Managing the dairy downturn

It is still far from clear whether we have reached the bottom of the dairy price cycle. The Chinese seem to be coming back into the market but no one much else is. But even if prices do start to rise in the next few months, down on the farms things will be tight at least until Christmas.

There are considerable lags in the system between prices at the Global Dairy Trade auction, and the milk cheques that farmers receive. Hence the financial crunch is just coming on.

Currently, not all the advice that farmers are receiving appears to be sound. This is not the time to panic. Rather, it is the time for very careful decisions as to what costs can be reduced or delayed, and what inputs need to be maintained.

The local rural bankers understand the need for calm, and hopefully their Australian-based head offices will also understand. From what I can see, the banks are encouraging farmers to maintain expenditure where that expenditure feeds directly into income.

In this coming year, the only dairy farmers undertaking development will be those who have strong equity and good finance streams. For them, it is an ideal time for development, as rural supply firms will be open to pricing deals. For the rest, it is the time to hunker down, but not a time to lie doggo. There are decisions to be made.

On many dairy farms there has been a huge amount of development in recent years. Much of it has been linked to managing and decreasing the environmental footprint. Productivity improvements have also been occurring, particularly relating to within-shed electronic monitoring systems.

There is more development to be done. But for most farmers the next steps will have to wait until at least next year.

Preventive maintenance is something that can often be put off, but that is not the case within the dairy shed. A stitch in time saves nine is indeed the message in the dairy shed, particularly in anything that links to milk hygiene or udder health.

Many farmers will try and save on labour but that needs careful thought. Less labour means more stress, and there is already more than enough of that on many farms. Reducing labour just shifts the burden to others.

Many farmers will reduce their pasture renewal programs and thereby save some costs. In a perfect world it would not be recommended, but it is not a perfect world. For most farmers, it is a saving that can help this year’s bottom line.

On some farms, phosphate fertiliser can also be reduced without immediate loss of pasture production. But that can only be done for one year or at most two years.

In contrast, any reduction in nitrogen fertiliser will show up very quickly in the milk vat. Nitrogen is usually the quickest and cheapest way to boost pasture production, although of course this has to be done within environmental limits.

Independent of current prices, I see evidence that some farmers are reducing their stocking rate. There is a feeling that stocking rates were being pushed a tad too high. This is definitely the case in Canterbury where I live, where there is recognition that less cows does not necessarily mean less milk production. I think that recognition may also be occurring in other parts of the country.

One of the ongoing debates in New Zealand dairying is the role of supplementary feeds. Within DairyNZ, the dominant mantra has been to encourage all-grass based systems, but many farmers have increasingly been adding supplements.

I see advisers aligned to the all-grass low-input system using the current downturn to promote their philosophies and arguing for less supplementary feed. In some cases this may be appropriate, but I am also seeing evidence of some farmers doing more harm than good by making quick changes.

For much of the last decade, I was a judge for the Dairy Business of the Year (DBOY) competition, for which the key criterion was always return on capital. What I have seen is that there is no simple answer as to whether high or low supplement systems are the most profitable. Within-system differences greatly exceed between-system differences, but more years than not the winners have tended to the high-input systems. This has still occurred in low payout years.

Particularly insightful to me, both from DBOY and other data that I see, is that the high-input systems do not necessarily have high costs of production per kg milksolids. That is because there is both a numerator and a denominator to that calculation. It all depends on the extent of the increased production from the increased inputs.

One very clear message from this work is that regardless of production system, the most profitable farmers always have a low cost of production. The best farmers have an equal focus on both the numerator (i.e. input costs) and the denominator (i.e. milksolids production). It is all about getting the balance right.

One of the biggest flaws within parts of the New Zealand dairy industry, including within industry organisation DairyNZ, is the assumption that a low-input strategy leads to low cost of production. Sometimes it does and sometimes it does not.

One thing I am very certain about is that the current financial downturn is not the time to make rash decisions about the specific production system. Farmers can and do change their systems over time, but these should be strategic decisions. Within any one system, trying to make short run changes simply leads to hungry cows. And underfed cows always pay back their owners in an unpleasant way.

In recent years, farmers have been increasingly recognising the importance of keeping up winter feed and improving cow condition. I never saw a DBOY winner who did not have superior per cow performance in relation to norms for the geographical region and production system. Now is not the time to forget those lessons.

Of course pasture is always going to be the cheapest feed whenever it is available. But during winter and also early spring, pasture is typically scarce. Every time I do the calculations relating to the cost of supplements, then I find it is better to not skimp on feed. And that applies even with current prices.

So for the next six months to a year, the focus has to be on survival and not panicking. Hopefully any distressed sales will be the exception. The banks have a big responsibility to stick by their clients. Farmers also have a responsibility to keep their bankers informed, and to demonstrate that they are doing the sums to make the right decisions.

In all of this the often-forgotten people are the businesses that service dairy farmers. They too are going to face tough times.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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7 Responses to Managing the dairy downturn

  1. Pingback: Managing the dairy downturn | Agrigator

  2. George Steven says:

    Keith, This is an excellent piece of work, I am surprised that it hasn’t drawn much comment yet. As a new dairy farmer I have been a bit perplexed by Dairy NZ’s obsession with grass. Grass is no longer cheap is it, not with the investment we have in land. I would be really interested in your comments on this. I am no financial analyst so you can probably correct my amateur calculations…. My irrigated farm is valued at $7 million to feed 400 cows. It grows 15T DM/HA times 130 HA.That’s $420 000 of interest to produce 2000 .t/dm. Thats 21c/kg of DM. But there’s still the costs of irrigation, nitrogen, pasture renewal, fertiliser, topping etc etc.thats another $100 000. So we’re up to 26c. There are times when PKE is cheper than this. Dairy NZ’s recommendation that a feed shouldn’t cost more than 3.5% of the payout means we need to grow grass at less than 18c this coming year. I suppose we do this by subsidising the interest cost on the land with some equity. Mmmm sure theres an article here somewhere for you. Keep up the good work, George S

    • Keith Woodford says:

      George, Yes, grass is expensive if the interest cost is included. The 3.5% figure of DairyNZ might make some sense if it is used in relation to the ‘base feed’ on a dairy farm. But it is a silly number if used as the maximum price that should be paid for feed during the shoulders and in winter. PKE is an example of a feed that can often be used to increase profits, but it needs to be used as a strategic and tactical supplement. I will probably write some more on these and related issues over the coming weeks and months.
      Keith

      • PKE rips up cows’ guts i.e. it causes leaky gut. Is the bottom line really worth that? In the United States the life of a dairy cow is only 3 years.

  3. Mark says:

    Keith, thanks for this shining light of common sense on the horizon. Greatly appreciated and necessary for these times of change.
    Mark T

  4. Pingback: Rural round-up | Homepaddock

  5. Pingback: The price of milk

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