Keith Woodford says for dairy farmers it is the time to hunker down, but not a time to lie doggo. There are decisions to be made

Keith Woodford says for dairy farmers it is the time to hunker down, but not a time to lie doggo. There are decisions to be made

By Keith Woodford*

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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Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The US Department of Agriculture's Beijing bureau has cast doubts on the accuracy of previous estimates of January 2015 whole milk powder stocks, leading to a bearish revision of demand forecasts.

"Trade sources report China has 300,000 tonnes in carry-over stock on hand, double the previous USDA estimate," the bureau said.

"These carry-over stocks are likely to suppress import demand for the remainder of 2015," it added.

With swollen inventories, 2015 milk imports were revised down by 30% to 400,000 tonnes.

http://www.apriliaforum.com/forums/showthread.php?284773-Stanleybobly-is...

You are right, a friend wants me to do a motor bike tour of Spain and Portugal with him this year,I'm looking at cheap bike options, Aprilas are notoriously unreliable but can be worked on, he has a new BMW which isn't working out to well in the reliability stakes and it's bloody expensive too.

According to GTIS, Apr ’15 total Chinese dairy import volumes remained weak, finishing down 33.0% YOY. Total Chinese dairy import volumes have declined YOY for eight consecutive months at an average rate of 31.3% over the period. Apr ’15 total Chinese import volumes also remained slightly below three year average volumes for the month of April, finishing 0.8% lower. Total Chinese dairy import volumes did increase 6.8% MOM on a daily average basis, which was a contra-seasonal move when compared to the ten year average March – April seasonal decline in total dairy import volumes of 7.6%.
Apr ’15 whole milk powder (WMP) imports finished down 64.7% YOY and 10.9% MOM on a daily average basis while skim milk powder (SMP) imports finished down 12.9% YOY but increased 28.8% MOM on a daily average basis. WMP import volumes remained below three year average volumes, finishing 42.8% lower, while SMP import volumes finished at the second highest April level on record and 25.3% above the previous three year average volumes.
http://www.attenbabler.com/chinese-dairy-imports-update-may-15/

Banks have their eyes blind during $8.5 payout period and believe that $7.00 is the new norm.

Then, they encourage farmers, who may not have enough finance literacy to judge, to borrow and borrow more.

Here we are.

Wind back 1 yr and have a look at all the pundits' forecast of milk payout in NZ.

One thing proved -- all are terrible forecasters! No one has their foot on the ground!

Milk price is ultimately determined by animal feed costs, and ag-policies in the EU and the US.

Westland have announced $5.60 - $6 for next season with a $4.40 advance. Their suppliers will be happy - for now.

You saying,' talk is cheap', CO?

Farming on The Coast isn't always easy Aj. That advance rate is good.

How's the feed in Southland? Canterbury sounds awful. Been a tough year with us but most will nut their way through somehow.

Been a tough year in Southland Aj. Southland Fonterra down YTD 7% in April and they were down again in May for the month. Individual farm production drops vary between 6% & 15%. Had a reasonably good autumn so most farms will have adequate feed for winter. As with up your way, we will nut our way through and hope for a good winter/spring.

Had some good news from a young couple - they are being 100% compensated by ANZ re the Swaps inquiry. They are no longer ANZ clients, and the compensation will definitely help them in the coming season.

Heard today there are some farms on the market down our way - at the direction of the banks. Also heard recently that some of the big players are cashing up to create a war chest for when farms drop in price. - Will be interesting to see if/how far they go.......

Been talk around the traps that Fonterra needs a more diverse Board. Interesting to see Ralph Norris go. Suppliers I have spoken to are now starting to question the size of the Board and number of farmer directors. A 9 member Board with 5 farmers/4 independents seems to be the preferred at the moment. Whether or not it will gain traction is yet to be seen.

What are the big players, 'cashing up'?
Making a quick buck by speculating must run in kiwi's blood these days.

Wasn't explained in detail Aj. Did wonder if it was cashing in on their Fonterra shares. There's an article is Stuff today about the Hamilton family. Their 5 south island farms will no longer be Fonterra farms. If you work out the value of Fonterra shares it would amount to a substantial sum.

http://www.stuff.co.nz/business/farming/dairy/68938567/dairy-farmers-sla...

Who will they sell their shares to?
When these big farmers talk about' cashing in' what they are really saying is, ' we need to pay down some debt quickly, before Mr Banker comes calling'. We should call it, 'crashing in'

They can sell them on the Fonterra Shareholders Market. Leave Fonterra and they have up to 3 years in which to sell their shares. It's an attraction for farmers with low(ish) debt. Sell the shares and use the funds to put towards a new property.

does that not require a willing buyer, someone looking to supply Fonterra?
Don't rush to the exits all at once, let just stay calm and walk-fast.

Not just suppliers Aj. I have often wondered how many shares the Custodian of Fonterra Units buys in order to be able to match requests for units.

The question I have is, if Synlait and Tatua both have a similar number of suppliers - then how come Synlait isn't up there interms of payout, with Tatua? Do we have effectively cartel behaviour in farm gate milk price when the corporates set their payments to suppliers based on 'Fonterra milk price +/- x cents?

it's nothing personal, but business is business.
Synlait I take it is not a c-oop

Yes, Ruth Richardson recently implied at a meeting that farmers don't care about what they receive for payout! ;-)

Has she got a degree in economics?

when we were looking it seemed to be they'd pay no more than 25 cents less than Fonterra, with implication would pay more if could. - may be different now or change as its listed.
https://www.nzx.com/markets/NZSX/securities/SML?icharts=true

If together we owned and ran $100m or more of stainless steel, advisers would tell us to pay suppliers as much as we need, rather than maximise on farm gate $$. Advisers would also tell us we need not pay everyone the same, for instance if our biggest supplier and part of a global value chain leaned on us a little than we could do what we want. They would also tell us no one need compare as we say we have different product out put, equip spec. and customer identity...

As an aside, while farmgate $ number is important, the processors counterparty name (ability that "A" payment will be made) is more so. Remember those recently departed Russians.

or as you say pay down debt. ;-) A lot of farms are holding significant amount of $ in their Fonterra shareholding - millions in some cases and and a million or more in most. - Though with share value dropping currently and getting back to closer to be where it should be, that equity will be reduced - but then it depends on the price paid.

I'm thinking Fonterra have solved the redemption risk by passing it onto the individual farmers, am I correct?

Yes. But I'm not sure Fonterra expected so many suppliers to use the opportunity to cashup for expansion reasons and supply someone else, when they brought in TAF. It has being said that a senior Fonterra staffer is talking about farmers in the future, using derivatives and futures? to smooth their payouts. You would have more idea of how that would work than me, but I'm guessing a certain amount of financial literacy would be required to engage in that? Is that even more buck passing from the Corporate to the supplier?

Arrgh, CO I'm but a simple man, it's all double Dutch to me. I lake my contracts in Plain English. Trust no one, watch your back.

may include co op retentions

Westland just upping the pressure a notch, particularly in Canterbury, I like it.

There is a rumour going around that some bigger farming are on the bones of their arse and are refusing to pay creditors going forward saying prices are to inflated for feed and suppliers will have to carry the can unit the price becomes better. Sounds like another round of Bankruptcy's for every one on the cards. Chinese are going to scoop some big enterprises if Fonterra doesn't deliver the numbers.

Norris leaves fontera board. Directors these days have to be fussy about the Company they keep!