Headlands Conference: “Resilient and Profitable Dairying.”
A paper presented by B J Ridler (GSL).
(Resilient: flexible, quick to recover).
B J Ridler (GSL) W J Anderson (Massey University).
This term means little when searching for policies to implement on farm.
If we consider the reasons why a system may be resilient we must return to the basic resources and efficiency of allocation over a wide range of circumstances.
Such analysis can then define a set of criteria whose application over time can be labelled as “resilient”.
But such a descriptive word does not move us any further towards understanding what factors create such a state, where we should concentrate our efforts to improve the system nor why we should attempt.to do so (does it lead to more money: how much more?. Less risk; how do we compare this?)
Analysis: Under revision
A range of predominately NZ dairy industry price and volume information is provided here with regular updates and periodic analysis. Regardless, the NZ dairy industry remains informationally and analytically deprived.
A section has been added reflecting on speculation by Fonterra of NZ dairy industry payouts in excess of $8.00 per Kg of milk solids in the approaching 2010-2011 season.
United States Department of Agriculture (USDA) data on international commodity prices are graphed and supported by market comment at the end of the analysis. This comment may be of particular importance:
Oceania traders and handlers of manufactured dairy products continue to analyze the impact of the sharply lower prices recorded at the July 6 gDT event might have on current and future prices. In most instances, prices did ease, but often not to the extent of the 10 - 15% declines recorded for the various dairy products traded. Some traders are indicating that they have heard that some offers for various products out of the Oceania region are at levels below the average auction values. Traders and handlers are also stating that buyer interest has slowed greatly with many buyers stepping back from the market until more stability is realized.
For those buyers that are still in the market, many are seeking product for short term or immediate needs with most stating what they will pay versus what suppliers are quoting. Traders are stating that it appears that China may be backing away from the marketplace as their milk production comes more in line with needs.
To go direct to any required subject click on the relevant index link below:
USDA spot price data are to the 10th of November 2010. NZ dairy export statistics include data for July 2010. Global Dairy Trade auction prices are to the 3rd of August 2010.
Any milk producer will almost certainly have been heartened by the impressive gains made in dairy commodity spot prices seen from the beginning of August 2009 to May 2010. The gains have been led by whole milk powder and have flowed on to other dairy commodity products just as Fonterra said they would. The gains are such that they have largely dwarfed any impact of currency changes.
Price increases are faster than ever before, unusual in being coordinated across products, and appear to defy supply and demand logic. But milk production has hardly moved and demand curves are in all probability still moving left with lower disposable incomes across much of the world. In short, current dairy commodity spot prices are not the result of milk producer supply meeting the demand of final consumers, but of milk processor offered supply meeting the demand perceptions of supply system intermediaries. A good illustration of the artificial nature of the current situation (November 2009) from NZ is supermarket prices for retail packs of butter and cheese - including those produced by Fonterra - in many cases retailing below quoted Oceania spot prices for bulk supply.
While price volatility is being mentioned by most commentators, there are few economic reports being produced in NZ at the moment - including those from the RBNZ, that do not refer to rising dairy prices as grounds for significant optimism for the sector. The potential gains are being heralded as though they have already been achieved, and are in some cases encouraging a resumption of NZ dairy industry expansion.
For milk producer’s price volatility is destructive. The spectacular rise in dairy commodity spot prices is boosting industry confidence, but confidence not balanced by recognition of the price downside of volatility - something that could be severe.
Dairy Industry Restructuring
Wind back to 2000 and 2001 and the expectation was that the formation of a mega co-op would ensure the future of New Zealand’s dairy industry.
Ten years on and questions remain as to whether the future of NZ dairying is still through a variant of Fonterra. That shouldn’t be the case after eight years of Fonterra effectively calling the shots for the industry.
The question of Fonterra’s restructuring should be put into the context of whether it will make a material difference to saving the NZ dairy industry.
That question is not being considered – rather it is being deflected by interest in redemption risk and capital restructuring. Neither of which are amongst the two most important issues facing diary farmers.
This article is as submitted - an edited version was first published in The Official Journal of the New Zealand Institute of Primary Industry Management Incorporated: Vol 13 No 3 September 2009 ISSN 1174-524X
The New Zealand Institute of Primary Industry Management's Website is: http://www.nzipim.co.nz
In 2007 MAF policy engaged Four Cubed Limited to explore the potential from optimising resource allocation on NZ dairy farms. The assignment was the outcome of discussions over the preceding year with Treasury and MAF Policy by Four Cubed and others on subjects that could broadly be described as agricultural production economics. It was expected that the results would be published, or at least presented in an appropriate forum.
MAF circulated a draft of the results around interested government agencies and industry parties. The dairy industry hotly contested aspects of the work. No attempt was made to formally present or publish the findings, but agprodecon.org received a boost.
The passage of time reveals much. Optimising resource allocation is now entering the lexicon of the dairy industry, the 2009 Dairy Industry Strategy’s focus is on systems – systems of course being the basis of production economics, and Agresearch and Lincoln University have been jointly funded $1 million to develop LP farm models. The latter should be questioned given that the technology already exists, is NZ owned and developed, works well and is available commercially.
The following is work done for MAF Policy as it should have been published in August 2007.
The findings are still relevant today, but would be more precise if redone with current costs. A rough heuristic given increases in on-farm costs would be that farm operating surplus in 2006 from a milk solids payout of $4.24 is equivalent to that from a $5.20 payout in 2009.
Concluding analysis on NZ Agricultural Debt, June 2009
This month’s analysis should complete a picture of debt in NZ agriculture. The picture has been painted, the data is solid, and both are out in the open. Some institutions are still in denial, but that is only a matter of time.
We would like to move on and in future concentrate more on:
Profitability has been the primary objective of this site. Changing culture was not a direct objective but is critical to achieving the former, and if there is to be sustainable agriculture in NZ i.e. if we are to avoid a repeat of farming for asset gains.
Achieving profitable and/or sustainable agriculture would appear to require first understanding the availability, contestability and control of information and ideas within NZ.
Update on Fonterra's 31st January 2009 interim financial report
The Mega Co-operative Model – an evolutionary dead end?
Performance Assessment of Fonterra
Annual Financial Data from 2002 to 2008
Interim reports to January 2009
Note: When comparing a six month interim report for a seasonal agricultural industry i.e. dairying that differs from the previous report in that two mid winter months (June and July) have been removed and replaced by two mid summer ones (December and January), only balance sheet data will meaningful.
Highlights from Fonterra’s just released interim financials would therefore be:
Data Source: Fonterra Annual Reports, Interim Reports, Annual Reviews, and Statutory information provided
We earlier looked at the implications of dairy farm debt to September 2008 (further below). That work was based on a sophisticated approach estimating the present values of farms based on their profit under normal or optimised production – something a little too complicated for many to wade through. While the approach is still valid it also requires work on costs for the 2009-2010 season – something not yet completed.
This update takes a simpler approach - still using that earlier work but with updated debt figures and ignoring farm present value calculations. We provide data for a range of three market asset values and rely on the reader to select the value matching their perceptions, or to interpolate.
This article is intended to promote political and economic debate as well as provide information. It was originally inteded to be a technical paper explaining aspects of production intensification in pastoral agriculture. It now provides a less detached but more pointed analysis of the changing nature and risks of high intensity dairy production under conditions of uncertain payout.
April 2009 Commentary on agricultural debt:
March figures for increased agricultural debt are shocking. In brief, bank lending to agriculture in March increased $646 million to $43.49 billion with no additional lending by NBLIs being noticed.
March private sector credit (PSC) at $287.95 billion is down $420 million from February and roughly back to its level in September 2008. Private sector credit has now contractedfor 4 out of the last 5 months.
Food manufacturing reduced claims $335 million to $4.42 billion but also reduced funding $453 million to $682 million. There is little sign of Fonterra's $800 million bond issue showing up as increased working capital.
The Marginal Cow – Part I (TMC I) stressed maximizing operating surpluses by producing to the point where marginal cost equaled marginal revenue (MC=MR). This is the point of allocative efficiency – the right level of resources being used to provide the maximum operating surplus. TMC II is not about moving along a production function to the point where MC=MR, but looking at different production functions – presumably still with the intention of setting production to MC=MR.
The world for the most part uses economics that dictate that for a business income is maximized at the point where marginal cost (MC) equals marginal revenue (MR). The logic behind this is simple: for a given business system (firm or farm) production is increased until the next unit of output will return less than the additional cost of the inputs i.e. increasing production further loses money.