Friday, March 29, 2024

Lessons from the lower payout

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A memorable quote from past United States President Lyndon Johnson was that in politics, overnight chicken salad can turn into chicken shit.
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Expand the overnight to about a year, and instead of politics, he could well have been referring to the New Zealand dairy industry.

Almost a year ago, August 2014, I was expressing concerns about intensification in the industry. To support this, I presented the-then recently obtained results from the trial at the Stratford Demonstration Farm. This was a comparison between the more traditional low-cost, low-input, dairying system relying virtually exclusively on pasture for feed, supplemented where necessary with home-grown silage or hay, and an intensive system, having a significantly higher stocking rate, supported by a large indoor loafing-feeding facility, and a considerable component of bought-in feed, primarily palm kernel and maize silage.

The result from the 2013-14 season did show a measurable advantage to the intensive system – an Economic Farm Surplus (EFS) of $5423/ha, compared with the $4358 EFS/ha obtained from the low-cost system.

I noted those figures were obtained from a payout of $8.40/kg milksolids (MS) produced. When the figures were reworked using a $6 payout the situation was reversed with the low-cost system giving an EFS/ha of $1940, compared with $1543 for the intensive one. After presenting these figures I had the temerity to suggest $6/kg MS was a more sensible and realistic figure to use in long-term budgeting and planning.

Feedback suggested I was being far too pessimistic and unrealistic. There was a noticeable body of opinion, especially from more recent entrants to the industry, that there was no possible way the price could take a tumble of that magnitude – especially in the immediate short term. Well hello!

That the type of intensification practised in the Demo Farm trial will be profitable at a higher payout, but will put the farming business on a steep and slippery downward slope, can be easily shown.

Taking 1kg drymatter (DM) at the generally accepted standard of 11 MJME, a typical cow of average 450kg LW producing 400kg/MS a year will need a feed intake of 5300kg DM total over the 12 months. A fairly typical onfarm cost figure for maize silage or palm kernel would be about 35c/kg DM equivalent. At this value our 5300kg DM to feed our cow for the year would be worth 5300 x $0.35 = $1855.

At last season’s payout of $8.40 the 400kg MS our cow produces would be worth 400 x $8.40 = $3360. Effectively, this means at the high payout, it would be theoretically possible to feed the cows on 100% bought-in feed (don’t try this at home). Now do the sums again for a $4 payout. Our income drops to 400 x $4 = $1600. Not a pretty picture. As an academic exercise only, using this maths, a simple calculation shows the break-even point for payout would be $4.64/kg MS

There has always been debate about the cost of producing pasture drymatter. In calculating this, it is essential only the direct costs, such as fertiliser, drainage, and weed and pest control, be used. This is the only way the cost of pasture drymatter can be compared with other feed alternatives. On this basis the cost of 1kg DM of pasture will be 3-5 cents with the lower end being the most common. Intensive irrigation could prove an exception.

This obviously provides the key to ongoing viability in the low payout situation. As payout decreases the ability to strategically input higher priced supplements to give a profitable return becomes increasingly difficult. The bottom line is not maximising total milk solids a hectare, but rather, net dollars. The efficient farmer will focus on getting 100% utilisation of the pasture drymatter produced before trying to further enhance production by buying in feed.

Unfortunately I have seen more than a few cases where palm kernel is being fed at significant levels while pasture is being neglected and wasted. It makes no sense to be allocating feeding costing 35 cents/kg DM when a comparable or better alternative is available at 3c/kg DM.

When the final economics analysis is done for the Demo Farm trial, there will be little doubt the major item contributing to the much greater cost of the intensive treatment will be the operating costs of the standoff wintering facility. Fortunately this was financed completely from farm reserves so no interest costs are involved with this. A purist would of course say there is still an opportunity cost here, ie. if the facility had not been built the money spent would have been invested, thus creating more income.

There can be no doubt the standoff facility has given a production increase to the farm. This by way of better feed utilisation, reduced maintenance requirements, better animal health and welfare, and most significantly, reduced pasture pugging damage. So if the criteria for success is increased production the standoff can be judged a success. Last year’s results suggest in economic terms this success was at best marginal, with most, if not all, of the financial gains made from the extra production gained being absorbed by the extra costs involved. It is a sure bet with this year’s payout the returns will fall far short of recovering costs.

Another aspect here needs challenging – the belief that where wintering is the brake on further production increases, the only way forward is installing a standoff facility.

It is sometimes said there is nothing ever new in farming. As far as standoff wintering areas are concerned, this is quite true. In the late 1960s and early 1970s in Manawatu their adoption and use became quite popular and its justification generated some debate. In response to this Massey University set up a trial on their No 3 Dairy Farm to compare the production benefits of wintering cows housed in a barn and fed on a concrete feeding area, with those 100% paddock wintered. The No 3 farm was an ideal choice for this trial as its soil type was Tokomaru silt loam, a heavy soil notorious for its poor drainage and propensity for extensive pugging damage. Most surprisingly, and contrary to all expectations, after – from memory – three years, there were no significant production differences between the two systems.

There was one good reason for this – and it is one that was never recognised or quantified. The trial and its management were overseen by an advisory group drawn from all the considerable agricultural science in the Palmerston North area – DSIR, the Department of Agriculture, NZ Dairy Board, and Massey University. This provided a top level of specialist expertise in all the disciplines conceivably related to the trial – animal health and husbandry, soil science, pasture management, and farm management. From this wider representation a core group was selected. Every Monday morning it would meet on the farm with the farm supervisor and farm manager  – both astute – for a farm walk and discussion on management. 

I was privileged to be part of this group and well recall the features of a typical meeting a stroll past the standoff area with a cursory glance and a “Well they’re okay” comment, then a vigorous and protracted debate and discussion on the paddock-wintered herd, until finally consensus was reached. 

The point is while the paddock group matched the performance of the housed one, this was achieved only by the input of a level of expertise not available to the normal farmer. Given this, in these circumstances the case for installing a standoff wintering system would be justifiable if the economics stacked up.

The main point to be recognised from all this is the way forward does not necessarily require, or automatically mean, heavy investment in projects and infrastructure – especially when they are likely to involve expenditure of $0.95, or worse still, $1.05 for every extra dollar gained. Exploring and adopting a more efficient and sophisticated management may well give concrete productivity gains at little or no cost.

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