Agribusiness: Farmers look at trimming costs

Phillip Bell, Auckland Federated Farmers Dairy chairman.

There may just be a ray of sunshine among the gloom of falling milk prices, writes Glenys Christian.

A slow-down in dairying's growth as a reaction to lower international prices could be a good thing for the industry in the long term, says Auckland Federated Farmers Dairy chairman, Philip Bell.

"We've been in a long growth spurt where we've seen cow numbers rise in a way we've never dreamed of. It may be a good time to see a steadying.

"It's forced on us with China and other world markets in a state of flux, but it may give us a bit of a breathing space," he says. "But taking the foot off the accelerator is hard when you're such a large part of New Zealand's economy."

Bell says the effect of the lower dairy prices is really starting to bite and it's becoming more evident there will be a slow recovery.

"In the new year there were some good increases in GlobalDairyTrade auction results and things were looking favourable."

But recent falls, following two drops in the Fonterra forecast payout for the 2014-15 season and a low prediction for the current one, now sees farmers really focused on trimming costs inside the farm gate.

"It's going to be a very difficult season until there's a correction in world markets," Bell says. He milks 200 cows on an 80ha farm at Clevedon, south of Auckland, which has been in his family for 151 years.

Reasonably favourable cull cow prices would mean it is tempting for farmers to cut stock numbers and concentrate on the higher producers in their herds.

"They're making sure that every cow they milk is a good one."

Supplement use will be cut, but Bell is quick to point out that successive droughts in many areas left farmers with little choice than to use expensive feed options. Some may not winter their cows off-farm, as usual.

"Costs have jumped quite a lot, in animal health for example, so they'll be looking hard at those things," he says.

Farmers are committed to having good stock health and that's an area they would still see as priority for spending.

It would be very difficult to deal with a downturn like this on our own. That is why we need the co-op.

Philip Bell

Bell says it remains to be seen whether smaller farms might go out of dairying due to the lower returns, or whether larger scale operators, run on more corporate lines, would look to invest.

Most Fonterra shareholders are like him and committed to the co-operative, Bell believes.

"It's where their destiny lies and it would be very difficult to deal with a downturn like this on our own. That is why we need the co-op."

But he wonders whether shareholders have been asking the right questions of directors and management.

"Have we received provable answers? There have been a lot of programmes to improve things, but they don't seem to have worked."

Fonterra's response often seems to be to come up with a new plan, he says.

"But what happened to the ones in the past? A lot more questioning is needed. Farmers wanted to see outcomes.

"It's disappointing that Fonterra's communication isn't as good as it could have been," Bell says.

Fonterra's recently announced plans to reduce its workforce made farmers ask why the staff were there in the first place and why numbers had grown so large. And while programmes like Milk in Schools sounded a good idea, farmers were now questioning their effectiveness.

When it came to moving up the value chain, Bell says this was never going to be a fast process. Farmers tended to think about an increase in branded products but often there were better returns for ingredients.

It's hard for individual farmers to find out how successful new products have been because this information wasn't revealed in Fonterra's balance sheet. And they were also questioning how well Fonterra was handling local market sales.

Bell says that before Fonterra's formation, dairy farmers felt a lot closer to their dairy company's business. In difficult times they could ring a local director and have a frank discussion. Now Fonterra directors are bound by much tighter rules when it comes to information they could give out.

Fonterra Shareholders' Council has worked well in dispersing knowledge to them, Bell says. "But they're not directors, so they can't be party to real decisions. It's directors who farmers want to speak to."

He is hopeful that the present review of the Dairy Industry Restructuring Act, under which Fonterra was formed, will create a fairer playing field, after the last one ironed out some perceived problems.