An analysis of operating profit margin: a valuable tool for New Zealand dairy farmers

Abstract

Operating profit margin (OPM) is a well-supported and easily interpretable parameter from the DuPont framework for understanding firm performance. It has not been widely applied in the dairy industry, despite its role in driving profitability, resilience and debt serviceability in low subsidy export-oriented farming systems. We analyse the drivers of OPM in depth for the first time on New Zealand dairy farms. We utilise a 10-year panel dataset developed by applying simulation methods to sample and population data, giving a representative picture of the industry. We group farms into quartiles of their long-run OPM performance and perform non-parametric Games-Howell testing to investigate differences between the groups. We then estimate individual and time fixed effects panel regression models for the entire sample and each quartile separately to examine the factors driving changes in OPM over time. We add to the limited literature on the factors driving changes in OPM over time.

KEYWORDS:

• Dairy industry
• New Zealand
• operating profit margin
• panel data
• profitability

Data availability

The data that support the findings of this study are available from DairyNZ. Restrictions apply to the availability of these data, which were used under license for this study. Data are available from the corresponding author with the permission of DairyNZ.

Disclosure statement

Zack Dorner received funding from the Ministry for Primary Industries in 2022 to review modelling of agri-emissions pricing policy. He received funding in 2021-22 from DairyNZ to co-supervise a Master's student. He also receives funding from a Ministry of Business, Innovation and Employment Endeavour project, looking at increasing pro-environmental actions on farms. Robbie Maris has no potential conflict of interests to declare.

Notes

1 Waikato is a dairy-focused region in New Zealand. Please see Section 3 for more details on the average characteristics of farms in the Waikato.

Additional information

Funding

This research was part-funded by DairyNZ and the University of Waikato’s summer research scholarship programme. Inputs from Graeme Doole, Ryan Mills, Mark Neal and David Silva-Villacorta from DairyNZ were beneficial and greatly appreciated.