DairyNZ: Strong payouts offset high farm costs
The dairy sector is in a relatively stable position, with strong milk price payout forecasts continuing to offset ongoing high farm costs, according to DairyNZ.
The only constant in the future will be volatility and farmers must set their businesses to be able to absorb uncertainties if they are going to survive volatile times.
Historically, the old adage was that the difference between a good farmer and a bad farmer was time. In other words, all farmers do the same thing eventually; the big difference is the timing of their actions. From an operational perspective, this is still true. However, increasingly I see that the difference between a successful business and one that struggles through challenging times is that one has a plan and the other manages day to day.
The key to resilience is a strategic plan that guides major decisions. This is not to say that your day to day tactical management is not important. However, to use a rugby adage, “forwards win matches, backs decide by how much”. Your strategic plan is the forward pack of a dairy farming business, securing the business in the set piece and ensuring the team will not be caught unawares by a poor climate year or a low milk price; and the tactical management (the backs) determines by how much we win the game.
The need for system resilience is more important than ever before because future milk production will be set against a backdrop of increased farm business uncertainty.
Fundamentally, a resilient system has three essentials: profitable every year and not just when milk price is high; a low production-cost base to insulate the dairy farm business from price shocks; and the means for the farm to generate sufficient funds in better times to exploit opportunities in lean years – when other businesses can’t capitalise.
A resilient farm business is one designed to utilise its competitive advantages. This requires a ‘fit for purpose’ system that will provide a consistent level of production at a consistent cost, within the general averages of climate, input price and milk price uncertainty.
A resilient farm system will, therefore, have a plan for the appropriate stocking rate for the farm, an appropriate level of supplementary feed purchases, and key decision rules about drying off and culling cows which it will not change come hell or high water.
Resilient systems still have sufficient tactical flexibility to overcome unanticipated events that can lower short term profitability (e.g. cold wet spring, dry summer, low milk price), but the foundation principles of the resilient system remain the same. At the same time you need to enjoy what you do at a personal level and have fun farming. It’s a tall order – but most farmers I know love a challenge.
Markets love volatility, as Christine Lagarde, managing director of the International Monetary Fund, is fond of saying. Maybe that’s what we also must do – learn to love the thing that challenges us the most. Because it’s here to stay.
Historically, farmers have focussed their learning on plant and animal husbandry, rather than developing broad management skills. Don’t get me wrong – those skills are still vitally important. As a dairy industry scientist, that is part of what I do every day: help farmers to maximise value from understanding production systems. However, modern dairy farming has increased in complexity.
My firm view is that dairy farmers need an increased level of understanding of business management principles if they are to prosper in a tumultuous ‘price-taker’ environment.
It is now vital that farmers have a broader range of management skills alongside their traditional farming skills. These include cashflow budgeting, human resources, contract negotiation and knowledge of multiple facets of compliance. The resilient farmer has to have the science of management sitting alongside his animal and plant husbandry skills.
• Dr John Roche is DairyNZ’s principal scientist.
