Keith Woodford reviews the outlook for dairy and finds many farmers adjusting with the future in mind; not so by the dairy organisations, he worries

By Keith Woodford*

With calving in full swing, most dairy farmers have no time to think about anything but today. Things are indeed grim and the short term focus has to be on survival. For the next few weeks, there is some logic to focusing on the simple day to day things that can be influenced. Even in the good times, these are the things that often separate out the best from the not so good.

Despite the gloom, most of the farmers I know do seem to have things well under control. Perhaps that is because most of my mates have lived through tough times before, back in the 80s and 90s. They have always assumed that at some time a storm would burst upon them and so they have not panicked. Rather, they have been quietly and sequentially battening down the hatches for more than 12 months.

Battening down the hatches has not necessarily meant sitting on their haunches. Indeed some of them have been expanding, particularly through purchase and lease of support land, to get better control of their businesses.

It has not so much been a case of predicting where we would now be. Indeed I am sure that none of them predicted where we are now.  But it was a case of always having in the back of their minds that the good times never last for ever, and remembering the Boy Scout motto of ‘be prepared’.

It is all about survival so as to still be there when the good times return.

One of my farmer friends recently reminded me of the so-called Stockdale paradox.  James Stockdale was the highest ranked American prisoner in Vietnam, and he remained a captive for more than seven years.  One of his famous statements, quoted in the Jim Cross book “Good to Great’ is that “you must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be”.

Stockdale said that those who relied on false optimism to see them through were the ones who died. Those who accepted reality with stoicism, and remained focused on their situation and what they could do, were the ones who survived

The current worry is that some farmers are making things worse by poor decision making. Many of these poor decisions will be a consequence of stress. So I thought I would write a little about some of the decisions that I see the old timers making.

Feed decisions

The first point is that it is seldom sensible to make one decision in isolation. And the silliest decision of all is to try and skimp on feed. Hungry cows always punish the farmer. 

I am seeing some dangerous advice coming from DairyNZ, implying that farmers can save on purchased feed by improving their pasture utilisation. In most cases, farmers will not be able to make major improvements in the short term given the personal stress they are under. It’s not the time to be learning new tricks.

The situation will vary throughout the country, but in Canterbury where I live, the winter has been remarkably cold. For the first time in many years, the pastures have not grown at all over the winter. So pasture covers are down, although fortunately the cows themselves have held up well.

If farmers want to save on feed, then they also need to sell the bottom end of the herd.  In most cases, it might be between two and five percent of the cows.  Typically they will be low producing late calvers. Other farmers are planning to cull much earlier in the season than usual.

Cutting back on supplementary feed does make sense when there is a substitution effect with pasture. Pasture is always the cheapest feed on grazing farms, and high pasture utilisation is fundamental to success. The DairyNZ advice is predicated on this being the situation.

But on many farms there is no additional pasture to be utilised. And at the risk of being repetitive: hungry cows always punish the farmer.

One of my farmer friends says he is feeding PKE which he contracted in advance for $250 per tonne. This week he has picked up additional quantities at $210 per tonne.  When I run the numbers on those purchases, it is very evident that even at this year’s disastrous milk prices, and in his specific situation of a feed deficit, that this is sound business.

Many farmers are planning to eliminate off-farm wintering of dry stock.  This can make a lot of sense, but only if the feed budgeting and hence the stocking rate is correct.  Once again, cows will need to be reduced.

The other big revolution in winter feeding is fodder beet. I am increasingly seeing farmers take control of their wintering costs by growing this crop.

The forward thinkers have been quietly trying out fodder beet over the last one to three seasons and are now increasing the area this year. For those who are new to the game, it is better to tread gently in the first year. 

Reducing the cost of production is not always the only solution. One farmer who has a barn tells me that with winter and shoulder payments he will get an overall herd premium of 85c per kg MS.  The challenge with these systems is to control the per kg cost of feed.

The medium term

Overall, I remain very confident that, as an industry, dairy will emerge from the short term gloom to medium term sunshine. What neither I nor anyone else can say is just when that will happen. Currently, I am frustrated that prices are holding up better in Europe and the US than in New Zealand, and this will slow down the Northern Hemisphere adjustment.

In the meantime, farmers are frustrated with Fonterra’s inability to give accurate price estimates. It needs to be emphasised that in a commodity market no-one can estimate future prices with any accuracy. That is the fundamental nature of commodity markets, where minor imbalances in supply and demand lead to very large price volatility.

Unfortunately Fonterra has dug a hole for itself – and also for many farmers – by creating the illusion each year that prices can be estimated in advance.  Historically, Fonterra should have made much greater uses of a range of likely prices rather than single point estimates when communicating to farmers. I have been saying this for many years.

 Even the current estimate for 2015/16 is little more than a guess.  I think Synlait does a much better job of communicating to its farmers as to where current returns sit in relation to the overall seasonal prediction.  Synlait regularly gives its farmers a graph showing seasonal prices to date and what payout these prices will support. Currently that figure is less than $3. This allows farmers to make better judgements as to where things are at.

Although I am confident about the medium term beyond the next one to two years, I am less sure about the long term beyond about five years.   This is because our seasonal supply industry is not well suited to value-add consumer goods.  In relation to whole milk powder (WMP) there is only one big global supplier (New Zealand) and one big global consumer (China).

Sometimes I have debates with people as to whether or not we are over exposed to China. The point I try to make – often without success – is that if WMP is the game we are in, then China is the place we have to play it.

I have little doubt that China will increase its dairy consumption but I do have niggling concerns as to how much milk powder they will want in the long term.

I think one of the big new dairy products is going to be ESL (extended shelf life) milk. This is different to UHT, and it tastes like ordinary pasteurised milk. However, it keeps from five to nine weeks and with ongoing technology improvements, this will further increase. It does not have to be chilled but it usually is. Already it is on all the supermarket shelves in Germany and the USA.

In the future, there is a real risk that this ESL milk will be conveniently transported from the USA and Europe at modest cost, and poor old New Zealand will be left wallowing in the wake without competitive brands and supply chains. Oh dear!

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Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com