Back to basics will avert losses

Trevor Hamilton, who owns farms in the North and South Island, says the worst thing that happened to the industry was the $8.40/kgMS payout.

He says in the present era of market volatility and low payouts, farmers need to check their balance sheets and delve into their cost structures.

Hamilton says farmers need to get costs down to around $3.50/kgMS.

"If you take the Fonterra milk price and average that over the last ten years, it's about $6/kgMS. So I believe that in the medium term, as long as you have a sound business at around that $6, you are probably ok; but if not you could well do with an assessment of your business," he told Rural News.

Hamilton says dairy companies such as Tatua and Westland Milk Products, which produce a higher percentage of value add products, are more shielded from the volatility of the commodity market.

Former Fonterra director Greg Gent believes that grass will become fashionable again as the effects of lower dairy prices persist. This is a positive effect of the current crisis.

"Our comparative advantage in the world is grass, and not all dairy farmers moved away from that. Many stayed with straightforward farming systems. Moving back to greater use of grass and relying less on supplements will make for a stronger industry."

Gent says in the days when New Zealand was getting $US5000/tonne for milk powder, any farm system could work and make money. But now the fallout from that is starting to show.

He says the present downturn will prompt farmers to look at how they handle risk and perhaps to build more resilience into their businesses -- a positive consequence.

Another former Fonterra director, Colin Armer, says clearer market signals would have helped farmers manage their way through the present difficult times.

He says while the low dairy prices can't be blamed on Fonterra, some clearer signals about what was happening would have been helpful.

Armer says to restore profitability to the industry there must be a move back to some basics, such as the volumes of production coming off farms and the cost of production.

"There will have to be a reset and some costs taken out of the business. We don't know how long this oversupply situation will last, but in the meantime people can't go on banking losses."