Dairy farmers urged to plan for volatility

Dairy farmers need to strengthen their business structures by rebuilding equity in the next price upcycle and further develop flexible production systems that can easily reduce costs when prices fall, a new report from Rabobank says.

The severe price downturn marked the third trough in the past decade and the sector must plan for inevitable future volatility, report co-author and dairy analyst Emma Higgins said.

"Tough decisions will need to be made in the next upward cycle. Farmers will need to make a careful and considered decision whether to put some debt to bed or chase a profit margin through increased investment and spending.

"Ultimately, New Zealand dairy farmers need to be the most cost-competitive among their global peers in order to be one step ahead of the price curve in both good times and bad. The experience they have accumulated in recent downturns should help them do just that,'' she said.

New Zealand's dairy industry had a greater need to build resilience compared with other milk-producing countries, due to its significant exposure to global markets and the resulting price volatility, the report said.

"With a minimal ability to sell milk into more stable and often higher returning local markets compared with other exporting nations, the New Zealand industry is largely at the mercy of global market influences and therefore subject to greater exposure to volatility.

"Because the majority of dairy product produced in New Zealand is exported, both positive and negative shocks affecting the global dairy industry are felt more keenly here,'' Ms Higgins said.

With New Zealand dairy debt having steadily increased from $11billion in 2003 to a record high of $39billion, the industry now accounted for 68% of total New Zealand agricultural debt.

According to the report, the "average New Zealand dairy farmer'' entered the current prolonged downturn highly geared and the average debt per kg/MS remains near record levels at $20/kgMS.

As a comparison, equivalent Australian (Victoria) dairy farm debt was 65% lower, at around $NZ7/kgMS.

A Dairy Progressions Pathways report, undertaken by AgFirst recently, showed sharemilking remained a viable career path in the dairy industry.

Sharemilkers continued to make up 35% of the industry, but the number of traditional herd-owning sharemilking (HOSM) agreements had declined from 25% in 1995 to 17%.

That could be due to milk price variation and the challenges it presented for sharemilkers and farm owners.

The number of farmers planning to buy a dairy farm after sharemilking had also dropped from 70% 20 years ago to 47%.

Federated Farmers sharemilker farm owners' section chairman Tony Wilding said the report showed opportunities for progression still existed but the career pathways had been changing and would continue to do so.

While the number of HOSM was slowly declining, the scale of them had increased and other options to invest in cows and land in equity ownership were continuing to emerge, he said.

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