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A farm management economics approach to extension: Water use efficiency on irrigated dairy farms in northern Victoria and southern NSW

Daniel Armstrong

Department of Natural Resources and Environment
Kyabram Dairy Centre, 120 Cooma Rd, Kyabram VIC, 3620


In northern Victoria and southern New South Wales (NSW), efficient use of irrigation water is important to the future of the dairy industry. Limitations on the availability of irrigation water, rising costs for this resource and environmental issues have resulted in increased pressure to improve water use efficiency (WUE). Water use efficiency is defined as the amount of milk produced from pasture per ML of water applied by irrigation plus effective rainfall.

A large random survey of irrigated dairy farms in northern Victoria and southern NSW (Armstrong et al. 1998, 2000) found a large range in WUE (25 to 115 kg milk fat plus protein/ML), indicating potential for many farms to substantially improve WUE. Effective irrigation, pasture, grazing and feeding management were the key factors associated with high WUE. Extension activities based on the survey information were effective in creating awareness, but did not result in widespread change (Bowman 2000). Industry benchmarking surveys can be very effective in developing a broad understanding of the industry issues (Burns 1966) and in indicating potential for improvement in areas of the farm business (Queensland DPI 1983). However, such surveys are unlikely to result in widespread changes in farm management practices and may not be an appropriate tool for making farm management decisions (Malcolm and Ferris 1999). Farm management decision making is about deciding on the most effective use of resources on a farm to achieve the objectives of the farm business in the future (Makeham and Malcolm 1993, Malcolm and Ferris 1999).

The WUE innovations that appear most likely to be adopted are those that result in increased farm profitability (Barr and Cary 1992) and improve labour efficiency (Kaine and Bewsell 2000). While improving farming practices may be necessary to maintain the regions natural resources, farmers need to balance this industry and community imperative with their individual objectives. Ensuring that adoption of information on sustainability issues makes individual farmers better off is an important aspect of being a responsible provider of information.

Farm management decisions needs to consider the complex combination of human, production, environmental, economic, and financial components of the business (Makeham and Malcolm 1993). To understand the complexity of decision making processes, in-depth examination of a small number of businesses is generally more beneficial than surveying a large random sample (Sterns et al. 1998, Crosthwaite et al. 1997). This case study approach is a legitimate and appropriate method for analysing farm management issues.

This paper documents an approach using farm management economics to investigate options for increasing WUE on a case study farm. The purpose was to examine if this extension approach could result in increased WUE, increased profitability, and be compatible with a farmer’s objectives. Economic and human/social issues are considered, as well as the environmental and production issues, to gain an improved understanding of the decision-making process and motivation for change.


Farm selection

The case study farm was selected from a group of 20 monitor farms (see Armstrong 2001), as it had characteristics that were relatively common to dairy farms in the region, making the information generated more useful to the wider population (Kennedy 1979). Also, changes had been implemented on the farm that had affected WUE and profitability in recent seasons, and options for further changes were being considered. This enabled investigation of links between WUE and profitability, and provided opportunities to obtain insights into other motivations for improving WUE.

Data collection and analysis

Production data were collected by personal interview in April 1998 for the 1995/96 and 1996/97 seasons and in July 1999 for the 1997/98 and 1998/99 seasons. The second visit focused on comparing WUE of the farm over the four seasons and discussing factors that may have contributed to changes in WUE. Economic and financial data were collected in February 2000, and options for the future discussed. The medium to longer-term plans and options for the farm, and the main constraints, were scoped through a semi-structured discussion.

The production efficiency calculations used have been documented by Armstrong et al. (1998, 2000). Farm management economics budgets were developed according to Makeham and Malcolm (1993).

Evaluation of development options

Based on the comprehensive information collected four initial development options were evaluated by estimating the whole farm operating profit, in the steady state, after implementation. After considering the operating profit and practicalities of four options, two options were discarded. Ten-year discounted net cash flow partial budgets (here in after referred to as development budgets) were completed for the remaining options, which were used to investigate the return from investing in these options and the feasibility of financing the development. These development budgets were the appropriate method to examine how the existing farm could be developed to improve WUE and profitability in the future (Malcolm and Ferris 1999). The 10-year period allowed the returns from the investment to be expressed and was consistent with the planning period of the farmer. Details of the prices and assumptions used in constructing the development budgets can be found in Armstrong (2001).

The key criteria considered in the economic analysis of the various development options were the whole farm operating profit after the change, the peak debt, Internal Rate of Return (IRR), and the ‘break even year’. The ‘break even year’ refers to the year when the cumulative net cash flow after interest becomes positive. The IRR shows the return on an investment over the life of that investment, and can be interpreted as the maximum interest rate that the business could borrow funds for the investment without losing money. Calculation of the IRR involves finding the discount rate that makes the discounted net present value (NPV) equal to zero. The discounted NPV is a lump sum that is worth the same, at present, as a series of flows of cash at various times in the future. Discounting involves adjusting the value of money that may be received or spent in the future, back to what it is presently worth (Makeham and Malcolm 1993). An analysis of the sensitivity of the different options to fluctuations in key parameters, such as, milk price, was also conducted.


Background, plans and constraints

The current owner operators (a father and son full time plus some assistance from the mother) purchased the farm approximately 15 years ago. They plan gradual development into the future. The father wants to hand over the management of the farm to the son over the next 5-10 years.

The milk harvesting facilities are the main constraint to increasing herd size, and hence milk production. A considerable amount of time is required to milk the 180-cow herd in the existing dairy. By building a new dairy, the owners anticipate a large enough reduction in milking time to allow them to milk an extra 70 cows without any extra labour. The owners considered replacing, or renovating, the dairy to be a necessary component of any expansion option, and would be desirable even if the herd size did not increase.

The relatively low irrigation water right per hectare of this property means there will be an irrigation water shortfall in most seasons, if the current area is fully irrigated. While reliance on temporary irrigation water makes the farm vulnerable to price fluctuations between seasons, the owners seem comfortable with this vulnerability. Purchasing permanent water right does not seem a sensible option in this situation as it will increase the total liability of the farm and make financing development options more difficult. It may be difficult to borrow substantial amounts of money to invest on this farm, as the equity of the farm business is currently relatively low (approximately 55 %).

There is about 20 hectares of non-irrigated land that could be developed for irrigation, but this would increase the vulnerability to fluctuations in the price of temporary irrigation water between seasons. Opportunities to purchase adjoining pieces of land may arise, but most land in the immediate vicinity of this farm also has a low water right per hectare.

Changes in WUE and profitability

The WUE of this farm was slightly above the regional average in the first three seasons and then increased substantially in 1998/99 (Fig. 1) when grazing and pasture management appeared to improve. Less grain was fed overall in 1998/99, but higher rates were fed in summer/autumn and lower rates in spring. This may have resulted in less substitution and greater responses to grain feeding (Stockdale et al. 1996).

The operating profit dropped slightly in 1996/97, dropped more dramatically in 1997/98, and then rose in 1998/99 (Fig. 1). Some of this variation was due to changes in commodity prices. Standardising milk and concentrate prices altered some of the fluctuation in operating profit between seasons. However, the general pattern remains the same with the highest operating profits recorded in 1995/96 and 1998/99, and the lowest in 1997/98. The reduced operating profit in 1996/97 was associated with an increase in permanent labour costs when the son commenced full time work on the farm, while the reduction in 1997/98 can probably be attributed to a lower milk price and an increase in supplementary feed costs.

There was not a simple, direct relationship between WUE and operating profit on this farm. However, the season with the lowest WUE also had the lowest operating profit (1997/98), and the increase in WUE in 1998/99 coincided with an increase in operating profit. While WUE is not always the major factor impacting on operating profit, increases in WUE can be profitable.

Figure 1. Comparison of the water use efficiency (silos) and operating profit (diamonds and line) of the case study farm over four seasons.

Potential areas for increasing WUE and profitability

Increases in WUE can probably be achieved through continued improvements in grazing management, which may lead to increased income and/or reduced feed costs. Observations of post grazing mass by the farmer, and others, indicated considerable scope to utilise more of the pasture grown. This suggests that reducing supplementary feeding, or increasing stocking rate, is likely to lead to higher pasture consumption and higher WUE. An hypothetical analysis was carried out with 70 additional cows being carried on the current milking area and about 15% more grain being fed per cow (see Armstrong 2001 for details). It was assumed that milk production per cow remained unchanged. The hypothetical WUE and pasture consumption are higher than the figures for 1998/99 on this farm, but still realistic for a farm in this region with high production efficiency (see Armstrong et al. 1998, 2000). However, it would be necessary to regularly feed profile the farm to assess pasture accumulation, consumption and utilisation to minimise risks associated with between year differences in pasture growth rates.

There appears to be potential to increase profitability by investing in infrastructure that increases labour efficiency. For example, a new dairy would allow milk production and income to be increased with similar labour requirements. The milk harvested per labour unit per annum has generally been about 450,000 L, whereas some farms harvest 750,000 L per labour unit per annum. (Hoekema et al. 2000). High labour efficiency should be achievable on this farm with improved milk harvesting facilities as the milk production per cow is above average and the irrigation layout and feeding system are not labour intensive.

The irrigation water use does not indicate significant potential to increase WUE through improved irrigation application efficiency. Alternatives to flood irrigation, such as sprinklers, are unlikely to reduce water use on this farm as the soil type is a heavy clay (Wood and Martin 2000), the irrigation layout is relatively easy to manage and the whole farm drains to a re-use system.

Some initial options were proposed that met the objectives of the farm owners, and provided opportunities to capitalise on potential for improvement in profitability and/or WUE. However, the practicality and economic feasibility of these options needed to be considered thoroughly.

Evaluation of the development options

The process we used to deal with the complex farm management decisions associated with the development options was developed and refined through discussions with a farm consultant (Ian Gibb, Farmanco) and other advisers, and is summarised in Table 1.

The projected whole farm operating profit of each of the four options, in the steady state after implementation, was higher than any of the previous four seasons (Armstrong 2001). After considering the operating profit and practicalities of implementing the four options, two options were discarded. However, the discarded options may be quite appropriate in a different situation on another farm. The remaining two options were (i) develop land for irrigation, or (ii) intensify on the existing land. Both options involved constructing a new dairy. While the whole farm profitability of the two options appeared reasonable, in the steady state after implementation, it is also important to consider the return from investing in these options and the feasibility of financing the development. Hence, 10-year development budgets were completed.

The development budgets suggested that intensifying on the existing land is the most attractive option. The IRR was high and the peak debt appeared manageable. Vulnerability to fluctuations in milk price, grain price, temporary irrigation water price, interest rate and the predicted gains in WUE were low. This option appears to be compatible with the objectives of the farm owners and was likely to result in increased WUE and profitability. The owners have commenced implementing this option in a slightly more gradual manner, which is congruent with their attitude to risk.

The main reason for not implementing the option of developing more land for irrigation is that it would substantially increase debt. However, this option may be considered in the future if equity increases.

Table 1. Process for dealing with a complex farm management decision.

Stage 1. Identification of the issue/problem – getting the perspective right.


Collect background information on resources, constraints, plans, goals.


Initial analysis (e.g. stocking rate, WUE).


Comparison of results from 1.2 with benchmarks and standards.


Interpretation of results from 1.1, 1.2 & 1.3 to identify key issues, constraints, and potential to increase profitability and efficiency.

Stage 2. Quantitatively predict the potential improvements identified in Stage 1. (Initially conduct Stages 2 & 3 roughly to eliminate some options, and then analyse remaining options in more detail).

Stage 3. Farm management economics budgets. Examine financial feasibility and profitability of making changes and test sensitivity.

Stage 4. Choose an option. Generally not a stage where an adviser has much input.

Stage 5. Plan implementation. Set measurable targets that can be worked towards.

Stage 6. Implement.

Stage 7. Review. Not crucial, but good for measuring progress and learning for future decisions.


The approach of assessing the current situation on the farm, identifying areas where potential to improve may exist, and then evaluating development options, appears to be appropriate for WUE extension in the irrigated dairy industry. An integral part of this extension approach and of farm management economics is understanding the goals and aspirations of the farmer.

The case study farm data indicates there was no simple, direct association between WUE and profitability. Economic analysis of development options for this farm found that there were some options that were compatible with the objectives of the farm owners and were likely to result in both increased WUE, and increased profit. Efficient use of irrigation water is one of many factors that contribute to whole farm profit in this region. Therefore, development options that have the potential to increase whole farm profit will invariably consider the potential to increase WUE.

An investment in improving WUE is often complex and generally impacts on a number of areas of the farm business. For example, increasing WUE by increasing pasture utilisation may require an increase in stocking rate and herd size. Replacement of existing infrastructure, such as, the dairy, may be required if herd size increases. The complexity of increasing WUE suggests that the individual situation of the farm needs to be considered before providing advice. Benchmarking surveys are likely to create awareness and identify scope for change, but are unlikely to result in widespread change. Options that simultaneously result in increases in WUE, profitability and labour efficiency appear to be more likely to be adopted than options that focus solely on increasing WUE.


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  16. Wood, M. and Martin, M. (2000) Paper presented to the Irrigation Australia 2000 Conference, Melbourne, May 2000, 412-422.

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