Co-op walks the tough journey with farmers

LIC understands the challenges ahead and earlier this year anticipated what was likely to come.

The board approved two initiatives to assist our farmer shareholders, with provision for extended credit with interest free periods for AB products during the peak spring mating season, and interest free periods on automation and DNA parentage products.

Later we also added options for herd testing, and special offers on the AB products for this season.

We are committed to maintaining a vibrant and enduring New Zealand dairy sector. We want to make sure the investment in good genetics will not be compromised. That's why we emphasised the value of Premier Sires, while providing a low cost alternative to those who needed it, and introducing a new value option to extend AB – SGL Dairy.

LIC also continues to review discretionary costs without affecting service to farmers. Like you, we have gone through our budgets line by line to reduce our costs as much as we can. This has somewhat affected our development of new products and infrastructure replacement.

Farm working expenses (FEW)

Given the industry's volatility and a milk price starting with $4, farmers have been looking closely at farm working costs. Here we can see how farm working expenses have changed over time; this is overlaid by the 2000-01 FWE costs with inflation.

In general, these expenses followed inflation until the 2007-08 season. In understanding what has caused this sudden change it is important to consider what happened with milk payout and the weather.

The 2007-08 season saw the milk payout climb to over $7 for the first time, and while this resulted on average in a record operating profit per hectare, the impact of the widespread drought had a marked effect on farm working expenses – particularly feed costs – as feed resources became difficult to come by.

The 2008-09 season was affected by the flow-on impacts of the previous season drought, and a lower payout resulting in the lowest profit margin in a decade. Borrowings were at a record high.

Farm costs don't tend to drop in line with falling milk prices, although in the current environment overall farm expenditure is expected to decline.

Throughout this whole period, breeding and herd improvement has accounted for a few percent of the total FWE. Through many initiatives we look to keep delivering maximum value in this aspect of spending on your business.

LIC contribution to value onfarm

How is your investment in herd improvement represented in onfarm returns? Using analysis from a number of independent and internal sources we have estimated financial value onfarm as follows:

Genetic merit: nationally at least $400 million annualised gains through genetic improvement and with our market share we generate over $300m of this (based on a breeding worth analysis so although affected by milk price it is a rolling average)

Health: reduction of mastitis by herd testing and culling a small proportion of cows with consistently high SCC equates to over $2m

Reproduction: from an increase in the 6 week in-calf rate observed over the last two years, LIC has played a key role in this with our reproduction solutions team

Production: resulting from the identification of poor producing cows by herd testing and the subsequent production benefits from having higher producing cows, this generates at least $40m. Short gestation length reported as $11m in June this year (at $5.25 payout) is now worth $9.5m at current payout.

Strategy and technology roadshow

For one week in June, LIC board members, senior management and shareholder councillors visited eight towns around the country to update shareholders on progress with the strategy and present some of the latest developments in technology.

These meetings were to allow early discussion with you, our shareholders, on the service and solutions we have in development, progress on acquisitions which fit with our strategy and funding options for LIC over the next few years. There was no burning issue, but we wanted to give shareholders the opportunity to discuss the direction of the co-operative. We wanted to understand your views as we consider LIC's implementation of its strategy over the next few years.

The directors are responsible for ensuring the long term future of the co-op is profitable. Profitability enables us to continue to invest in new product development and R&D and to deliver the service and solutions you will want and expect from us.