Tim Mackle: Low-cost grazing key to future success

Opinion

Listen to any market commentator in New Zealand or elsewhere and they will tell you we're operating in a time of great uncertainty. The speed at which we got here compared with the heady days of this time last year shows how quickly conditions can change.

Commodity prices were on a roll internationally, it seemed the world couldn't get enough of our milk and prices paid to farmers reflected that.

Now there's no doubt we're facing challenging times. We've been here before and New Zealand's dairy farmers are a resilient bunch and know dairy farming has a positive long-term outlook.

But we don't know how big the challenges are going to be, or how long they're going to last.

However, it does not remove our need to farm sustainably and efficiently or lose focus on labour issues.

Right now things are stacked against us. The next couple of years look pretty tight in difference between costs and payout.

Although the forecast payouts - while lower than the heights of last season's $7.60 to $8 - are still good historically, costs have skyrocketed over the past year with the average farm expenses from DairyBase (DairyNZ's national dairy farm business database) participants increasing by $1.10 per kg of milksolids.

We are forecasting these costs to ease in the next 18 months.

We don't know how long the global downturn will continue, but farmers need to be focusing on costs not just the predicted downturn.

As a dairy exporter, we have to be conscious of our cost position because whenever demand for dairy products starts to level off globally, that's when the crunch comes in terms of competitiveness versus countries such as Chile and Uruguay, where dairying is expanding - in part because of New Zealand expertise.

As long as we have strong demand for dairy products relative to supply, the difference between the cost structure in New Zealand and emerging countries is masked, but if demand falls, that's when we end up competing on price which means we have to be far more agile in our ability to produce milk cost effectively.

The medium-term outlook for protein demand is good, especially when you consider the world population is expected to be nine billion by 2050 and there is a large, underlying momentum for development around the world.

But there are risks that demand for New Zealand's dairy ingredients will be curtailed by demand for substitutes (eg, soy) and also for local, fresh milk. Our location means we cannot get fresh milk to other markets.

In terms of New Zealand dairy farming that is a real threat. This means we have to keep our production systems cost-competitive, whether to compete with other lower-cost protein sources or as a basis for profitable value-added processing.

We have to consider what adapting to the present market volatility means for our farming systems. We don't want to be playing catch-up to market conditions. New Zealand dairy farmers will be positioned far better if we can meet whatever market conditions may be thrown at us.

This means keeping the core of our systems to low-cost grazing, while developing opportunities to add value to our milk over the medium-to-long term.

The peak prices of last season, while good for us short-term, may have softened demand and caused a supply response from producers; and then came the slowing of economic conditions globally.

The weakness in the New Zealand dollar has buffered that to an extent, but we cannot rely on currency fluctuations as a saviour.

Dairy farmers know farming is volatile but what we're seeing now is that the volatility has increased, and the frequency of peaks and troughs appears to be increasing.

Given the volatile global economy and lack of credit, high levels of debt servicing is a risk for farmers and focusing on cash flow will be crucial. Maximising operating profit is key to managing debt levels.

Labour is another issue for New Zealand dairy farmers and DairyNZ is working both with the employers, in helping them know what best practice is, and with employees, helping attract new blood to the industry and funding training initiatives, such as AgricultureITO.

It's the good staff who are going to help maximise profit in the short-term and deliver on sustainability, and we have to position ourselves well by continuing to attract good people to take advantage of the global recovery when it occurs.

* Tim Mackle is chief executive of DairyNZ.

* Owen Hembry returns in May.