Being average is not good enough

Also critical are maintaining perspective, evaluating the role of diversification or income smoothing for more sustainable business plans, understanding the potential impact on balance sheets and responding to the dynamics of increasingly complex international economies.

The first priority must be to keep events in perspective and as much as possible stay optimistic. It’s essential the current negativity doesn’t become a self-fulfilling prophecy. It seems the market fundamentals driving confidence in dairy markets to date remain intact. 

Right now the dairy sector is hampered by media overexposure and is not helped by negative sentiment from farmers themselves about the management of their cooperatives. No doubt things could have been done better and people need to be accountable. But there is little to be gained from whingeing or worrying about who’s to blame or what will go wrong next.

Solution focused businesses need to isolate themselves from this and build their strategy on credible industry comment, seek out well-informed advice and restrict their diet of headline grabbing news. 

The next step is rigorous analysis to evaluate scenarios and compare the current strategy with ‘plan B’ options. 

One alternative could be to develop a ‘price smoothing’ philosophy either at industry or individual farm level. In my view the current Fonterra interest-free loan ‘support’ scheme is in reality a price smoothing mechanism. While this will buffer the downturn it will also dampen the recovery. If applied over the last five years, when milk prices have averaged $6.50/kgMS, a more stable and sustainable trading and capital environment may have eventuated.

A second option is to recognise the benefits of diversification. It’s all very well to participate in a rock star industry. However, risk is magnified when an operation is built on just one enterprise. Yes, there are economies of scale by concentrating on one farming system, but this means greater exposure to economic, bio security and market risks. 

Options to create diversity must now become a priority. Alternatives such as dairy beef, cropping, horticulture or off-farm investment could help balance the portfolio. These may offer more than economic advantages. They have the potential to improve environmental sustainability and reduce compliance costs currently impacting dairy operations.

Finally, industry forecasts need to be scrutinised to ensure assumptions for budgets and business plans are soundly based.

Despite the collective efforts of banks, government agencies, processing companies, exporters and experts across the industry the anticipation of the recent change in market conditions has been poor at best. Many will, like me, have attended conferences and presentations describing positive prospects for our industry. Most, like me, will be wondering how the investigation that underpinned that expectation could be so wide of the mark.

While some of the contributors to an oversupplied market, such as the removal of European production quotas, were widely anticipated, others could not have been predicted. 

Disruptive events such as conflict in the Ukraine and embargoes causing product to be diverted to markets supplied by New Zealand dairy companies are more difficult to foresee. Technologies that have contributed to a step change in the availability of oil, consequent declines in the cost of feed combined with reallocation of crops no longer needed for biofuel to dairy rations have accelerated production in some key milk producing countries.

These types of changes can occur quickly. Their randomness means diversification and planned risk management have become entry-level tools for the modern farming business.

Yes, these circumstances are challenging. They also offer real opportunity for best practice operators who will benefit from an agile, informed, proactive business culture underpinned by dedication to capturing the benefits of technology and relentless focus on best practice.

This is without doubt an environment where average will not be anywhere near good enough. Expect a lot more change and a lot more opportunity as a result.

• Kerry Ryan is a Tauranga agribusiness consultant. Email him at www.kerryryan.co.nz.