Drivers Of Risk In New Zealand Dairy Systems

Much research have been focused on the importance of physical parameters on the profitability of New Zealand pastoral systems, however not many efforts have been addressed from a financial perspective. As farms get bigger, the identification of the main drivers on farm economical viability becomes more important. The objective of this study was to identify important factors affecting Return on Equity (ROE) as a measure of risk in pastoral systems. A 5-years database of owner operated New Zealand dairy farms with seasonal milk supply pattern was analysed. A logistic regression model was used to examine the effects of several variables on ROE. The analysis was undertaken between farms and within seasons to account for the effect of milk payout on risk. The Debt to Asset Ratio, Operating Profit Margin and Asset Turnover Ratio were negatively correlated with risk and significant for the whole period analyzed. The Debt Servicing Capacity was positively correlated to risk and significant for the 5 years period; it was also the most dominant variable in determining the risk. The Farm Working Expense Ratio was positively correlated with risk however its significance level varied during the period analyzed. Effective Area was positive but not consistently correlated to risk. Thus improving economic efficiency and leverage (both amount of money borrowed and interest rates) are key issues to managing risk under New Zealand conditions.