Friday, March 29, 2024

Payout crashes, what next?

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The market has collectively decided that milk is suddenly worth about half of what it was last season and the effects of this are being felt both onfarm and through the whole New Zealand economy. While we can philosophise about when the milk price decline will reverse, there are some urgent decisions that need to be made onfarm to make the best of a rather rough deal this season.
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Cashflows will need to be scrutinised for capital expenditure that can be postponed. Any unnecessary operating expenses must be weeded out. If they were there in the first place, then why? Unnecessary spending doesn’t make sense at high payout levels either.

Pretty quickly we’re looking at the one item we do have easy control over – the level of supplements fed. Of course we could screw down the fertiliser spend as well, but we all know what happens when we do that, so I won’t go there. 

Since there are about 11,000 dairy farms in New Zealand, there are going to be about 11,000 correct answers to the question: How much supplement should I put in this season given a payout of, say, $5/kg milksolids (MS) in order to maximise profit.

That’s because the problem is so multifaceted – the “right” answer depends on stocking rate, cow condition, cow genetics, farm infrastructure, grass growth patterns, soil fertility, milk price, supplement price, grazing prices, feed characteristics such as energy content, protein content, palatability, concentrate vs forage and keeping qualities, contracts that may have been in place from before the price crash, and last but not least what system the farmer is comfortable with. If you’re comfortable with a given system, chances are that’s the one you’re good at running.

I won’t be able to produce the universal right answer because such a thing doesn’t exist. Predictably, there are calls for the industry to abandon most or all inputs and go back to all-grass systems. And fair enough – if these systems are run well, they can be very successful, even more so at lower payouts. But is that the only correct answer? Given the large number of other factors, probably not. 

‘One change in a system has multiple flow-on effects and simply reducing inputs may have the opposite effect of what you wanted.’

By abandoning all inputs there is a danger of throwing out the baby with the bathwater, but let’s start one level up and look at the bathroom – pasture harvest. No matter what intensity a system is run at, pasture harvest will be key to financial success. What you did when you bought the farm was buy future feed. The land provides both a place to hold the animals and an ongoing source of high-quality digestible feed, ie pasture. The beauty of growing and then converting a crop like grass into milk or meat is that the more of it that’s harvested, and the better its quality, the cheaper it becomes, at least the capital component of it. There are some relatively cheap operational tools to increase pasture growth – phosphate, potassium, sulphur (PKS) fertiliser, nitrogen, gibberellic acid, the three-leaf grazing principle, irrigation for some, and most of all operator skill. No matter what level of input is chosen, if pasture harvested is not optimised, financial success will not be optimised either.

To get some idea of which strategies might work and which ones might not, an existing Manawatu farm was modelled using Udder and Redsky software and the outcomes of different farming scenarios compared.

The starting point was a 203 hectare un-irrigated farm with a feedpad, running nearly 700 cows, growing 10ha maize onfarm as well as 12ha of summer crops, using about 180kg nitrogen/ha and with a pasture harvest of about 12.2t drymatter (DM)/ha. Current farm debt was $4.9 million.

Total inputs in this current scenario were 484 tonnes palm kernel ($230 landed, 11.4 MJ, 10% wastage), 290t DM maize silage (200t DM homegrown @ $160/t DM, 90t imported @ $320/t DM, 18% wastage) and 120t DM grass silage (imported @ $320/t DM, 15% wastage). Milk output was about 294,000kg milksolids (MS), 430kg MS/cow and 1450kg MS/ha. This system has been run on this farm for several years.

The system was modelled in Udder and then tested for varying levels of supplement inputs and various stocking rates, making sure of 1500kg DM residuals throughout and an end-season pasture cover of 2300kg DM/ha. Table 1 lists the variables and outcomes:

One could criticise the lower end-May condition score (CS) in the lower input scenarios, and it would be quite simple to re-model so that all scenarios ended up with the same end-May CS, by once-a-day milking later in the season and-or drying off earlier. However doing this would reduce both production and profit – it’s one or the other so in this case I’ve chosen to maximise production at the cost of some CS.

‘By abandoning all inputs there is a danger of throwing out the baby with the bathwater, but let’s start one level up and look at the bathroom – pasture harvest.’

The overall picture is that it’s quite possible to reduce total farm working expenses (FWE) and-or the cost of production (COP) per kg MS by reducing intensity. However, because the farm debt is virtually the same across the scenarios, with small variations because of the number of shares held or number of cows owned, the total debt to service stays almost exactly the same. As production levels decrease by feeding less (well-priced) supplement, total FWE will decrease as planned, but COP per kg MS might or might not, and the cost of finance per kg MS will almost certainly increase, a real see-saw mechanism. The bottom line, farm profit measured as earnings before tax (EBT), could actually decrease. Yes you’ll produce lower-cost milk but less of it, so the business ends up with a worse profit result. To make matters worse, the herd’s condition score may reduce, so mating performance this and next season as well as production and profit levels for next season will come under pressure.

Replacing the palm kernel in the base scenario with $450/t grain @ 12.5 MJ (2% wastage) changes the picture again. In that case the COP per kg MS increases to $3.97, the breakeven milk price lifts to $4.53 and the EBT falls to $144,801.

Of course the number of possible scenarios is endless and there is no hope of showing them all, but the conclusions are clear – do your sums carefully rather than making decisions based on gut-feel. One change in a system has multiple flow-on effects and simply reducing inputs may have the opposite effect of what you wanted. Be careful what you chase – is it low-cost milk, or is it farm profit. Producing lower-cost milk might make you more money, but does not automatically mean you will.

Disclosure. Helwi Tacoma, the author, wishes to disclose his financial interest in SourceNZ, a company supplying stockfeed to the NZ market. Tacoma adds he is, however, not silly enough to put his professional reputation at stake by publishing biased information.

Helwi Tacoma is a qualified veterinarian and a farm consultant for Farming Systems Ltd and Intelact. He is a member of the New Zealand Institute of Primary Industry Management (NZIPIM)

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