A Kellogg Rural Leadership Programme project by Zach Mounsey looked at a systems approach for NZ dairying and concluded this would be the result if there was a 55 gram response to every kilogram of palm kernel drymatter (DM) fed. This would mean the previous breakeven price for supplements at an 80g/kg DM response drops from 5% of the milk price to 3.5%.
Even at the higher rate there were only two years since 2008-09 where feeding palm kernel would have been profitable.
“Farmers need to be cautious of making reflex decisions in altering their systems due to a short-term shift in milk price,” he said.
They needed to understand the key drivers and values of the operation and make decisions based on the core objectives and strategy, and current performance. They also needed to recognise opportunities to make strategic changes to increase business profitability and resilience.
Mounsey is an equity partner in his family’s 114ha farm near Otorohanga but intends to buy the herd of almost 300 cows for the 2016-17 season. He has been working for the past year as an economist at DairyNZ after completing a finance and strategy degree at Waikato University.
He said the aim of his project was to allow farmers to gain a wider perspective of farm systems and develop an institutional position on the topic.
“It touches on the brand of where NZ lies, what our experiences are and what we’re trying to sell overseas,” he said.
“We’re not going to beat our competitors. It’s only getting harder with the way we’re doing it.”
While the Mounsey farm is a DairyNZ System 2 property, feeding supplements tactically and with a meal silo, he said the dairy industry today was vastly different to that of the previous decade.
Many farmers had pursued an intensive farming system in their quest for further profitability. In the 2000-01 season 70% ran low-input farming systems, medium systems accounted for 17% and high-input systems just 13%. But by 2013-14 that had changed to just 30% having low-input systems, medium 41% and high 29%.
“The increase in intensity has been both intentional and unintentional.”
There were strategic, operational and tactical reasons for intensification. But incremental intensification or systems creep had been driven by droughts and the availability of palm kernel.
Feed costs had shown a 100% increase from 2004 to 2013-14, during which time there had been an increase in per cow production of just 20%. This contributed to farm working expenses increasing from $3.66/kg milksolids (MS) to $5.17. Increased feed costs from 2007-08 had not declined since, leading to an erosion of this country’s international competitiveness with a loss of efficiency, low cost base and resilience.
“High-performing United States farmers are now producing milk at working expenses comparable with the bottom quartile of NZ farmers,” he said.
It had always been complicated to forecast international prices or production risks, such as the weather, but future production would be set on a platform of uncertainty and increased volatility, so whatever the farming system adopted, NZ farmers needed to be resilient in order to react rapidly and positively to any change.
Mounsey said his report didn’t promote any particular feeding system but analysed different aspects of system profitability with a focus on the tactical use of supplements with profit the main driver.
Many farmers had been very successful at putting in place and operating intensive input systems.
“There’s no reason why they can’t do it well but they have to have their hands on all the levers,” he said.
“However many have not been so successful. If a farmer does not manage pasture well it’s highly likely they will not be able to get the most out of an intensive system.”
While higher-input systems might have led to greater returns for individual farmers it was not clear whether these alterations had enhanced NZ dairying’s overall profitability, competitiveness and resilience.
Mounsey analysed industry data over the 2011-12, 2012-13 and 2013-14 seasons, comparing high, medium and low-input systems. There were 204 farms analysed in the first season, 217 in the second and 301 in the third. These years took in a long-run mid to high median payout of $6.08/kg MS, a relatively low payout at $5.84 and an abnormally high payout at $8.40.
In the first year high-input farmers with costs of $4.82/kg MS needed to produce 10% more milk to break even, with low-input farms with costs of $4.69 showing a $1264 operating profit/ha. In the second year they needed to produce 21% more milk to break even with the $832/ha operating profit of low-input farmers. Their costs were $5.04/kg MS compared with the low-input farmers’ $4.87 operating costs. And in 2013-14, with a record high milk price, they needed to produce 11% more milk to break even, while low-input farmers had an operating profit of $3026/ha. Their operating expenses were $5.29/kg MS compared with low-input operators at $4.95. However, if they wanted to receive the same level of return on assets as low-input farmers they would have needed to produce 22% more milk based on an average valuation of $36,369/ha and $39,989/ha for more intensive operations.
Based on a forecast $4.60kg MS milk price for the current season and an estimated trimming of operating expenses by 11% from those of last year, low-input farmers would show a slight profit of $179/ha.
“While some high-input farmers will in fact be able to break even and generate a profit, on average the majority will not, based on this analysis.”
NZ dairy farmers’ debt expenses had increased by 70c/kg MS, making up 22% of costs, from 2000-01 which made farmers even more susceptible to low payouts. In 2011-12 high-input farmers had an interest expense of $1.48/kg MS and farm working costs of $4.11, so needed to produce 130% more milk to breakeven with low-input farmers with interest costs of $1.25/kg MS and farm working costs of $3.70 to achieve a margin of $1027/ha. In the following year they need to produce 200% more milk with an interest expense of $1.44/kg MS and farm working costs of $4.20 compared with low input farmers with an interest cost of $1.43/kg MS and farm working costs of $3.81 to achieve a margin of $515/ha.
In the 2013-14 high-payout season high-input farmers had an interest expense of $1.21/kg MS and farm working costs of $4.48 so needed to produce 14% more milk to break even with low-input farmers with an interest expense of $1.35 and farm working costs of $3.97 to achieve a margin of $2702/ha.
Mounsey said palm kernel imports had increased despite the drop in milk prices, with two million tonnes used last season compared with about 200,000t less for the previous season. But the milk production response could be lower than anticipated because of wastage, which could be 5% for in-dairy feeding, 10% for feedpad feeding or 15% for feed offered on trailers in paddocks.
While there could be 20% wastage for feed offered in paddocks in dry conditions this could double when it was wet.
Wastage could also come through the decline in pasture intake or substitution and energy that wasn’t directed into milk yield.
For the 2015-16 dairy season at a forecast $4.60/kg MS payout, and a 55g/kg DM response supplementary feed shouldn’t be purchased for more than $161/t DM. If the higher rate of an 80g response was used the cost could go up to $230/t. While issues such as cow health or reproductive issues could drive supplement use, DairyBase data showed spending more on supplementary feed per cow didn’t result in a higher in-calf rate.
Farmers also needed to reduce exposure to increases in feed prices to manage risk, which DairyNZ suggested was best done by limiting supplement use to 500kg per cow per year. More strategic decisions were needed in running an intensive dairying system leading to a greater impact for any errors.
“Changing intensity and farming system will not eliminate risks, it only shifts the risk from one part of the business to another,” Mounsey said.
“Analysis of farm working costs along with interest payments shows the average farmer who has consolidated and increased cow numbers, land holdings and associated costs over the past decade has been no more profitable for doing so when looking at cashflow.”
Income and expenses both rose from 2004-05 over the next 10 years when farmers increased the area milked on by 30ha, lifted cow numbers by almost 100 and produced 60,000kg MS more than previously. But their cash available for living and growth dropped below the level it would have been at had they stayed with the status quo. Revenue was calculated as the weighted average milk price of Fonterra, Tatua and Westland as well as dividends paid.
A DairyNZ and AgFirst study done last year on 14 dairy farms where cow housing had been built showed a breakeven price of more than $6.50/less than $7/kg MS.
The authors also cautioned while building a wintering barn increased the capital value of a property it was relative to the lift in production as a result of the intensive system adopted.
Key recommendations
Farmers looking at system intensification need to look at all possible associated risks.
No matter what system is operated the key focus to improve productivity and profitability should be to manage pasture for maximum growth and maximum intake by the herd. Up to 74% of the variation in onfarm profitability can be determined by pasture management.
Before supplements are added farmers should understand why they are considering this move and the impact on profitability, then ensure target grazing residuals are maintained.
In a low payout or dry year it’s important any drop in production is outweighed by a fall in farm working expenses for profit to be improved.
Resilient farming systems must be simple, repeatable and understood by all those involved in running them.
Modern farming is complex so farmers need greater understanding of financial and business management principles to prosper in a volatile and uncertain environment.
Kellogg projects can be accessed from: www.kellogg.org.nz/alumni/projects/.
