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