What makes a farm business resilient? With increased milk price volatility seemingly the new normal for New Zealand dairy farmers, the ability to survive and thrive in the face of that volatility has never been more important.
Recent and ongoing research undertaken by OneFarm – the joint Massey and Lincoln universities’ Centre of Excellence in Farm Business Management – digs into just what makes a resilient dairy farming business tick.
Spearheaded by Professor Nicola Shadbolt – the DairyNZ Chair in Farm Business Management at Massey – the early stages of the research focused on exploring and identifying financial or physical indicators that could measure resilience among farmers.
What is buffer capacity?
Buffer capacity – the ability to “bounce without breaking” (see sidebar Defining resilience) – was the first cab off the rank. The research team used DairyBase financial benchmarking data to see if consistent indicators of the system’s buffer capacity could be found.
Pulling some ideas from ecology, buffer capacity itself can be broken
into four aspects (see Figure 2) – latitude, resistance, precariousness, and panarchy.
“Think of the farm as the ball bearing in the cup of life and resilience being management’s ability to keep it in
the cup despite challenges,” Shadbolt said.
“Latitude, the breadth of the cup, is the maximum amount a system can be changed before losing its ability to recover to its original form.”
For dairy farming, per hectare liquidity metrics like discretionary cash or cash surplus can represent a measure of latitude. A farm with limited cash resources, sometimes unable to meet its commitments would have narrow latitude and be vulnerable to shocks.
“Resistance, the depth of the cup, is how difficult it is to change the system.”
For the study, efficiency was adopted as a proxy for resistance. A highly efficient dairy farm would be relatively more resistant to shocks compared to a less efficient farm. Efficiency measures like operating profit margin and milksolids per hectare, per cow, or per labour unit can represent resistance.
Precariousness is how close the current system is to a tipping point towards a permanent system restructuring. It effectively measures the vulnerability of the business to shocks. For this study solvency measures like debt to asset ratio and interest plus rent per kilograms of milksolids were tested.
Panarchy concerns the interactions of a system with its environment and how shocks at one scale (eg, government legislation) might impact at another scale (eg, farm level).
This would include informal and formal interactions with other members of the overall supply chain and the community at large. Panarchy is impossible to capture via DairyBase so was not considered in the study.
Defining resilience
For the OneFarm research project, resilience was broadly defined as the ability of a farm system to withstand and-or bounce back from sudden or acute shocks, like an unexpected large drop in milk price. It was broken into three elements that effectively formed a progression of tactical-strategic responses depending on the magnitude of the system “shock” – buffer capacity, adaptive capacity, and transformability (see Figure 1).
Buffer capacity – the cushioning incorporated into the system; the ability of a farm system to cope with disturbing forces that are relatively small and predictable in a relatively stable environment (eg, normal climate variability).
Adaptive capacity – the stretchiness of the system; the degree to which the farm system is capable of responding to disturbances because of a major change in the underlying environment (eg, a fundamental shift in milk price or a series of severe droughts).
Transformability – starting again from scratch; the ability to rearrange the resources of an existing farm system when the operating environment makes continuing that system impossible (eg, having to halve nitrogen leaching from farm).
Buffer and adaptive capacity only work up to a point. When the shock to the farming system is completely beyond what it can tolerate, transformation is the only option.
Upside-downside
Farm businesses that best captured upside risk (eg, rising milk price) and had higher return on equity and discretionary cash/ha, also:
- Had a higher operating profit margin and asset turnover ratio;
- Generated and used more liquidity;
- Were mostly DairyNZ System 3 and 4 farms producing more milk/ha;
- Were larger and irrigated;
- Had a higher debt:asset ratio.
- Those that best minimised downside risk (eg, falling milk price) that had a high return on equity and discretionary cash/ha, also:
- Had a higher operating profit margin;
- Had lower farm working expenses/kg MS;
- Were mostly DairyNZ System 1 and 2 farms producing less milk/ha and were smaller with lower stocking rates;
- Had a lower debt:asset ratio.
For more about OneFarm’s resilience research go to: tinyurl.com/onefarm-resilience
