New Zealand dairy farmers must shore up their businesses against likely future volatility in returns, says Fonterra chairman Sir Henry van der Heyden.
"Our future as dairy farmers in New Zealand, our international competitiveness and this country's future - it all depends on how we respond to the more volatile markets," he said today at a farmer forum at Mystery Creek, near Hamilton.
"Volatility is a fact of life, a constant - we better get used to, work with it - and change how we run our farming businesses," Sir Henry said. "Those who don't might find it tough going in this new world."
Global dairy consumption growth was expected to recover to around 2 percent by the end of this year - adding demand equivalent to Fonterra's total annual production every year.
"Strong demand means prices should remain well ahead of long-run averages," he said. "But with much more volatility".
Sir Henry said the volatility was already evident with month-to-month changes of milk powder prices increasing - in 2006 monthly price fluctuations were typically around plus or minus $US50 a tonne, while today farmers often saw movements above $US500 a tonne.
Whole milkpowder prices at Fonterra's monthly internet auction jumped around $US600 in April, a 21 percent lift to $US3969/tonne, a price not seen since August 2008.
At the time, global dairy trade manager Paul Grave said Fonterra did not know whether the jump in prices was a blip or a trend, and described the market as "impossibly difficult to predict".
The latest auction today consolidated the new level with only a drop of about 1 percent.
Sir Henry said that big government-held stockpiles for USA and EU government support programmes, supply shocks had resulted in increased price volatility within Europe, the US and globally traded dairy markets, and made forecasting a "real challenge".
"For farmers it's hard to budget and get the most out of your farm when you have to factor in plus or minus $NZ2 per kilogram of milksolids," he said.
In the season just ending, Fonterra farmers are expecting the co-operative's second-highest payout $6.10/kg - up 17 percent on last year's $5.20/kg - likely to be the equivalent of $850,000 for the average farmer.
Sir Henry warned farmers not to stray too far from their core strengths of growing grass and turning it into milk.
"Our ability to grow grass and turn it into milk more efficiently than anyone else is our point of difference," he said.
Fonterra farmers needed to concentrate on the fundamentals of pasture-based systems, he said in a warning apparently targeted to increasing numbers of farmers who have been boosting their milkflows by feeding dairy herds relatively expensive supplements or even planning factory-farming operations like feedlots or "cubicle cows".
Sir Henry said there were two key threats to the nation's dairy farmers.
"One is other people being able to grow grass and produce milk more cheaply than we can," he said. "The other risk is if we get too far down the path of adopting farming practices that make us uncompetitive."
Supplements and imported feeds had a place on New Zealand farms, but their use had to be matched with a precise understanding of the impact they had on the business's financial profitability,
The need for business discipline had never been greater, and dairy farmers should have rigorous planning, forecasting and reporting processes. They should also be forging stronger relationships with their bankers and lenders, and using specialised advisors to help manage cashflows efficiently.
"In times of uncertainty and volatility - the more strength and flexibility we have in our farming business the better," Sir Henry said.