Wairarapa-based dairy consultant Chris Lewis of BakerAg says this time the tide’s stayed out longer and those who’ve been skinny-dipping are being found out.
It’s not just one or two – in general the cost of production has risen to the point that at the start of this season DairyNZ put the breakeven milk price at $5.40/kg milksolids (MS).
That’s what was necessary to cover the cost of production plus average drawings, interest, rent and tax.
That figure’s been revised to $5.25/kg MS as farmers have worked hard to slash costs.
Lewis says that based on the Dairy Systems Monitoring (DSM) benchmarking his company does in conjunction with another farm consultancy, Macfarlane Rural Business, farm operating costs have dropped by 50c/kg MS this season compared with last.
Most farms have their farm working expenses down to less than $4/kg MS but in many cases the reductions have come from a survival-mode approach and could be unsustainable long-term.
In many cases farmers should be looking at a step-change, Lewis says.
“There are two fundamental factors in cost per kg MS – the numerator and the denominator. Concentrate on one alone and you run into problems.”
Some have been solely concentrating on production – the denominator – and allowed costs – the numerator – to climb.
Recently there’s been a return to cutting costs but not enough attention has been paid to how to maintain the denominator while reducing costs.
Lewis used an example in his monthly newsletter, Milklines, to illustrate the point.
At $450,000 total costs and 100,000kg MS production the cost per kg MS is $4.50.
At 50c/kg MS less the total costs came out at $372,000 but 93,000kg MS as production dropped too to give $4/kg MS cost of production.
If production had been maintained but costs cut the equation would have looked different.
$372,000 total costs and 100,000kg MS = $3.72/kg MS
While producing the same, or even a little more, for less could be seen as the silver bullet, there were numerous ways of achieving that.
No single method was likely to be an industry saviour. Instead, farmers must look at their own situation to see how they could achieve the same or more for less. What is certain is that the ability to optimise the harvest of home-grown feed is going to be
key to re-setting the system, Lewis says.
For some it could mean dropping some cows out of the system along with some supplements but even that would require a sharpening up in pasture management so the extra pasture available was efficiently turned into milk.
Re-grassing and using crops onfarm might also be an option for some.
That came with a cost too, but if supplements could be reduced and home-grown feed successfully increased there could be an on-going improvement to profitability even at low milk prices.
Farmers must start their systems re-set by establishing where they are now – having an accurate knowledge of their physical and financial key performance indicators so they know where they can improve, he says.
Waikato-based consultant James Allen from AgFirst agrees and says what farmers are looking for now is how to go right back to the drawing board and re-think their systems.
“There are a lot of lost people out there. They’re not sure what that next move is – how to go about re-designing their system,” he says.
The first step is to establish their evel of profitability and productivity and think about how sustainable that is long term.
For some that will mean making a concerted effort to improve their financial literacy and put their heads up to take a look at how they compare among their peers through benchmarking tools such as DairyBase.
DairyNZ tools such as the pasture ready reckoner and comparative stocking rate tools will help farmers understand where they’re at and Pasture First workshops are helping people look at the effects of varying stocking rates on the amount of bought-in feed.
Farmers can try different scenarios using those tools but they have to run the financials alongside them to work out the optimum situation.
It might not be as simple as cutting stocking rates, wintering cows onfarm or pulling supplements out.
There will be multiple ramifications of any systems change and they all need to be investigated.
For instance, those running very high-input systems might already be operating at well below $4/kg MS because they’re able to turn their inputs into high milk outputs.
Allen says running scenarios through a modelling tool such as Farmax and Udder will ensure the effects of changing key factors such as stocking rate, imported supplement or pasture harvested are revealed.
They need to run it through the model and look at what effect it has on the budget and cashflow for the season at various payouts and input costs.
System changes couldn’t be assessed in isolation from environmental outcomes and checking the effects via a model such as Overseer was important, particularly in regions where nutrient limits were already in play. Importantly farmers should also take a good look at how well-equipped they and their staff are to manage a new system or variation.
“Those non-financial factors can be critical. What’s the skill set for managing pasture surpluses, ensuring pre- and post-grazing covers are spot-on?
“How will staffing numbers be affected by system changes and what flow-on effect does that have?”
“There may be capital implications for a system change too. What are the implications when it comes to timing of stock sales – you could find you’re caned when it comes to the value you receive for those animals.
“What effect will that have on your asset value?”
Allen says farmers also need to be aware of the dilution effect of production and what that does to fixed costs and factors such as your interest payments on a per kilogram of milksolids basis.
“That’s all got to be considered in the context that if you’re more profitable you’ll have more available to make those payments.”
Take stock and plan
Intelact consultant Helwi Tacoma turns an old adage on its head when he says don’t just do something, stand there.
Helwi Tacoma
Rather than reacting hastily, he advises farmers to take stock and build a plan when a downturn hits for whatever reason.
In this case it’s been sustained low milk price
• First step is measure all actual costs on a per-cow, per-ha or per-kg MS basis item by item.
• Deal with the weak ones and build on the strong ones.
• X-ray your system using feed budget tools.
• Regardless of the system, maximise pasture harvested and pasture quality.
• Look at using home-grown fodder beet instead of silages.
• Don’t focus on cost of production alone.
• Remember profit = (milk price – cost of production) x kg MS.
• Sole focus on costs or production is detrimental.
• Find the optimal point between minimising costs and maximising production.
Reassessing a system change
Use a modelling tool such as Udder, Farmax or spreadsheets as a feed budget tool.
Your inputs will include cow numbers, genetics, pasture growth, pasture quality, supplements, nitrogen and feed costs.
The outputs will be milk production, pre, post and average covers, condition score and financial margin.
Modelling can be used as a strategic decision-making tool and as a tactical decision-making tool to set up annual strategies and make short-term adjustments to the system.
When used for strategic decision-making, use it to compare scenarios that might include different stocking rates and feed inputs.
Measure the effects of those scenarios on average pasture cover, pre and post grazing covers, pasture harvested and financial margin under varying milk prices.
Then map out a risk profile using those scenarios.
When it’s used as a tactical decision-making tool use models such as Udder to monitor actual versus budget and adjust short-term strategies such as nitrogen levels, supplement levels, rotation lengths and culling decisions to look at the effect on financial margin.
The information from the modelling tool should also be transferred into the cashflow and budgeting tool used onfarm, such as Cashmanager Rural, Xero or MYOB, to create the necessarily accurate financial budgets month-to-month and annually that will actually be followed and monitored.
The risk profile needs to be assessed at different milk prices because of the more detailed figures.
Monitoring actuals versus budgeted month-by-month is critical.
It’s important to extract the per-cow, per-ha or per-kg MS information from this tool.
Benchmarking is important to identify any shortcomings and areas of strength so each year the information from annual accounts and the physical farm data should be transferred to a benchmarking system such as RedSky and-or DairyBase. Accurate key performance indicator data can be extracted and compared with industry top 10% values in the data base.
Benchmarking allows you to build future scenarios to maximise return on assets and return on equity.
Those scenarios can then be transferred back into the modelling tools as well as the cashflow and budgeting tools.
