Saturday, March 30, 2024

Risks in too readily following others

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Farmers and Fonterra risk getting stuck on the “mouse wheel” of a high-cost, lower-profit strategy, Canterbury dairy farmer Leonie Guiney says.
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She’s recently returned from a year in Ireland and Europe and is worried a shift towards capital-intensive, foreign-style farming systems here is fast cutting farmers’ competitiveness and locking them in to riskier, less profitable businesses.

Fonterra’s value-add strategy too could come at a high cost and farmers needed to know just how fast and how far the company intended to go with it, she said.

Taken too far she believed it put the co-operative in the position of competing with companies that are also its customers, trying to beat them at their own game when Fonterra had been a champion at its own high-quality commodity game.

“Dependence on a volatile commodity is not in itself a risk if the producers of that commodity run businesses that are resilient, profitable and sustainable during both the peaks and troughs of the commodity cycle,” she said.

Most NZ farmers are now exposed to another volatile commodity, purchased feed, she said. Farmers complained of increasing costs of production but what they’d done was shift their farming systems away from being pasture-based to increased exposure to purchased feed.

“They have positioned themselves poorly to ride the wave down the other side of the commodity cycle.”

They’d paid too much for land, decided their return on capital invested wasn’t good enough but ironically looked to further capital investment as a solution, putting up more feed infrastructure, even cow barns that shifted their farming system further towards those of the northern hemisphere.

They locked themselves into a system they couldn’t easily get out of and shifted cost structures up over $5/kg milksolids.

“It’s nonsensical logic.”

“Onfarm we are galloping toward playing the intensive, housed, supplementary feed-dependent farming game instead of our own game of seasonal pasture utilisation, at which we were excellent,” she said.

“We have over-stocked farms in the business of converting imported feed to milk, rather than pasture to profit.”

Guiney recounted an email from a concerned Australian dairy leader who observed four issues contributing to the present plight of Australian dairy farmers.

  • A milk price structure more connected to manufacturing costs and efficiency than onfarm costs and efficiency, which they described as a fundamental long-term weakness.

  • A steady stream of promotions for the benefits of overseas farm systems and genetics – another fundamental long-term weakness.

  • Foreign-owned manufacturing now dominated the processing sector while the largest co-operative’s under-performance had failed shareholders, suppliers and the industry more generally, its chairman said.

  • Elimination of the cost of production advantage as northern hemisphere producers reduced their costs.

In the past NZ had positioned itself better than its Australian counterparts.

“But not so now,” Guiney said.

Industry leaders and academics with vested interests in feed companies and infrastructure should be careful about espousing their views without openly declaring those interests.

“With intensification we bring environmental risk and regulation upon ourselves,” she said. 

“Ironically, our historical systems that stocked the farm only to eat the pasture-grown create less of the environmental risk intensified systems create. Yet there’s evidence of throwing good money after bad into cow housing to mitigate the environmental effects of over-stocked farms that are in the business of converting imported feed to milk, rather than pasture to profit.

“In my time in Ireland I concluded one of NZ’s greatest strengths was our independent, industry-owned extension service, which insulated us from all these commercial interests.

“We need to start again with clarity on what made us internationally envied. Should DairyNZ’s role be to help perfect whatever system a levy payer chooses to farm, or to ask the hard question ‘Have you got the ladder on the right wall?’ Should Fonterra jump on the mouse wheel of branded business and push farmers to flatten their production curve as a perceived solution to keep up with their increasing cost of production?”

“The cash that flows around NZ comes from farming profitability, not Fonterra’s profitability.”

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