The question is, are the factors that made us successful over the past 20 years the same for the next 20?
NZ dairy hasn’t always grown strongly. In 1990 I was employed as farm production officer for the newly formed Tui Milk Products. My job description was simple – to increase milk supply by 10%.
The Manawatu and Wairarapa-Hawkes Bay region had stagnated as other land uses competed with the traditional family dairy farm.
In the early 1990s sheep and beef farms weren’t profitable and there were some relatively favourable milk price years. You could buy a good sheep and beef farm in northern Manawatu, convert it to dairy and, partly because dairy company shares were undervalued, make an instant capital gain.
That was the first wave of dairy growth, which continued to be bolstered by dairy conversion and the new management practice of buying in supplements to support the stocking rate and increase per-cow production.
As a result, along with irrigation technology improvements being applied in Canterbury, NZ milk production grew 140% to 20.7 billion litres between 1995 and 2014, a per-year growth rate of 4.5%. This was an extra 5b litres of milk compared with the historic growth rate in the previous decade of just over 2.75% p.a.
This extra milk has shaped our industry. Southland and Canterbury are unrecognisable and there has been a huge growth of milk drying capacity.
The enabler of growth has been land value gains. From 1996 to 2014 land prices increased on average by 8.5% a year. Many farmers grew their businesses significantly, even if supported by ever-increasing levels of debt.
But growth of this magnitude seems unsustainable. Even at the pre-1994 growth rate, that would mean an industry producing 35b litres by 2034.
The following are just a few of the factors why a lower milk supply growth rate of 1-2% a year seems more sustainable.
First, the saying “production is vanity, profit is sanity” makes sense. When we have talked about productivity improvements (measured by the units of output for corresponding units of inputs) many of us have been talking about production.
The world is increasingly global and under our commodity model we need to regain our cost of production advantage, and we need to retain this focus regardless of commodity price cycles. It might be harder to grow a business by increasing our operating margins than by increasing milk production.
But with finite land resources and no comparative advantage in sourcing offfarm feed, we can focus on producing milk more efficiently by increasing forage production, through automation, through new management structures, through better financial management and through herd improvement.
Secondly, our environment might not stand many more cows. We are entering a new world of nutrient limits. In some regions we are unsure how we will fit existing systems within planned nitrogen caps.
Key from a farming perspective is our ability in the future to use forage crops, our management at the start and end of the season and winter management. This is also about our licence to farm and is certainly related to any sustainable/natural brand we might be able to create around NZ milk products.
Thirdly, is growing milk production for commodity use making the most of the NZ opportunity? Today we compete with overseas farmers producing milk using industrial methods.
They have the ability to scale easier than us (walking distances constrain the size of our farms), they might make better use of robotic and automation technology, and they can pick their feed sources from a plethora of products which might benefit from GMO and other technology.
They might have higher marginal costs for their confinement farming systems but we have more capital tied up per kilogram of production. And for the longer term, the “Beyond the Line of Sight” event, run in December 2015 by Trutest, Callaghan and NZTE, highlighted the ultimate in industrial milk and meat – produced from plant material and-or cell cultures.
It seems to me our pathway is relatively clear. NZ produces milk the way nature intended it.
Our cows are free-range, they graze pasture and we produce milk in an environmentally sustainable and animal-friendly way. Our food is safe.
Perhaps some of this is aspirational, but somewhere between an organic milk price of $9.20/kg milksolids (MS) and a commodity price of $4.25/kg MS there is an opportunity for a pasture-based, free-range milk brand.
Whatever path we choose, we still need to focus on productivity gains. Establishing a NZ pasture-based brand, including the new sales channels, might take decades. Challenges onfarm could be significant; selling added-value products to food service and direct consumer channels wouldn’t be easy. But we need to be thinking about it rather than thinking the past will repeat itself.
Andrew Watters is executive director at MyFarm, a farm and horticultural block syndication investment company.
Dairy Exporter welcomes contributions to the Industry Insight column. Email jackie.harrigan@nzx.com
