Growing dairy enterprises in New Zealand

The average New Zealand dairy farmer is under real pressure. Dairy NZ, the New Zealand research and advisory body, estimates that the average dairy farmer in the Waikato district, where 24% of the milk is produced, is going to make a cash loss of about NZ$150,000 (€91,000) this season.

The predicted milk price is NZ$4.60/kg milk solids (MS) (€0.19/litre) for the season but is currently sitting at NZ$3.10/kg MS (€0.13/l). Average costs of production, including interest payments but excluding capital repayments, are in the order of NZ$6.20/kg MS (€0.26/l).

Ten years ago, the average costs of production in New Zealand, including debt servicing, was NZ$4.72/kg MS (€0.20/l). Over the same period, the importation of palm kernel expeller has increased by two million tonnes, equivalent to nearly 400kg dry matter for every cow in New Zealand.

New Zealand dairy farmers have embraced palm kernel – it’s a low-cost supplement (currently NZ$170/t or €100/t from the port), milk production increases, body condition score rises and it is safe to feed in high quantities so is a useful supplement when grass is scarce.

However, the link between the increased use of palm kernel and the increased costs of milk production cannot be ignored.

It appears that for the average New Zealand dairy farmer, the opportunity to make big profits in the good milk price years was swallowed up by increased spending on supplement, and the machinery and infrastructure to feed this out. They have drifted away from what was once their competitive advantage – producing the lowest cost milk in the world from grazed grass.

The banks are busy arranging term loans to finance current expenditure on farms. Between the NZ$0.50/kg MS (€0.02/l) loan offered by Fonterra and loans from the bank, debt levels on farms are going to rise by about NZ$1/kg MS (€0.04 c/l) this year alone.

Debt levels are already high, but most farmers are paying interest only anyway – paying back capital is optional for most. Average debt levels are in the region of NZ$22/kg MS (equivalent to about €5,400 per cow). Interest rates in New Zealand have always been high but are historically low at between 4% and 6%.

But focusing on the average does not tell the true story. Not all farmers are making a loss this year. Those who have stuck with the principles of high grass utilisation are continuing to make profit, and pay down debt. Many of these farmers have grown their farm businesses substantially over the last few decades.

Farmers like Arthur Bryan, who moved to New Zealand from Cork in 1976 is now milking over 2,000 cows in the Waikato district and has business interests elsewhere. Colin Armer has expanded to 14,000 cows in the North Island and a 38% shareholding in Dairy Holdings, a farming corporation milking 46,000 cows in the South Island.

I was on farm with both of these men last week. There are many similarities between them. Both started out with little or nothing. At 18 years old, having left school at 14, Colin Armer re-mortgaged his car to put a deposit on his first herd of cows. Arthur Bryan had a deposit on a herd of cows when he left Ireland. Both men share-milked their herds for a few years before buying their first farms a few years later.

The farming principles that led to such huge growth are also similar. Both farmers operate low-input systems and focus on profit per hectare and not on production. Arthur Bryan says: “The first farm I bought was more than just a farm – it was a house and a home for my family. But the next and subsequent farms all had to stack up financially. My key focus is on EBIT (earnings before interest and tax) per hectare and on equity growth. When the focus is on EBIT per hectare, equity growth comes naturally.”

By focusing on EBIT, both Arthur and Colin have concentrated their growth in the North Island on the less favourable parts where land is cheaper. Colin has 11,000 cows on 10 farms near Lake Taupo in the centre of the North Island.

Land here is a lot cheaper than the dairy heartlands of the Waikato and Taranaki districts. Arthur Bryan’s most recent land purchase was a hill farm in Waitomo, on the fringes of the Waikato. These farms were purchased because they were cheaper to buy and while they may not grow as much grass or produce as many kilogrammes of milk solids per hectare as land in other parts, they satisfied their owner’s requirement for EBIT per hectare.

Arthur’s farm at Waitomo extends to 604ha. The farm was put together since 2008 and was originally just a drystock run-off. The most recent land acquisition was a 200ha block adjoining the drystock farm. This was purchased for NZ$13,000/ha (€8,000/ha), considerably less than the NZ$70,000 to NZ$80,000/ha (€42,000 to €50,000/ha) that established dairy farms are making in other parts.

Two hundred and twenty hectares are being used for dairy production, with the rest of the farm used for rearing 1,200 head of youngstock from Arthur’s other farms. The dairy farm is being managed by Arthur’s daughter Katie and her partner Hayden. Arthur expects the dairy farm will produce 1,000kg of MS per hectare from 800 cows (275kg MS/cow).

Production levels of 1,000kg MS/ha or 275kg/cow are well short of the industry averages, both in New Zealand and in Ireland. Similar production levels are targeted by Colin Armer. I asked Colin why he doesn’t target more production. “We have a very simple system. We run higher stocking rates and we calve a bit earlier than most people but we don’t make or feed any supplement. We only feed grass or fodder beet, even in winter. The system is based around rotation lengths. These are managed closely throughout the year. We use the spring rotation planner in spring and go on a really long rotation through the winter. This keeps our costs low.”

Low-cost production, combined with lower debt per hectare, means that EBIT per hectare is greater than the industry average. This is driving equity growth. Colin has used this growth in equity to finance expansion, purchasing more farms. This has a compounding effect.

He has also used the equity from the increased value of his farms to finance growth. Because he has mostly purchased sheep and beef farms and converted these to dairy farms, the value of these farms has increased considerably so this can be used as collateral for other purchases.

So what systems are delivering such high EBITs per hectare? Arthur and Colin are adamant that maintaining good grazing residuals are key, never leaving more than 4cm post-grazing height but regularly going below 4cm in spring. They have strict guidelines for what rotation length should be in spring, using the spring rotation planner. Summer rotation lengths are never less than 30 days and go to 40 or 50 days in a drought.

Surplus grass on Colin’s farms is used for deferred grazing, either during a summer drought or in winter. Surplus on Arthur’s farms is baled and fed out in the autumn after a drought. Neither farmer will ever supplement to produce milk. When trying to build grass covers in autumn, or reduce grass demand in a drought, empty cows and cows for culling are also sold off. Then first-lactation cows are dried off.

Both men stressed the importance of getting these marginal farms up and running as quickly as possible. Investment in soil fertility is never delayed. Infrastructure such as roadways and efficient milking parlours are never skimped on.