Keith Woodford reviews the outlook for dairy and finds many farmers adjusting with the future in mind; not so by the dairy organisations, he worries

Keith Woodford reviews the outlook for dairy and finds many farmers adjusting with the future in mind; not so by the dairy organisations, he worries

By Keith Woodford*

With calving in full swing, most dairy farmers have no time to think about anything but today. Things are indeed grim and the short term focus has to be on survival. For the next few weeks, there is some logic to focusing on the simple day to day things that can be influenced. Even in the good times, these are the things that often separate out the best from the not so good.

Despite the gloom, most of the farmers I know do seem to have things well under control. Perhaps that is because most of my mates have lived through tough times before, back in the 80s and 90s. They have always assumed that at some time a storm would burst upon them and so they have not panicked. Rather, they have been quietly and sequentially battening down the hatches for more than 12 months.

Battening down the hatches has not necessarily meant sitting on their haunches. Indeed some of them have been expanding, particularly through purchase and lease of support land, to get better control of their businesses.

It has not so much been a case of predicting where we would now be. Indeed I am sure that none of them predicted where we are now.  But it was a case of always having in the back of their minds that the good times never last for ever, and remembering the Boy Scout motto of ‘be prepared’.

It is all about survival so as to still be there when the good times return.

One of my farmer friends recently reminded me of the so-called Stockdale paradox.  James Stockdale was the highest ranked American prisoner in Vietnam, and he remained a captive for more than seven years.  One of his famous statements, quoted in the Jim Cross book “Good to Great’ is that “you must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be”.

Stockdale said that those who relied on false optimism to see them through were the ones who died. Those who accepted reality with stoicism, and remained focused on their situation and what they could do, were the ones who survived

The current worry is that some farmers are making things worse by poor decision making. Many of these poor decisions will be a consequence of stress. So I thought I would write a little about some of the decisions that I see the old timers making.

Feed decisions

The first point is that it is seldom sensible to make one decision in isolation. And the silliest decision of all is to try and skimp on feed. Hungry cows always punish the farmer. 

I am seeing some dangerous advice coming from DairyNZ, implying that farmers can save on purchased feed by improving their pasture utilisation. In most cases, farmers will not be able to make major improvements in the short term given the personal stress they are under. It’s not the time to be learning new tricks.

The situation will vary throughout the country, but in Canterbury where I live, the winter has been remarkably cold. For the first time in many years, the pastures have not grown at all over the winter. So pasture covers are down, although fortunately the cows themselves have held up well.

If farmers want to save on feed, then they also need to sell the bottom end of the herd.  In most cases, it might be between two and five percent of the cows.  Typically they will be low producing late calvers. Other farmers are planning to cull much earlier in the season than usual.

Cutting back on supplementary feed does make sense when there is a substitution effect with pasture. Pasture is always the cheapest feed on grazing farms, and high pasture utilisation is fundamental to success. The DairyNZ advice is predicated on this being the situation.

But on many farms there is no additional pasture to be utilised. And at the risk of being repetitive: hungry cows always punish the farmer.

One of my farmer friends says he is feeding PKE which he contracted in advance for $250 per tonne. This week he has picked up additional quantities at $210 per tonne.  When I run the numbers on those purchases, it is very evident that even at this year’s disastrous milk prices, and in his specific situation of a feed deficit, that this is sound business.

Many farmers are planning to eliminate off-farm wintering of dry stock.  This can make a lot of sense, but only if the feed budgeting and hence the stocking rate is correct.  Once again, cows will need to be reduced.

The other big revolution in winter feeding is fodder beet. I am increasingly seeing farmers take control of their wintering costs by growing this crop.

The forward thinkers have been quietly trying out fodder beet over the last one to three seasons and are now increasing the area this year. For those who are new to the game, it is better to tread gently in the first year. 

Reducing the cost of production is not always the only solution. One farmer who has a barn tells me that with winter and shoulder payments he will get an overall herd premium of 85c per kg MS.  The challenge with these systems is to control the per kg cost of feed.

The medium term

Overall, I remain very confident that, as an industry, dairy will emerge from the short term gloom to medium term sunshine. What neither I nor anyone else can say is just when that will happen. Currently, I am frustrated that prices are holding up better in Europe and the US than in New Zealand, and this will slow down the Northern Hemisphere adjustment.

In the meantime, farmers are frustrated with Fonterra’s inability to give accurate price estimates. It needs to be emphasised that in a commodity market no-one can estimate future prices with any accuracy. That is the fundamental nature of commodity markets, where minor imbalances in supply and demand lead to very large price volatility.

Unfortunately Fonterra has dug a hole for itself – and also for many farmers – by creating the illusion each year that prices can be estimated in advance.  Historically, Fonterra should have made much greater uses of a range of likely prices rather than single point estimates when communicating to farmers. I have been saying this for many years.

 Even the current estimate for 2015/16 is little more than a guess.  I think Synlait does a much better job of communicating to its farmers as to where current returns sit in relation to the overall seasonal prediction.  Synlait regularly gives its farmers a graph showing seasonal prices to date and what payout these prices will support. Currently that figure is less than $3. This allows farmers to make better judgements as to where things are at.

Although I am confident about the medium term beyond the next one to two years, I am less sure about the long term beyond about five years.   This is because our seasonal supply industry is not well suited to value-add consumer goods.  In relation to whole milk powder (WMP) there is only one big global supplier (New Zealand) and one big global consumer (China).

Sometimes I have debates with people as to whether or not we are over exposed to China. The point I try to make – often without success – is that if WMP is the game we are in, then China is the place we have to play it.

I have little doubt that China will increase its dairy consumption but I do have niggling concerns as to how much milk powder they will want in the long term.

I think one of the big new dairy products is going to be ESL (extended shelf life) milk. This is different to UHT, and it tastes like ordinary pasteurised milk. However, it keeps from five to nine weeks and with ongoing technology improvements, this will further increase. It does not have to be chilled but it usually is. Already it is on all the supermarket shelves in Germany and the USA.

In the future, there is a real risk that this ESL milk will be conveniently transported from the USA and Europe at modest cost, and poor old New Zealand will be left wallowing in the wake without competitive brands and supply chains. Oh dear!

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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

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'I have little doubt that China will increase its dairy consumption but I do have niggling concerns as to how much milk powder they will want in the long term.'

Here you have it. The absolute basis of our vastly expanded commodity dairy industry. It's called belief, hope and guesswork - a planning model consistent with licking your finger and holding it up to the wind.

And on decision-making no more rational or disciplined than this, we have built up 30-40 billion dollars of dairy debt, turned our rivers into sewers and lakes into sceptic tanks, deeply compromised the health of some of our most rare, beautiful and admired South Island environments (important to our tourist economy, and surely to our own national self-respect), and sunk much of our economic freedom of action into an absurd 'Comprehensive Strategic Partnership' with communist China (an agreement that even includes commitment to defence engagement).

It may well be that China increases its dairy consumption. It is very much more certain that the country will have plenty of opportunities for supply. And it is absolutely certain that China has no intention of being beholden to anyone else's price-setting.

Beautifully put, once again, workingman !

Now we have to guts it out. The horse has bolted ! If ever we needed some vision and direction from our leadership, it is now. Blind faith, that it will all come right in time, is just not going to cut it!

My sheep and beef (mostly store) mate, who has 80% equity on a $M14 hill country place has been asked (by the suits) for a monthly cashflow report. He says he's shocked to be considered in the 'at risk' group !

I think more of us are in the 'at risk' group than we care to acknowledge !

Because he has equity , they will hound him nonstop , ASB I wonder

I think more of us are in the 'at risk' group than we care to acknowledge !

Including the State.

Landcorp had "long-term contractual arrangements" that meant they would have limited choices about how to proceed with respect to their conversion, English said.

The Government was "digging into [that] in a bit of detail" to find out what the company's obligations were, he added.

"They've indicated that they're having a good hard look at it. They're a bit uncomfortable with it, so we'll see how they work it through." Read more

A sovereign credit warning, maybe?

My understanding is that Lancorp entered into a long term contractual obligation, to convert the forest into dairy land something like a 20+20 year lease, at which time the land reverts back to the forestry owner,that was the rumor.
Someone who knew someone who knew someone, told me that it was the deal of the century for the forestry company that purchased Fetchers central North Island forests, he was gob smacked that Landcorp could be so stupid,described it as better than the Kiwi Rail or Telecom windfall, again just rumors. No firm information on the deal perhaps we will get something now.
I drove over the conversion just for the hell of it and it was quite something to see 18 yr old trees being ripped out of the ground and then stumps getting mulched and then some expensive machinery following behind to grass the areas, all on very sensitive , very free draining volcanic soils, new houses,fences and sheds going up everywhere.Then some guy in a new Toyota turned up and threw me off rather unceremoniously, as it was 'commercially sensitive', just as I was starting to get to the interesting questions with some of the workers.
If we had decent Journalists they would be investigating how Landcorp just happened to get so much water allocation from the Waikato river, excellent timing, more unanswered questions.

http://www.dairyexporter.co.nz/article/28923.html

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=3589549

http://www.propertytalk.com/forum/showthread.php?1801-Forestry-estate-cl...

My understanding Aj is that Landcorp don't hold the water consents - Wairakei Pastoral do. For the Taupo farms/forest.

I have heard that the Lawyers were in the council officers minutes after the court approved the water take from the river ready to sign up, in which case someone got a wink and a nudge, nudge.

d p

Wasn't it rich Auckland lawyers that own the land

Wasn't it rich Auckland lawyers that own the land

....nail on the head yet again!

Indeed, and whilst China will likely increase demand at some point, who's to say it will be from our supply. They will have multiple markets and sources available to them, Europe, US/Canada, and then there are their own productions they are setting up - sure they'll supply Russia with dairy but why pay someone else for something you can/do make yourself.

http://theglobaldairy.com/noticias/china-builds-100000-cow-dairy-farm-43...

I say production because 100,000 seems beyond what I'd call a farm...ad you wouldn't expect they'll stop at one

Will China even need baby formula or milk powder outside of its domestic production from now on? Demographics might have the last say.

Not a single Wall St. or Fed head will speak honestly about the troubles the economies of the world face...apparently it's up to folks without PhD's or titles to spread the gospel of reality...no matter how unpopular it may be.
In short, as population growth slowed, debt and leverage was cranked up to bridge the gap. However, it was never going to work as population growth wasn't coming back...at least not in our lifetimes.

http://econimica.blogspot.co.nz/2015/08/chinas-collapse-is-last-straw-of...

John Key on CNBC Conversation at 11:30 this morning. (Sky 91)
The message is: it's all good, GDP forecast 2.5, Dairy only minor, TPPA will bring prosperity to NZ.

if only we could export that BS as diary product. I wonder if China will take JK after the coming election

I suppose (I do not know for sure) that the sacks of fontera powder and its containers of grease that are stockpiled in China have Use By dates and barcodes upon them, unlike Aussie minerals which can hang around for years. That will be a positive.

Milk powder packed propertly in barrier packaging will last years from when packed, probably up to 7-10 years. Storage is a feasible strategy.

My understanding was that Vitamins A and D Dissipate fairly quickly. I read up on it a few years back. Could be wrong, again.

http://www.dairyglobalnutrition.org/SafeQuality/content.cfm?ItemNumber=8...

you will have to rebag it then as the powder bags currently have a use by date of 2years(-1day)from manufacture..

That's a shame then DC, progress I suppose. When I lived in the bush, years ago, the tinned and packaged stuff went off well within a year. Butter and cheese we used to pack ourselves in layers of flour into wooden tea chests and hang them from roof beams, out of reach of (most) rats and mice. How times change.
Regs. EP

In safe hands with Landcorp.
Average payout is around the $4.40 a Kg and pumice country is not going to make cut with a $4 payout. Lets see if he really can make pigs fly?
I'm expecting some kind of enforced production cuts for farmers.

http://www.nbr.co.nz/article/landcorp-rejects-suggestion-low-dairy-price...

So Bill English is looking hard at the deal with Wairakei Pastoral. Landcorp are denying anything is wrong. Landcorp struggle to make money on a good day. There would have to be the mother of all bad budgets staring Landcorp in the face. I wonder what is going on behind closed doors.