THE dairy industry is not as healthy as it looks, according to a leading industry consultant.
Onfarm Consulting director and principal John Mulvaney said the "massive" increase in input prices had not been highlighted as much as record milk prices.
"For an individual dairy farmer, the critical issue is not milk price, but margin, because that ensures survival," Mr Mulvaney said.
"The question often being asked is: 'have prices and costs moved significantly compared with where we were and where does that leave us?'
"The dairy business is healthy, but the margin (depending on which one you rate as most important) is about the same level as 2005-06 unless cost savings can be achieved."
To highlight his argument, Mr Mulvaney has analysed financial figures from a focus farm in Gippsland.
He found that production costs have risen a staggering 62 per cent and are above the milk price paid in 2005-06 and the five-year average milk price.
All input costs have risen 15-117 per cent, yet operating surplus and profit increases were less than 10 per cent.
Mr Mulvaney calculated the return on capital for the Gippsland farm fell from 14.3 per cent in 2005-06 to about 10.2 per cent this season.
"The decline in the percentage return on assets is due to the fact that even though the budget surpluses and profit are slightly above 2005-06, the asset base that produces the milk has grown in value," he said.
"This is a particularly important issue in Gippsland. Long term, it means that it will be more difficult to retain assets in the industry unless milk price continues to increase.
"The profitability of the last unit of input has to be questioned as much, if not more, than it was in 2005-06 when this farm's milk was 32.9c a litre and grain was 21c/kg; a ratio of 1.56 compared with a ratio now of 1.1."
"Margins are under pressure as costs go up and we are at a starting point where inputs are already quite high," he said.
