Farm Strategies

Dairy Farming Strategies

Picking a correct strategy for dairy farming is going to depend on the industry's strategy and on individual perceptions of risk. Irrespective of the industry's strategy being confused, it is still possible to outline some major dairy farming strategies.

The Fairy (on the basis of similarities to believing in the tooth fairy or fairytales)
AKA the bigger fool theory.

Annual asset gains of more than the gross payout are sustainable, or if they are not owners are smart enough to know to get out before anyone else realises. The implications of this are:

  • Production economics hardly matter, and income from production is second class as it is taxable
  • High debt is almost unavoidable for new entrants
  • Forms of equity other than the farmer's own are usually required
  • Ownership of farms is becoming increasingly corporate or foreign
  • There is a (supposedly) very large life style premium in dairy farming

The Fairy is NZ agriculture's mainstream strategy of the 21st Centuary. It is not sustainable. NZ dairy farm asset values are significantly higher than those in Australia and the U.K. - sometimes double. These are not low cost or third world countries, have much greater precentages of dairy production consumed locally, and have higher milk payouts.

More Production
This strategy worked well for several generations until further increases in production required high inputs with high costs resulting in high marginal costs. This turning point occurred sometime during the 1990's. The high marginal costs are usually obscured by the use of average costs figures.

This is a good strategy to the point where MC=MR, but not sustainable beyond that. It is a strategy best suited to low cost producers.
A variation of this strategy relies on increased production being reflected in asset values despite lowering income. In the longer term this variation depends on the Fairy strategy holding.

Resource Allocation Optimisation
This strategy is rare in NZ dairying. It relies on production economics to determine optimal resource use and maximum income. It typically results in higher income from lower production. This results from a mix of eliminating the production where MC>MR and better resource use.

This combination is sustainable and environmentally advantageous, but directly in contrast to the More Production strategy.
Higher income, lower intensity farming results in considerable quality of life benefits.

Organic
This should be tending to sustainable, soft on the environment and compatable with Resource Allocation Optimisation. Less than 100 organic dairy farms in NZ. There may be real life style premiums associated with this strategy.

Commodity Counter Cyclical
All variations of these strategies are counter to mainstream dairy farm thinking, but nonetheless have great potential for a small number of more thoughful farmers particularly in situations such as the current dairy boom. The high demand for all dairy inputs including cows and the raising of almost all 2007 born dairy heifers to calve in 2009 offers a range of options.

A Conservative Counter Cyclical strategy would be to optimise resource allocation to the higher prevailing costs, reducing cow numbers and selling them at high prices to those following a More Production strategy.

An Innovative Counter Cyclical strategy would be to sell the entire herd and lease or graze off the farm until 2009 to those following a More Production strategy and prepared to pay high prices. In 2009 there will approximately the same amount of grass being grown but an extra 500,000 milking cows available at modest prices. This scenario may be repeating itself around the world. Depending on predicted payouts for 2009-2010, a range of options - some quite attractive - will present themselves.