Are New Zealand dairy farmers losing the plot in turning away from low-cost milk production?

After five years it was time to make a trip back to New Zealand to visit family and friends. It's certainly been nice to experience some sunshine and dry conditions after the year we have had in Ireland.

As most of my contacts are either dairy farming or working within the dairy industry, it's also been a great opportunity to discuss recent changes.

One obvious change is an increase in the number of businesses scaling up and running multiple units. There is, however, a challenge for new entrants to progress up through the industry with regard to sharemilking, especially larger 50:50 sharemilking positions.

Sharemilking is where the sharemilker receives a defined percentage of the milk cheque relative to their input. By definition a 50:50 sharemilker, owns the cows and receives 50pc of the milk cheque.

The costs are shared between the owner and the sharemilker according to the contract in place. While those with a high level of motivation and skill are still managing to find opportunities, I have heard of 50:50 sharemilking jobs being referred to as 'gold dust' or 'hens' teeth'.

As a result there has been an increase in the number entering into equity partnerships. These changes have resulted in a big increase in the number of large farm businesses.

This, in turn, has forced industry bodies to focus heavily on business 'governance', alongside the more traditional areas of management and operational structures.

So there is a lot of talk about structures that provide adequate strategy and vision required to lead the business, inter-generational succession and 'plan-do-review' cycles.

evolving

In essence, opportunities to progress in New Zealand are constantly evolving, depending on milk prices, the cost of production, land values and debt levels. But those that are making most progress are those that are relying more on planning.

The cost of living has increased significantly due to a strengthening NZ dollar. The cost of milk production has also significantly increased. For example a tonne of urea is around NZ$1,000 (€631). To reference concentrate price, palm kernel expeller (PKE) is at around NZ$330/t (€209).

A staggering figure is the cost of silage which, depending on supply and demand, appears to range from NZ$65 to NZ$100 per bale of 250kg drymatter. This equates to €41-63 per bale or €160-250/t of DM.

Looking at the present Dairybase figures for the season ending June 2012, the average stocking rate for owner operator farms was 2.9 cows/ha.

The average number of cows milked at peak was 521, milk solids were at 1,150kg/ha or 399kg/cow. The average number of cows milked per full-time equivalent was 149.

Operating expenses, including depreciation, wages for management and winter grazing, averaged at NZ$4.84/kg of milk solids (€3.06) or 66pc of gross farm income with a milk price of NZ$6.71/kg of milk solids (€4.24). If a standard litre of milk has 3.6pc butterfat and 3.3pc protein, these figures equate to costs of 21.5c/litre and a 29.8c/litre milk price.

The previous year, operating expenses were closer to 22.4c/ litre and 32.7c/litre respectively. Clearly, these figures are not dissimilar to Ireland.

As you drive around, the look of the countryside has changed slightly. For example in Canterbury there are more centre-pivot irrigation rigs, but less trees and shelterbelts compared to five years ago. In other provinces milking cows can be seen where there once were sheep and beef cattle, although these still have a presence.

The odd herd home (cattle housing) has popped up in most provinces, and a large number of farms have feed pads. A lot of these facilities have been justified on grounds of sustainability due to environmental restrictions and concerns, or financially for the opportunity to increase stocking rate and exploit the differential between milk price and the cost of feed.

The increased levels of meal feeding has resulted in more feeder wagons, slurry tankers and concrete. To my mind, some New Zealand dairy farmers run the risk of becoming over-capitalised on a higher cost system when future milk price volatility is considered.

changes

A field day held for the 2012 Dairy Business of the Year certainly exemplified such changes when the farm in question revealed that 25pc of the cows' diet was concentrate, equating to 1.2t/cow. Will farmers such as this have the ability to pull away from concentrates if milk price is low and concentrate price increases?

While New Zealand farmers are certainly not fools and are very focused on profitability, it does appear from the outside that the competitive advantage in terms of a low cost system has been substantially eroded.

It is possible that it has become a victim of its own success, with the low-cost systems that allowed farmers to be so profitable disappearing as these same farmers use these profits to create lower profit systems.

It is clear that Ireland has the ability to compete with these grazing systems, and already has systems in place for environmental compliance.

What is less clear is direction that dairying will go in New Zealand in the future.

Five years ago I was clear about what type of farming system I felt offered sustainability.

Now I see a more complex system that is vulnerable to market forces gaining ground. To me, it doesn't make sense anymore.

Dr Mary Kinston is a Kerry-based dairy consultant. Email: mary.kinston@gmail.com