That consensus extended to confidence dairy has a prosperous future and that the current difficulties were an opportunity to reset the sector’s goals and performance including those of processors and exporters.
But that required farmers to focus on growing profits instead of production, making capital gain a consequence instead of a business goal and changing management structures to differentiate the roles of governance from management.
There was agreement not all dairy farmers would survive the downturn but media commentary on the number likely to exit was viewed as speculation because each business would be considered on its merits.
Massey University College of Business lecturer James Lockhart said changes to the sector should include a shrinking of the Fonterra board.
At 13 the board was too big and he felt a figure of seven to nine was more appropriate.
“There is a sweet spot around that but we know it is not 13.”
University of Waikato economist Frank Scrimgeour told the conference that while he was optimistic about the future of agriculture he warned the downturn would see farm consolidation.
“In a few years we will not be talking about 11,000 dairy units but a number substantially less.”
Scrimgeour said dairy was responsible for virtually all the growth in agricultural debt, which was a concern only if it had been spent buying over-priced assets and not growing revenue and reducing costs.
Rural bankers also predicted an industry to emerge that was quite different from today.
ASB economist Nathan Penny said farmers would become more focused on what they could control, such as productivity.
“In a few years we will not be talking about 11,000 dairy units but a number substantially less.”
Frank Scrimgeour
Waikato University
“Productivity is not something you look at when times are bad. You should look at it in all parts of the cycle.”
Penny said there were still opportunities but “the low hanging fruit” had been plucked and future investment should be for profit not capital gain.
“We can’t rely as much as we have in the past on capital gain to grow our business.”
Westpac agribusiness and property finance head Mark Steed said dairying was no different to any other business in reaching a point where it had to recalibrate.
Speaking at the Central Districts Field Days he said dairy assets had doubled in value every 10 years for the last two decades and farmers should not count on that happening in the future.
Farm businesses were unlikely to be as highly leveraged as in the past and Steed said dairying would become as financially conservative as the sheep and beef sector.
Steed’s main concern was how sharemilkers were coping and he said the industry needed to rally to ensure their survival.
ANZ agri and strategy manager Ross Verry said dairy farm governance needed to be split from ownership and daily farm management.
“With the traditional model of mum and dad doing it all at once, it is hard to hold yourself accountable and it also lacks the flexibility to bring new capital into the business.”
The sector needed new capital but also the governance and business management skills and structure to accompany that investment.
Profitability had to be the sector’s priority but Verry also warned that NZ dairy farmers not only faced stiff competition from other dairy producers but those competitors were more competitive.
Lockhart said even in prosperous times it was crucial to maintain fiscal disciplines, comparing goals with outcomes, budgeting each month and planning.
Accountability was a key element of governance and he said the dairy industry only had itself to blame for its problems.
Rural banking competition hotting up
A sizeable chunk of the primary sector might be in the doldrums but Westpac Bank sees it as an opportunity to try to almost double its share of agricultural finance business.
Mark Steed, the bank’s head of agribusiness and property finance, said it would employ 20 new rural bankers this year and another 18 next year with the aim of growing its share of agricultural finance from 13% to 20% within three years.
In an interview at the Central Districts Field Days in Feilding, Steed said a low milk payout did not indicate a poor operator but highlighted other skills such as the ability to manage a low payout period.
The bank would look at the business fundamentals of potential clients including their ability to adjust their businesses to milk price cycles.
Steed said Westpac did not chase farm banking business during prosperous times in part because other banks aggressively sought new clients.
“We’re looking for the customers of tomorrow.”
