The Manawatu-based BakerAg consultant says the industry hasn’t seen a sub-$4 payout since the 2002-2003 season but operational and expenditure fundamentals have shifted significantly since then.
“Back then Fonterra was just getting going, and the country produced 1.2 billion kg milksolids (MS) and the cost structure was about $3/kg MS. Production grew over the next decade by 50% to a peak in 2013-14 of more than 1.8 billion kilograms, driven by what was regularly quoted by the industry that the growth in demand was running hot at twice the level of supply growth.
“There were blue skies ahead with a big shiny light on the horizon, but that position has changed and a new scenario needs to be clearly understood and business adjustments made,” Boyle told Manawatu agribusiness professionals at an industry update in late February.
Milksolids peaked at 1.86b kg in 2013-14 and he forecasts that dropping to 1.68b kg in 2016-17, because of the low milk price not being able to profitably sustain the current farm inputs. This is the second season of a less-than-$4.50 milk price and prospects for next season are no brighter.
BakerAg’s indicator budget for the lower North Island forecasts a $112,000 deficit this season. The 150ha representative farm, running 450 cows producing 155,000kg MS, reduced numbers this season to 420 after the $3.85/kg MS announcement in July. Faced with another low payout year, he sees farmers in the region trying to avoid a repeat of this result by adjusting cow numbers back by 5% to 400, further adjusting inputs resulting in an expected drop to 145,000kg MS and a small deficit of $13,000.
“Fewer cows were peak-milked this season with a late winter cull, and empty rates at or above last season, we see cow numbers dropping by 5-10% to reduce costs. Production will drop next season, how far will depend on how well a lower input system is operated.
Boyle outlined the key areas where cost reductions will be made.
Supplement inputs have grown to well over 1000kg/cow/year on many farms, so a reduction by 300-500kg/cow is expected with more emphasis on pasture utilisation, Boyle predicts. At $4/kg MS the costs need to be below $200/tonne unless the system has a massive conversion and efficiency advantage. Major feeds such as maize will be less affordable.
Grazing costs will come down as fewer cows and replacements are grazed off and there will be a reduction in rates.
Staffing will be reduced, probably by 0.5 of a fulltime person per farm.
One area of increase needs to be fertiliser as more reliance is on feed from pasture, not an area to skimp on.
One reaction to the downturn will be a loss of cow condition, Boyle says, with the national herd dropping by 0.25 body condition score (BCS) and cows calving at 4.5 BCS because the income won’t be there this autumn-winter to support a higher score.
He warns a lot of dairy farmers who have only been in the industry for the last decade are not used to seeing what cows look like “if they are not getting their pudding each night”.
Dropping cow numbers, reducing feed input and rearing fewer replacements will translate into less labour requirement onfarm and Boyle says if every farm drops half a labour unit then 5000 positions, and people, will not be employed in the sector.
This will have a negative flow-on effect for small communities, alongside a loss of service sector workers. These are people who “get out of bed each day, do their job, get paid $35,000-$50,000 and are provided housing,” Boyle says, and he can’t see the booming tourism industry employing them all.
“There is a limit to how many extra coffees we need.”
Cost reductions in these areas and being very frugal in others produces what he calls the “coffee budget”. This is the implementation phase where there is a lot more time spent drinking coffee as the plan is monitored and reviewed rather than rushing out and spending money.
“We’re down to pretty cheap coffee too, with milk.
“The skills to develop a system change from where we are at the moment, to not only a survival budget at $4/kg MS , but to thrive at $5/kg MS are not actually in abundance out there on farms.”
That’s a challenge to the servicing sector for this industry which he is in no doubt will survive but will come out stronger, “it’s just going to look a little different than we imagined it would three years ago”.
Survive at $4, thrive at $5:
Milking 400 cows on 150ha, producing 145,000kg MS
Based on $4.50 budget for 2016-17
Net income: $780,030 (incl stock)
Savings:
Wages: -$20,000 (0.5 labour unit)
Grass silage: -$10,000 less made
Imported feed: -$8700 less bought-in
Calf rearing: -$1000 fewer reared
Wintering cows: -$8000 half number wintered-off
R&M: -$10,000
Total farm working expenses: $547,513 ($3.78/kg MS)
Cash loss after drawings, debt, tax, capital: -$13,383
