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An equilibrium displacement model of the Australian dairy industry is being developed for estimating the net benefits from dairy research undertaken by DPI Victoria. In this initial version, the dairy industry is represented by a system of aggregate demand and supply relationships for two input sectors, raw milk and milk processing inputs, and three output sectors, export and domestic manufactured milk and domestic fluid milk. Quantities and prices are calibrated in terms of milk equivalents. The vertical and horizontal disaggregation of the industry in the model enables the distribution of benefits from farmers to consumers to be assessed. The results for a 1% hypothetical shift in the supply curve in the farm and processing sectors are presented. Sensitivity analysis is also conducted for the uncertain elasticity values specified in the model.

Making farm decisions is difficult, especially making decisions about selling and pricing wheat in deregulated supply chains. This study, conducted prior to export deregulation, sought to identify which factors were important to northern New South Wales (NSW) wheat growers when they were making decisions about wheat selling and price risk, under production and market uncertainty. Key questions were about how they make these decisions and the implications, particularly for larger-sized farmers, merchants, end-users, bankers, advisors and trainers. The research aim was to test the behaviour of users and non-users of five selling methods and six pricing-hedging strategies against eighteen management and seventeen risk attitude-adoption questions. The findings from this research will assist understanding of farmer decision-making. Information about growers’ decision processes on wheat selling and pricing will be helpful to supply chain intermediaries and service personnel in improving the targeting and alignment of growers. More research is required on the cross-usage of different selling-pricing methods, the interdependence between discretionary costs of production and selling-pricing decisions, how speculative storage compares with on-farm rental storage of pre-sold product that integrates the farmer with the supply chain, and how speculative storage affects cash flow and debt repayment. Volume 20, Paper 2, (pp. 11-38) The Aggregate Economic Benefits to the Australian Beef Industry from the Adoption of Meat Standards Australia: updated to 2010/11 + Garry Griffith and John Thompson Meat and Livestock Australia and the Cooperative Research Centre for Cattle and Meat Quality funded a major R&D program in the mid 1990s to investigate the relationships between observable beef and cattle characteristics, cooking methods and consumer appreciation of beef palatability. Out of this R&D program grew the Meat Standards Australia (MSA) voluntary meat grading system which was aimed primarily at providing an accurate prediction of beef eating quality for the domestic market. The MSA system commenced operations in 1999/2000. The gross benefits associated with using the MSA system were quantified by using data on the number of carcases graded and certified, a survey of retailers and wholesalers based on prices for MSA graded beef (3 star or better) versus ungraded beef, and market reports of prices paid for MSA quality cattle versus non-MSA quality cattle. Over the period 2004/05 to 2010/11, beef consumers across Australia were prepared to pay on average $0.30/kg extra for MSA branded beef on a carcass weight equivalent basis to guarantee tenderness. This beef is primarily sold through independent butcher shops, although one of the major supermarket chains has now started selling MSA branded beef. The retailers kept about $0.06/kg and paid their wholesale suppliers the remaining $0.24/kg to source MSA compliant cattle and MSA graded carcasses. About $0.13/kg was passed back to cattle producers on average. The cumulative retail-level economic benefit of the MSA system to 2010/11 is estimated to be around $523 million, with a current annual benefit of around $77 million over the past three years. After accounting for all the costs of development and implementation, net benefits are at least $200 million. Volume 20, Paper 2 (pp.39-58) Dairy Directions: A decade of whole farm analysis of dairy systems B. Malcolm, C.K.M. Ho, D.P. Armstrong, P.T. Doyle, K.A. Tarrant, J.W. Heard, C.M. Leddin, W.J. Wales Dairy farm systems are complex and diverse. A decade ago, a dairy research and development project, Dairy Directions, was developed. In this program, the whole farm approach of farm management economics was used to investigate questions about options dairy farmers had to maintain and improve profitability, to achieve their goals. Commencing in one region of Victoria, with an initial focus on farm decisions, the scope of the work evolved to identifying gaps in scientific knowledge, contributing information to public policy formation, and expanded to other regions. A steering committee of farmers, related industry representatives, scientists and farm economists proved the key to success in this research process. In this paper, the whole farm economics approach to farm systems research is described and explained; in particular the role of using information about response functions, risk, time and case studies in answering questions about alternative farm futures. The application and results of the whole farm approach to a range of research questions about dairy farming in Victoria is presented. As well as confirming the known, findings have also identified unrecognized dimensions, and challenged theory.

Irrigation re-use systems are a common way of improving water use efficiency on irrigated dairy farms in the Macalister Irrigation District. A partial budget analysis of installing a range of irrigation re-use systems on an existing dairy farm was conducted using a case study approach. Two re-use dam sizes were tested – 6 ML and 9 ML. The analysis quantified the benefits of installing a re-use system through growing and consuming additional grazed pasture. There are also potentially other benefits of installing a re-use system both on and off farm, including improved irrigation management and reduced nutrient transfer from the capture area. The analysis found that irrigation re-use systems were almost always a good investment, regardless of the volume of water re-used or the amount of additional pasture consumed. The 9 ML dam had some economies of size, and therefore a lower pasture response per megalitre of water re-used was needed to meet the decision criterion (10% nominal internal rate of return). Only in the situation where both the value of pasture and percentage of water re-used were low ($100/t DM and 10% respectively), was the investment not justified on economic grounds. For a 6 ML re-use dam, a pasture price of $150/t DM and a re-use rate of 10% was still able to achieve a nominal internal rate of return of 12%.

Interest in automatic flood irrigation is strong, given the labour and lifestyle benefits it can provide. An economic analysis of three automated flood irrigation systems for a dairy farm in northern Victorian indicated that automatic irrigation can be a profitable labour saving investment in many cases. However, profitability was sensitive to the amount and value of the labour saved. Pneumatic and timer systems were good investments regardless of the area they were installed to service. The supervisory control and data acquisition (SCADA) system was a good investment when more than 50 ha were serviced by the system. Irrigation water savings are unlikely to have a significant effect on the profitability of automatic irrigation, particularly if the price of water is under $100/ML. The labour efficiency of the irrigation system before automation has an important effect on the magnitude of benefits that might be achieved by automation. Larger bay sizes and fewer bay outlets enable the capital cost of automatic irrigation to be substantially decreased. However, this reduces the economic advantage of automatic irrigation systems as the labour savings are reduced.

A range of options for utilising additional land on a dairy farm in the high rainfall area of Gippsland were analysed. The aim was to determine if additional land may assist the owners/operators in maintaining or increasing profit in the medium term (5-10 years). Historical trends have been towards fewer, larger, more intensive enterprises, and this project studies the value of additional land in continuing or altering this trend. A case study farm and spreadsheet modelling approach was used to examine these issues. Five different uses for additional land were identified by an expert steering committee, and were compared to the base farm system over a 10-year development period. The results suggest that expanding the milking area by purchasing additional land without a significant increase in herd size (2A) increased annual operating profit by approximately $70,000/year without increasing variability when compared to the base farm system. This was the only option examined to earn a high enough internal rate of return on additional capital investment to justify the investment without capital gains. Additional milking area with a substantial increase in stocking rate (2C) significantly reduced annual operating profit (by approximately $70,000/year) and notably increased the variability of these returns. The purchase of an outblock for conserved fodder production improved profitability, but would require some capital gains to be an attractive option on profit measures alone. The most appropriate changes to dairy farm businesses in response to changes in the operating environment will vary from farm to farm. The analysis indicated that simple following previous industry trends may not be appropriate on many farms. Optimising the amount of home grown feed and efficiently using purchased supplements are important, particularly if the milk produced is subject to the fluctuations of an export milk price.

Interest in automatic flood irrigation is strong, given the labour and lifestyle benefits it can provide. An economic analysis of three automated flood irrigation systems for a dairy farm in northern Victorian indicated that automatic irrigation can be a profitable labour saving investment in many cases. However, profitability was sensitive to the amount and value of the labour saved. Pneumatic and timer systems were good investments regardless of the area they were installed to service. The supervisory control and data acquisition (SCADA) system was a good investment when more than 50 ha were serviced by the system. Irrigation water savings are unlikely to have a significant effect on the profitability of automatic irrigation, particularly if the price of water is under $100/ML. The labour efficiency of the irrigation system before automation has an important effect on the magnitude of benefits that might be achieved by automation. Larger bay sizes and fewer bay outlets enable the capital cost of automatic irrigation to be substantially decreased. However, this reduces the economic advantage of automatic irrigation systems as the labour savings are reduced.

Average total factor productivity measures for the dairy industry provide an insight into how the industry is performing as a whole, but reveal little about what may be happening on individual farms. A case study of an irrigated dairy farm in northern Victoria, over a 37-year period, found that total milk production and some measures of partial productivity increased substantially. The economic performance of this case study farm over the 37-year period is described and analysed. From records of income and expenses, operating profit, returns to capital, labour and management and total productivity measures were calculated. Between 1980 and 2000, the business achieved productivity gains at higher than the rate estimated for the whole industry. This performance was related to the timing and sequence of developments on the farm, with investment in land and infrastructure occurring prior to the 1990s, followed by a period of intensification involving increasing herd size and supplementary feed use.

Recent analysis from surveys of dairy farms has shown that despite large increases in production, the productivity gains on these farms have been modest. Productivity gains are important for farm viability, farmers have made production gains through adoption of technologies and increases in scale. This long-term farm case study of an irrigated dairy farm over a 40-year period provides an in-depth analysis of system changes and management complexity. Detailed records of milk production, herd, farm area and infrastructure, water use, supplementary feed, and labour were collected and pasture consumption was estimated. Changes in milk production were analysed in relation to individual resources, particularly farm inputs. Increases in production were associated with the use of more resources, including cows, land, water, fertiliser, feed and labour. However, measures of partial productivity indicated that that there has also been a trend towards more efficient use of these resources. This long-term study can provide an insight into production impacts from changes in farm resource use and illustrates the short and longer term impacts of changes to farming systems.

The dairy industry in northern Victoria faced dramatic changes between 2001/02 and 2002/03. Drought resulted in a substantial decrease in availability, and subsequent increase in price, of irrigation water and supplementary feed. Most farms recorded substantial net cash flow deficits. Prior to 2002/03, a project had been established using case studies and a spreadsheet model to examine potential futures for different farm types. This approach was successfully adapted to examine drought impacts and recovery options under the vastly different prevailing circumstances. Several factors appear to have contributed to the adaptability of the approach, as follows: • The approach considered many aspects of farm management systems, but was simple enough to allow adaptation. • The project team and steering committee had developed a good understanding of the relationships between components of farming systems, enabling rapid adaptation of their mental frameworks. • The approach focussed more on helping people question, discuss and learn, rather than providing an absolute answer.

The dairy industry in northern Victoria has been subject to rapid change in recent years, resulting in great diversity in the irrigated dairy farming systems in the region. Continuing analysis is needed of the various farming systems that may be viable in the future. This study examined possible development options for different farm systems to enable them to maintain financial viability. Four case studies, representative of different farm systems, were used. All four had options to combat the effects of declining terms of trade. However, the option most suitable for one case study may be unsuitable for another farm due to differences in resources, goals or skills. A key outcome of the study was the development of a robust approach to continually analyse farm physical and economic performance in a rapidly changing environment. Importantly, options can be analysed, enabling business managers to evaluate risks and reach informed decisions on investments.

Farming systems throughout the Murray-Darling Basin are under increasing scrutiny from the perspective of ecological sustainability of farm and catchment systems. In northern Victoria, the dairy industry is a major user of water, and contributes to the environmental issues. Changes in irrigation water price, availability and policy will invariably impact on the viability of dairy farming in this region, but the diversity of dairy farm systems suggests that the impact will vary between farms. Two case study farms, a 'water reliant' farm and a 'fodder reliant' farm, were used to examine economic and social impacts of changes in water price, availability and policy.