Keith Woodford looks at the downstream realities for dairy farmers and concludes that, despite the upfront costs, non-seasonal free-stall barn systems will better respond to what value-add markets need

Keith Woodford looks at the downstream realities for dairy farmers and concludes that, despite the upfront costs, non-seasonal free-stall barn systems will better respond to what value-add markets need
A New Zealand free-stall barn system. (Courtesy of Calder Stewart)

By Keith Woodford*

Recently, I have been writing about what we need to do in New Zealand to climb the agri-food value chain. I have been emphasising the importance of China – there really is no alternative – and the associated need for an integrated ‘NZ Inc’ approach to online selling direct to consumers. 

The products we need to be selling through this dedicated and integrated ‘NZ Inc‘ portal (but also linked into the major Chinese online portals) include dairy, meat, wine, fruit, jams, biscuits, chocolate, and bottled water.  Indeed almost anything else we manufacture for ourselves that has a shelf life of more than a few days, we can also manufacture for China. 

For most products, the big changes we need to make are post-farm-gate.  However for dairy we also need to make big changes down on the farm. Specifically, if we want to capture the value-add opportunities, we will need to build non-seasonal capacity into our industry. 

The New Zealand dairy industry has been built on seasonal production.  We have focused on spring calving and then following the seasonal pasture production curve. Until recently, it has been predominantly about low-input systems and production of long-life commodities. Whole-milk-powder has been the perfect product for that system.

There are only two major producers of whole-milk-powder in the world. They are China as Number 1 and New Zealand as Number 2.  In terms of consuming countries, then China is far ahead of everyone else. And in terms of import countries, it is also China that is by far the Number 1.  In terms of exports, New Zealand is totally dominant.

There is little doubt that over the coming years China will consume more dairy. But will it consume more whole-milk-powder?  I think the jury is very much out on that one.  As long as we are so dependent on whole-milk-powder, then we are relying on China taking a different consumption path than every other country.

Rod Quinn, the CEO of Westland Dairy Co-operative, made the point recently to his suppliers that whereas our milk powder exports to China have gone backwards in the last 18 months, the value-add markets in China have continued to grow at between 10 and 30 percent per annum. What he did not point out was that New Zealand has been losing market share to the Europeans in all of these value-add products.

If we decide that we need to further diversity to products other than whole-milk-powder, then our seasonal system becomes an increasingly important constraint.  These other products require higher investment in processing plant.   And whereas low plant utilisation might be acceptable for simple products like whole-milk-powder, this becomes increasingly problematic with higher-cost processing.

Under seasonal dairying, the peak weekly flow of milk in spring is about four percent of annual production. This means that overall plant utilisation only runs at about 50 percent.  In contrast, our major competitors run their processing plants at around 90 percent.  

This week I heard our Prime Minister John Key refer to his recent opening of the Yashili infant formula plant at Pokeno, south of Auckland. He turned to Fonterra’s Theo Spiering and said he now knew where lots of Fonterra’s and also some of Westland’s milk powder were going. Apparently Yashili has a warehouse, described by the Prime Minister as 50 times the size of the Great Hall at the Langham Hotel where we were sitting, which is full of milk powder.

Now most people might assume that all of this milk powder was simply going to be mixed with other ingredients to make infant formula. But that is not quite the way it happens.   Some quick inquires with industry folk confirmed to me that the first step is actually to put all the water straight back into the milk powder to do a wet mix.

So what does it actually cost to take the water out and put it back in again?

The answer – at least for the first part - is available from Fonterra. In this last year, the corporate arm of Fonterra charged its farmers $1.76 per kg milksolids to process the milk into powder. This processing figure is seldom talked about, but it is the key difference between what Fonterra gets paid for milk powder, and the amount which flows through to farmers.

So why don’t companies like Yashili just purchase the raw milk and get on with the process of making the infant formula without drying and then rehydrating the product? The answer is that they need a steady supply for 12 months of the year. In almost every other country of the world this is possible, but with our seasonal production systems it is not.

There is also another issue with seasonal production, and that is the changing composition.  This week I have been told of an international company that is investing in Australia – rather than New Zealand - because of access to a 12 month supply of milk with consistent composition. Also, it is no accident that the Fonterra-Beingmate joint venture for infant formula will manufacture at Darnum Park in Australia, rather than in New Zealand. Fonterra also has a New Zealand infant formula plant in the Waikato (Canpac) but it idles along as an under-utilised white elephant.

By now you will be getting the gist of where I am heading. The simple message is that companies can afford to pay considerably more for a steady and consistent supply of milk 12 months of the year. And New Zealand dairy has to go down that route if it is to be in the value-add game.

Fonterra already pays modest premium for all milk outside the peak production months of September to December. In 2014/15, the premium was 52c per kg milksolids. This year it is 51c. Some farmers also get additional premiums for 12-month supply to specialist factories, such as the mozzarella factory near Timaru.  One farmer tells me his overall payout this year will be 85c per kg milksolids more than the standard Fonterra payout because of seasonal premiums.

So the non-seasonal journey in New Zealand dairying has indeed begun, but there is a lot further to travel.

Already I can hear the groans from farmers. Under New Zealand’s pasture-based conditions, winter milking can be a real pain. Accordingly, in most parts of the country, off-paddock-wintering -systems need to be part of the 12 month-a-year milking story. And if we are going to get it right, both for the environment and animal welfare, it means free-stall cow barns, where cows have their own mattress beds.

By now the groans will be rising to a crescendo. And many farmers will have turned off. This is madness, they will say.    Or in more polite terms, and having cooled down a little, then the message will be that ‘this is one path I am not going to travel; it is going to cost lots of money and it is going to increase costs’. 

Well, that attitude is OK as long as farmers are happy to be producers of commodities in a world that is largely going value-add, and as long as their on-paddock wintering will satisfy increasingly stringent nitrogen leaching conditions that now hang like a sword across much of the dairy industry.

Personally, I am not too concerned about the capital cost, even with figures of up to $5000 per cow for the total housing plus effluent system. Most of the 50 to 60 farmers who have already gone the free-stall way would say that in any case the costs I am using here are far too high. But I have become a strong believer that paying more and getting the system right is actually the best way to go.  So those are the figures I am now using as a genuine ‘all-up’ cost  - much higher than I would have used 12 months ago.

Farmers who go the free-stall way typically raise their per cow production by about 150 kg of milksolids per cow.  This is typically through a combination of higher peak production, a more sustained peak, and longer lactations.  Whereas pasture-based farmers struggle to get a lactation length of more than about 260 days, with cows being dry for the remaining 105 days, in a free-stall system the dry period can be reduced to about 45 days.   My calculations are showing that under these systems, the overall capital investment per kg of milksolids is actually less than for traditional farming systems in New Zealand.

As for the operational costs, I agree that these – and in particular feed cots - will be the crucial issue. But once again I am confident there are solutions. In the last week I was emailed by a rural professional who said that he has two farmer clients who are making the system work brilliantly – my words, not his – with a free-stall system. Their farm working expenses this year will be a maximum of $3.50 per kg milksolids, and they are sailing along very nicely even with the low payouts.   

Those two particular farmers are still working within a seasonal system. However, my experience is that most famers with free-stall barns do end up eventually shifting to non-seasonal production. 

Clearly, we still have lots to learn about non-seasonal dairy production under New Zealand conditions. To me, it is very evident that free-stall barns are part of the solution. But we still have work to do to optimise the feeding for these cows under New Zealand conditions.  The way forward will involve a range of feed mixes that include a combination of pasture, other forage crops, and harvested fodder. Compared to our American competitors, we will make less use of grain.

As with all journeys, there is scope for false steps. Even with traditional pasture-based systems we have some farmers who do it brilliantly and some who stumble. And it is in a year like this one, when prices are low, that the stumbles typically occur. It will be the same with non-seasonal farming. Not everyone is going to get it right.


Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. Disclosure of interest: Keith’s clients include Calder Stewart who build free-stall barns. His archived writings are available at http://keithwoodford.wordpress.com

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Surely to draw an equation between stalling cows and value-add is no step forward either in New Zealand values or New Zealand value-add.

NZ already has a value added system. We just need to realise it and market our milk accordingly. We are setting our sights to low trying to feed the masses there is no money in that. With a little bit of intuition you can find out what people want wealthy people, not trying to customise to some customers that can live on a couple of hundred a month. Let the America's and Euros do that we need to focus on the wealthy. People that can pay regardless of the tariffs their governments put on them.
I take to point that Anchor NZ grass fed butter in the states sells for $us28/kg in US butter is a health food and they are going nuts about our butter. Our cheese is the same as well as our meat they want grass fed. Why do you think Fonterra want to now put limits on our use of PKE, Grass fed is getting and going to get more premiums as we go forward from here.
We must keep the uniqueness of the NZ dairy system this is what makes us different, otherwise you might as well lump our products all together with the rest and sell to the lowest bidder.

The Limits on PKE are not working very well. The butter of choice in the States is Kerry Gold. If they wanted to value add why all the new driers?

http://www.radionz.co.nz/news/rural/287064/palm-kernel-use-hits-record-l...
http://www.stuff.co.nz/business/farming/72361968/Fonterra-PKE-bombshell-...

and will that use (and increasing) not damage our brand?

Agree, I think there is a growing dis-quite over GMOs and a push to reject crops that damage the environment as well. What is the markup between std milk and organic? pretty big if the shelves are any indication strikes me as an easy value added right there (how do the costs work out?) The high use of PKEs in NZ was quite a shock for me seems it has slipped under the radar of consumers. We seem intent on destroying our clean and green image at every opportunity, which is just crazy IMHO.

A short while ago while proclaiming their magnificent increase to the organic milk price ( two or so years after saying they were dumping it completely due to low demand) a Fonterra rep reckoned organic milkpowder was three times the value of standard. Note they only pay a premium of about 10% for it though in the same way as they wont pay extra for non PKE milk despite saying it carries a premium at sale.

It's behaving like a co-op and spreading the love around :-)

Yea but sometimes their "love" is a bit rough n ready if you get my drift, and sometimes it's rather selective, GMP , capacity adjustment ( drought again is going to cost ten cents a kilo at least on that alone)

Keith, I have had an advisory role at director and CE level with several of the largest brand-owning conglomerates in the world. Since I have taken an outsider's interest in this industry (and I seek no engagement in it), I have become convinced that its understanding of value-add is both inadequate and outdated.

I see no value-add whatsoever in these stalling proposals. What I see that they amount to is increased volume availability (added supply for customers), but at the expense of further value erosion for the product portfolio, and continuing value blight for the country - value we cannot afford to lose. Your industry may well continue down the path you recommend, but I cannot see it as other than a route to further commodity entrenchment for the sector and our economy.

...you are so right. .NZ produced products should invoke an image of lush green fields, lazy cows and mountainous peaks. Well that how it used to be......now it's dirty rivers and palm kernel. Differentiation by being clean, green and sustainable (and perhaps organic) should have been the goal....add niche specialist value added products on top.

Good stuff Keith. Not to mention a free stall with a biogas system can export electricity, improve fertility level of the effluent and give more even spread of effluent on pasture.

If continuity of supply is the issue.... then why not have more suppliers stagger the times they have their off-seasons... That would also allow for more smaller niche factories...

Keith... why do we need to go down the "factory farming" route..??

Don't you think Value added also starts with what actually comes out of the cow...???
Is it a point of difference that milk comes from pasture fed cows vs factory farmed cows that are fed Palm Kernels..??

Somethings' weird if Fonterras Baby formula factory is idling ...and yet they are selling lots of milkpowder to the Yashili baby formula factory in Pokeno...???

I remember working in a milk powder Factory in 1981.... We did small runs of Baby formula back then... Also did runs of Cocoa/milk powder for Nestle..... thats 34 yrs ago... I would have assumed that Fonterra might now be one of the big players in baby milk powder formula..???

I heard the story of a Dutchman from Holland who made mega millions as a "Cheese Trader"....
40 yrs ago he simply hopped on a plane and went to different retailers in Different countries ( including middle east )..... and simply asked them what they wanted..
Turns out , a big issue was continuity of supply....
This guy did it all... mostly on his own.. with only a very few staff..
Sourced the cheese from factories in Holland and shipped it to his clients...
Over the yrs... he even ended up building his own Cheese factory...

I sometimes wonder if companies can get too big...??? Monolithic is a word that comes to mind...

The use of Palm Kernels here in NZ sure was an eye opener for me.

We fill in the holes in the Nth Hemisphere winter. Just like our apples, kiwifruit,lamb etc. It's what we do it's been our market niche. Now seasons have been extended with new technology we are getting forced in to a smaller and smaller window and we have other Sth Hemisphere countries noticing what we do and imitating.
There will be niche operators like your example but they won't be big enough to save NZ inc. Also the liquidity crisis that claimed SFF, could stop new ideas having access to the required capital. We borrowed against assets in search of Capital gain instead of against new ideas and innovation, banks like lending against assets.
The environment damage is going to get worse from the damage already done, it's going to take decades to fix. Then the debt is going to blow a hole in so many farmers lives, it's a huge tragedy.
http://www.bloomberg.com/news/articles/2015-11-13/u-s-wholesale-prices-u...

Great article for those wanting GMO and other tools of intensification and to be the same as everyone else. For those of us who believe the value is in being different it's not so good. Looks bad for Tatua.
I see Fonterra are upset with Synlait cutting out the middle man. Selling baby formula over the net for $24 instead of $67. They both pay the same for the raw material and make a similar profit so presumably someone else gets the other $43. Who?

Synlait's use of selling milk powder cheaply has been said by one of their directors to be a 'disruptive' tactic.I have heard Fonterra's 'MyMilk' described as the same. The question that is never answered is 'how much could Synlait be paying suppliers if they weren't hoisting their payout flag to Fonterra + or _ xcents?'. Of course we will never know. ;-)

I'm a fan of GMP - it was the only option offered to the entire supplier base to use as a risk management tool to help counter volatility. Stolle, winter milk and colostrum are not offered to the entire supplier base.

I do wonder about people that advocate importing northern hemisphere farming practices, especially as up there, there are some processors now offering premiums if cows are outside on pasture for x number of days a year. I would like to see a premium paid for non PKE milk. Can't see the majority of rank and file agreeing to that though. GMO should be banned as well in feed. But again I can't see the PKE/high input rank and file agreeing to that either. ;-)

Redcows, what looks bad for Tatua?

There are too many issues raised here to deal with in a single comment. But here are a few points:
1) I support niche opportunities, but one does not shout these new opportunities from the roof tops.
2) Tatua is a great example of a company that has developed niche opportunities. My expectation is that they will continue to succeed - but it is always possible to lose one's way, so nothing is guaranteed.
3) Bellamys is a great example of a company (in Oz) that is doing a great job with organics.(Incidentally, they do include palm oil in their infant formula, and for good reason.)
4) The sight of cows wallowing in mud in a Southland winter - and in may other parts of New Zealand on heavy soils - is not a pretty sight.
5) For environmental reasons, the future of dairying in many and perhaps most parts of New Zealand requires off-paddock wintering.
6) Do not assume that housing cows in winter (and sometimes at other times of the year) means wholesale acceptance of Northern hemisphere methods.
7) Dairy is very different to apples in regard to seasonal niches.
8) At the risk of being repetitive, most value-add opportunities are not viable without 12 month supply of milk
9) One should be cautious of assuming that there are major premiums for milk from grass-fed cattle. But if these can be created, then that will be a great opportunity for those who can deliver. In any case, do not assume that farms with free-stall barns in New Zealand will use lots of grain and/or PKE. Some will, some won't. And many will still meet 'grass fed' criteria.
10) The often-touted benefits from grass fed dairy cows are higher levels of omega 3 and omega 6 fatty acids. But these are short chain omega 3s and 6s. The ones with the proven benefits are the long chain omegas that come (mainly) from fish.
11) Do not build ideas about what the world will pay premiums for based on New Zealand experiences. We think we are world famous for our clean green image. But we are only world famous in New Zealand.
Keith Woodford

Keith, your point 11 is a radical blindness to to the one key factor in New Zealand's international reputation and competitive advantage. Your every other point rests on this one, and is undermined by your assertions in this one.

Although this reputation and advantage is in serious peril, the one outstanding quality that distinguishes New Zealand internationally is the perceived rarity, excellence and authenticity of its natural environment. It is far from a matter of 'only being world famous in New Zealand'.

I understand that the natural environment is the unchallenged leading draw for visitors to New Zealand. (The country has, after all, spent more on the 100% Pure New Zealand campaign and its derivative messages than any other positioning platform.)

In two minutes googling, I find that the World Economic Travel & Tourism Competitiveness Report 2013, ranks New Zealand 3rd for its pristine natural environment. In 2012/13 FutureBrand ranked NZ 5th in natural beauty, 5th in authenticity.

I see that the Ministry for the Environment writes, ‘The links between environmental sustainability and economic growth are now better understood, indicating that a ‘business as usual’ approach will not deal with the increased threats and opportunities. If New Zealand takes the wrong path, we risk damage to our domestic well-being and international reputation.'

The fact is provenance matters. Even the New Zealand Dairy Brands homepage features, ‘...the natural advantages offered by a clean green natural environment.’

There is no bigger global interest than the state and quality of the natural environment. It is the one area in which there is true value-add available for New Zealand products and produce. (Just like perfume from Paris, or a watch from Switzerland, etc.) But, to repeat, it is also the value that is under greatest threat of erosion and extinction.

No-one representing New Zealand business and economic interests should be unaware of these issues.

workingman, I respect the background you gave further up on your experience. You seem well placed to offer an outsiders intelligent comment to: Does the following actually make a difference to Brand Fonterra or is this money being spent that could have made a greater impact elsewhere? In other words does this accreditation make a real difference or is it more in the 'nice to have, but not really necessary' basket?

http://www.scoop.co.nz/stories/BU1511/S00471/world-first-for-fonterra.htm

CO, I think this accreditation is very important. Particularly so, as Fonterra stumbled badly in its botulism responses, and its experience in food safety and quality was assessed as 'not very helpful' in the recently published inquiry into the Sanlu disaster. The company needs to reach for every food safety accreditation available.

But, this said, food safety globally is an entry-level 'license to operate'. In other words, it is an expected warrant of adequacy. Any food's fitness for purpose depends on its being safe. Thus, it is an increasingly ordinary - or in the cliche, commoditised - attribute. Like the expectation that the brakes won't fail on a car. It has limited advantage in differentiation - although in some markets, like China, where food safety cannot be taken for granted, it is a particularly important issue. To answer your question directly, it is necessary, not merely nice to have.

Bottom line as I see it Workingman has challenged Keith on the fundamental that we are exporting the raw product, (milk powder) and very little processed product into markets. in other words we are giving the "value add' opportunity away. Not limited to dairy either.

Murray86, it's partly the export of raw, largely unimproved, product that concerns me. But I do understand that our costs in product value-add are higher than the costs for this work in some markets. This is one issue of commoditisation.

But just as important, to my mind, is what I see as the undermining of a key factor of competitive differentiation - something that also lifts a product out of the commodity basket - and this is the value derived from production in a relatively clean (authentic, unspoiled, cared-for, admired) environment.

Our milk powder - commodity as it may be - is in competition with milk powders from many other production environments. It seems to me that there is immense value to capture - value above the norm - via the promotion of environmentally admirable production. This promotion, of course, begins at home, in how we choose to care for our environment and our production conditions. What else, of this value and importance, does New Zealand have going for it? It's thus the common, and highly effective, theme in the brand platforms and the marketing of a myriad of internationally successful New Zealand products and produce portfolios.

Simply, we have to look for and understand our competitive advantages - whatever they are - and make sure our customers know them. Any environmental advantage is of extreme value in a world increasingly compromised by environmentally-inadequate industrial production practices. This differentiation is also added value, as is any process of product improvement.

Great. One of the great things about this site is the number of educated and experienced people who are prepared to debate the issues. While I understood the raw product issue, I hadn't fully grasped the underlying environmental ones. I guess in part because there are plenty of critics out there to highlight our environmental failings and these make us vulnerable to being challenged. Also the lobbyists are pressurising the Govt to not impose costs on the dairy industry to pay for the damage they are doing. Partly because the business model they have borrowed against hasn't allowed for much if any of a down side in either product returns, or operating costs. On the operating costs side I also feel that there are too many 2nd tier producers, supplying the primary industries, too quick to put their hand out to get on the gravy train. They exacerbate the struggle of dairy farmers.

.....plenty of critics? Lobbyists? How about referring to these people as concerned kiwis who are fed up with the trashing of our environment. Had a look at the rivers accord? Clean enough to wade in is the new normal......and this degradation has occurred within a very few short years.

Are you sure that the often touted benefits of grass fed dairy is specifically associated with omega 3s and 6s? http://chriskresser.com/why-grass-fed-trumps-grain-fed/
I think I recall the amino acid profiles are different to and considered more nutritious product than dairy derived from grains and concentrates, such as those in european and american confinement systems. I will keep my ear on the ground on that one, but I think as much if not more than our clean green image as debated above, our dairy derived from grass has the greatest value add potential, and you're right there does seem to be more noise about the benefits of food derived from pasture. God knows what it would take to capture this difference, if we are content to pay mega salaries to executives to market undifferentiated commodities.

Really interesting, Omnologo.The nutritional advantages of grass-fed meat versus feed-lot are certainly widely promoted. There may well be a correlation with dairy.

A few more thoughts. The more that customer groups live day-to-day at a distance from the natural environment, and the more their own built or city environments are chaotic, dirty, etc, the more concern there is with perceived natural values. And with the real or perceived efficacy of natural ingredients, and the real or perceived value of 'traditional' production conditions and processes.

Where natural production conditions or ingredients provide any particular functional or efficacious benefit, this - you're right - is crucial added value. The emphasis on natural this or that is obvious in any supermarket or pharmacy. The emphasis is there because it works.

And the market gap? Dairy products from Switzerland have long held the leading position in pure, clean, natural, environmental, and ingredients quality positioning - the old brand 'Swiss Maid' is a reflection of this. But I suggest the gap has opened in Asia for products from New Zealand to take this premium position. Simply, Switzerland doesn't have the resonance in Asia for natural products that it does, or has had, for other Europe-focused populations. The gap is there. It's up to the industry here to fill it.

Omega 3 and 6 is just the bit that the lazy scientists have looked at. Weston A Price is the go to source. I have not yet read his works as yet, but he was a dentist in the 1930s who visited native communities throughout the world to find out why so many of them had perfect teeth until the day they died. As they adopted a western diet their teeth deteriorated, as did their general health.