Comparing the profitability of a dairy business with alternative investments

Abstract

In the present study, the profitability of a dairy-farm case study evaluated over the period 2003–2004 to 2014–2015 was compared with the performance of other dairy farms and other non-agricultural investments over the same time. Investments are generally made on the expectation that a net return will be earned that justifies using capital in one particular way rather than an alternative way. The expected, and actual, returns from capital invested in different assets will differ according to the risks involved. Investors choose an investment, and mixes of investments, that align with their goals, preferences for risk and anticipated returns over time. Dairy farming involves investing in assets, such as land and improvements, water, livestock, plant and equipment, and people, which are managed to produce milk and ultimately to earn a competitive return on capital. With uncertain seasonal conditions, fluctuating costs and prices, declining terms of trade, wide ranges of equity and management abilities, and a steady decline in the number of commercial farm businesses, it may be tempting to presume that investing in farming, and dairy farming in particular, is a hard road, leading to lower and more variable returns than investing in non-agricultural investment opportunities in the economy. This need not be the case. Analysis of how a dairy business in northern Victoria performed from 2003–2004 to 2014–2015 showed that this farm did well compared with (i) other dairy businesses in Victoria and (ii) alternative investments, such as shares, bonds and property, over the same time. Compound annual return to capital for the dairy farm over the 12 years studied was 12.4% (real, before tax). Over half the return came from the farming operations and the remainder came from owning assets that appreciated in value, particularly in this case, water. The dairy business that was studied was well managed and earned higher annual average returns than the average returns of investments with similar risk elsewhere in the economy, such as shares, and matched it with the best performing of these alternative investments.