Allan Barber says alternate land use options are limited when all have restrained profitability at the same time. He reviews the outlook

Allan Barber says alternate land use options are limited when all have restrained profitability at the same time. He reviews the outlook

By Allan Barber

Previous downturns or relative changes in sector profitability have generally led to a change of land use; and because sheep farming was the predominant 20th century rural activity, land use change was usually to a form of farming other than sheep.

Think forestry in the late 80s and 90s, dairy since the early years of this century, horticulture, grape growing and rural subdivision for lifestyle blocks since the 1980s.

Now the dairy payout has almost halved in 12 months because of global overcapacity and weaker economic conditions, the question arises whether there will be a flight from dairy, either back to sheep and beef or to one of the other agricultural options.

There are two main facts about the dairy sector: the current price is below the cost of production and global dairy production will continue to increase.

There are also differing opinions about the implications of the price downturn and the prospect of improvement in the near future.

Improvement will depend on recovery in the world’s major markets, notably the EU and China, as well as a resolution of the stand off between Russia and NATO countries.

China is going through an adjustment of its economy, as it tries to achieve a soft landing, but its growth rate will not be allowed to move back up to its previous heights.

While last year’s record payout was almost entirely due to the impact of Chinese demand, this is unlikely to be repeated in the next five years, if ever.

Europe’s economy is a basket case because of lack of demand and deflation in most EU countries, while the ECB tries to stave off a recession by printing billions of Euros.

However the removal of milk production quotas on 1 April will see a lift in volumes in some countries, including Ireland with an objective of 50% growth by 2020, western France, Denmark and the Netherlands, which will result in more dairy volume on global markets. EU exports have already increased by 45% in the last five years. The United States economy is improving and dairy production there is also rising.

Fonterra’s recent announcements don’t exactly give great confidence there is any improvement just round the corner. GDT prices have fallen sharply since February which contrasts with hope expressed before Christmas the price would recover to $3500 a tonne which was the average required to preserve a $4.70 payout. Now the payout forecast has fallen to $4.50 where NZX Agrifax has had it for the last two months.

Almost worse, the dividend payment is stuck at 20-30 cents per share, at a time when low milk prices should have flowed into better added value margins.

In an environment of greater milk production and hopefully increased global demand, the importance of a value added product strategy becomes ever more pressing. Fonterra appears to be stuck closer to the commodity end of the spectrum and its product mix is still geared towards the farmer milk payout priority.

Unfortunately this season has illustrated how limited that strategy is.

The V3 initiative the company is pursuing must make fast progress as suggested by the third V in the strategy, that of velocity.

But for those looking to change their farm activity, the main alternative farming type, sheep and beef, has failed to maintain its 2014 improvement, further progress on meat industry restructuring is unlikely to happen, until participants assess potential developments arising from Silver Fern Farms’ equity raising programme.

The red meat sector needs to get its act together in a hurry, if it is to have any hope of encouraging dairy farmers to jump back over the fence.

At the moment the best the sector can hope for is a slowdown in the rate of dairy conversions which surely must come to a sharp halt after the latest downgrade.

Next season will be a nervous time for both dairy farmers and New Zealand as a whole, as they wait to see whether the White Gold rush will come again or merely more milk down the drain.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at or read his blog here ».

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Dairy farmers of old used to run a bit of bull beef. Maybe this could be an option along with a lower cost milking operation.

Generally not worth the labour cost. Often they were run behind the cows "to clean up" - if your pasture management is good there is nothing to clean up. Or they were run around creeks and odd bits of land that weren't dairy safe (banks, tomo's) it help keep the weeds down, didn't have to have water piped to it, and if one or a few didn't make it you fenced off the hazard and kept going - all value-ads which are illegal now. So unless you want to sacrifice core pasture production and put expensive labour into a side line the gain is minimal.

Sunk costs. It's a bit of a stretch to imagine dairyfarmers who imagine their land is worth $30k/ha switching down to grazing where the land is only worth $15k/ha. The only way it can happen is if dairy farm prices crash, if that happens the banks are toast anyway, and so is the country.

......just extend Auckland City limits to include the rest of NZ, cut off a few sections and keep selling them to each other. Job done.

All farming has it's ups and down price wise. Sometimes you just have to do what you have to do to get by. Have a bit of a rethink and go into survival mode.

I think with sheep and beef, people have got carried away in the past with the idea that " we can run this many stock units and therefore our farm is worth this much". But this doesn't necessarily mean you are profitable. Sometimes you can make more money running less animals in a lower cost operation but farmers worry that their farms are worth less because they are being valued on how many stock units they can run or how many milk solids they produce. All the farming spin off industries all want high production. I guess it depends for some people if they want to survive financially or keep the value of their farm looking good so they can sell.

Dairy farm values are now based on per hectare, not production based. e.g. $45k/ha regardless of production but there is some allowance for quality/type of buildings. This is quite a shift from when they were based on a per kgms basis. In the future they will valued like some parts of Canterbury already are - on their nutrient limit rates. Our regional council has mentioned in some meetings that they see the value of farms in the future being tied to limits, as they are looking at the geological make up of catchments, not just soil types. Reason being in some ares like Browns in Southland due to the geology there is a reasonably high level of nitrates before anything else is taken in to consideration. Some farmers are going to struggle to get to grips with the new value method in the future.

Buy out the farmers and sell the land to outfits like Google and IBM for research campuses. Think how much more valuable and productive that space will become and all without any of the toxic run-off.

Yes LOL - the computer/digital industry just exports all their toxic waste to third world countries. 'Out of site, out of mind'.

They have better connections.

Getting a bit too much like communism for my liking CO, where councils decide who the winners and losers are.

The use of artificial fertilisers in modern farming systems is a relatively new phenomenon. The side effects of intensive farming on light free draining soils is still being researched. However the effects of nitrates in drinking water looks more and more likely to be carcinogenic, the problem is the time it takes to reverse the damage is considerable, so it's better to avoid the problem in the first place.
My advise would be to stick to low cost extensive systems and avoid the over use of modern fertilisers. Yes the new zone changes will have a big impact on how we farm and production, especially on intensive irrigated farms.

Aj have you read this (page 7 Doug Edmeades article)

I sometimes wonder if people genuinely understand the time lag for some waterways and nutrient loadings and how vastly different it can be from one waterway to another.

Saw an interesting documentary on BBC Knowledge the other night Dr David Moseley comparing beef, chicken, pork, and lamb production. Intensive versus less intensive e.g. feedlot beef v grass fed beef and the methane/carbon emissions of each.

Ecan grandfathering nutrients was totally the wrong decision.

CO, I'm still trying to get my head around it.
I had a long talk to a friend form Pakistan, they have a lot of problems with salinity and it's a difficult problem to deal with too. Pollution is a big worry for India and Pakistan, their farming practices are dominated by short term thinking.

Tim12 - a fight back against bureaucratic and perceptive judicial victimisation of farmers has started...........

No sign of JK getting tougher on selling to foreigners like the aussies.

Ah didn't spot this article. Another job lot of farms going to foreigners

This lot are seeking to own $1b worth of NZ farmland within 5 years. Holy hell, can we really allow this to happen?

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