Is dilution part of the solution?
OPINION: Despite what DairyNZ says, increasing production per cow or hectare can help to dilute costs and increase profitability.
Since 1963/64, the dairy industry's Economic Survey has tracked changes in milk price, costs, profits, debt and the market value of assets.
"Despite economic and climate challenges and new environmental requirements, farmers have increased profitability – particularly in the last five to six years," says DairyNZ chief executive Tim Mackle. "And they've done that by farming more efficiently.
"We have to make these competitive gains to sustain the industry and dairy farm businesses. The survey shows farmers are doing that, which is good news because we predict that growing environmental requirements will add financial pressure to keep farms profitable.
"It's also vital we use actual farm data in these surveys to measure and analyse the impact of any policy and regulatory change on farms and local communities."
One trend the DairyNZ 2012-13 Economic Survey shows is that the inflation-adjusted cost of production held at a constant level of around $4.70/kg milksolids for 25 years from the early 1990s.
"Keeping the cost of production in check, along with increasing milk production per hectare, has been the catalyst for farmers having a higher level of operating profit – mostly over $1000 per hectare since 2000," says Mackle.
"This has been reinvested back into farms, creating opportunities for dairy farms to grow and contribute to the wider economy and the environmental sustainability of their farms. That growth has included the expansion of dairying in the South Island, where the national herd has increased from 11% in 1990 to 38% in 2013."
The Economic Survey's first 25 years, from 1963/64, saw operating expenses steadily increase, offsetting milk price increases.
"So in the last 20 years we've ultimately improved what we do and kept costs down on-farm – this means we're better at managing pasture and feed to produce more milk. But it also means the pressure is on to research and deliver farm systems that increase profit, but reduce the environmental footprint of farming," says Mackle.
"Essentially, what the survey shows is that dairying is more successful and critical to the economy than ever before, but it has become a tougher and riskier business. New rules and regulations to farm within nutrient limits will bring more challenges and put extra pressure on our ability to stay competitive internationally."¬¬
Since the late 1980s, volatility of milk price has been a big feature and farmers have made farm system changes to cope with that, but farm affordability surprisingly hasn't changed much, says DairyNZ senior economist Matthew Newman.
"Farms are as affordable as they were 40 years ago. This means around 23 years of profit from one hectare is required to afford to purchase that one hectare of dairy land, and that hasn't changed much from year to year," says Newman.
"However, we now have more diversity in the way farms are run, than we have ever had in the past. Despite all this, farmers are still operating with higher levels of debt – with interest payment costs that have doubled in the last 10 years, despite the record low interest rates.
"This is an area of concern, as it means an additional 60-70c per kg of milksolids in revenue is required to meet the extra interest payments."
To find out more about the Economic Survey or order a copy, visit dairynz.co.nz/economicsurvey.
