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Milking the cash cows

Milking the cash cows

Is New Zealand a land of milk and money?

By Karen Silk - Karen is Westpac’s Head of Agri-Business.

Has the promised wealth of the dairy cash cow dried up? The average kiwi might think so however dairy farmers in New Zealand are very much used to focusing on the long-term. As an industry this group of hardy farmers are well used to weathering the ups and downs of uncontrollable factors. With the unpredictability of the climatic conditions and the annual payout, dairy farmers are not only patient people but resolute when it comes to business.

A couple of years ago there was a joke going around the rural community about dairy farming being so profitable that farmers were having to add new rooms to their houses just to store all the money they were making.

As the 2002/03 season comes to an end – prematurely for some whose herds have dried up – the immediate outlook is not as rosy as the past couple of seasons. New Zealand’s dairy industry faces challenges both on the farm and around the globe.

Over the last year amid a climate of global economic and political uncertainty, export prices and business confidence have fallen. A 20 percent rise in the New Zealand dollar against the United States dollar, combined with duties costing $600 million in 2000 according to the Ministry of Foreign Affairs and Trade, has furrowed many brows.

Closer to home, substantial investment in land, irrigation and genetics has seen rural debt increase to nearly $17.5 billion, while drier climatic conditions, in some regions, has shortened the dairy production season. The prospects of a reduced payout of $3.50 per kilogram of milksolids compared with last season’s $5.30, and imminent tax and other bills will see more farmers reviewing their financial situation. The payout is closer to the average payout over the past ten years, highlighting how exceptional the past two years have been.

Farmers who seem to be performing best under the conditions tend to be those who want to improve all aspects of their farm’s performance and have a plan to achieve this. Knowledge is the key to long-term sustainability. It is evident that those well prepared to weather the short-term pain for long-term gain are utilising intelligence from a variety of sources to make informed decisions about their farm.

Smart farmers are taking advantage of the relationships they have with professional advisors, for example gaining insights from accountants, bankers and farm advisors on how to lessen their tax burden, manage their cashflow and make prudent decisions on investments. Some farmers are looking at restructuring their debt to longer terms and fixed interest rates.

Some have reduced their production costs so they will account for 50-60 percent of gross farm income, by cutting from around $1000/cow to around $850/cow - or $2/kg milksolids. Others are drying off their herds early, selling off stock, dipping into winter feed or buying supplementary feed.

Looking forward, it is important that dairy farmers examine their cashflow predictions for the coming year, taking into account likely reduced advanced payments next season, to understand their cash position throughout the next 12 months.

It is clear that dairy farming in the 21st century is a complex business. It requires farm management and business skills and knowledge to cope with natural variability such as reduced rainfall and market variability, ranging from decreased payouts to a strengthening New Zealand dollar. Many dairy farms are operations on a par with city businesses and require skilled financial and business management.

Dairy farmers committed to continuous improvement are using external benchmarking opportunities such as the Fonterra Westpac Dairy Excellence Awards to reap the rewards from improved performance. The shared knowledge from events like the awards and upcoming field days will help the dairy industry move ahead.

The last two years has seen some of the most dramatic changes in the 189-year old New Zealand dairy industry. Dairying is a multi-billion dollar industry that plays a significant role in New Zealand’s landscape, lifestyle and economy. The increasing sophistication and business acumen - along with recent efforts to lift performance in all aspects of the supply chain - of the world-class industry will ensure dairy remains a sustainable and viable cornerstone of New Zealand’s future growth.

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