For those who have just expanded or converted the timing of this downturn may be lousy. But for many, there will be some fundamental issues in the farm programme that are adding costs on a per kilogram milksolids (MS) basis and applying unnecessary pressure.
In those cases, it is not a matter of slashing costs to weather the low payouts. Instead, fundamental changes in the farm programme and approach to the business of farming are necessary for the long-term viability of the business.
Testing your resilience
What are your farm working expenses per kilogram milksolids? If you don’t know, work it out today. This is the farm working expenditure total on your cashflow page, divided by your expected milk production.
Technically, for benchmarking, you should add a lease cost for owned runoffs and add in things like management wages, but those adjustments aren’t essential when doing the cost of production exercise to confirm the robustness of your business.
For the 2013-14 season, average farm working expenditure for the Macfarlane Rural Business client base was $4.35/kg MS. The DairyNZ average was $4.30/kg MS.
Now add the interest and rent bills to the farm working expenses. Work out the interest and rent costs on a per kg MS basis – (total debt (mortgage))/revised production.
There has been a lot of focus on debt per kg MS but one of the concerns about using this ratio is that it encourages farmers to increase production to get the ratio down.
Business resilience
Resilience, from a farming systems perspective, is defined as “the ability of a system to withstand severe, usually unpredictable, disturbing forces”.
There are two elements of resilience:
- The system’s resistance to disturbance; and
- The speed and extent of the recovery from that disturbance.
So, a resilient farming system has a smaller reduction in productivity from a shock or disturbance and recovers more quickly and completely.
In a farming context, resilience has three defining characteristics:
- The amount of change the farm system can absorb and still function under its current basic structure.
- The degree to which the farm system is capable of adapting to change.
- The ability for farmers to learn and to apply that experience.
Researchers suggest four requirements for farmers and dairy farm businesses if they are to have robust, resilient systems:
- The farmers must have a good understanding of the interaction between feed, cows, and natural, financial and human resources.
- Systems must be able to maintain flexibility with respect to changing inputs.
- Farmers must be able to learn from each shock and apply what they learn in the future.
- Farmers operating such systems must be “connected” to the industry and maintain good social networks.
Jeremy Savage is a farm consultant at Macfarlane Rural Business, based in Canterbury, and is a member of NZIPIM.
