Wednesday, August 29, 2012

Abigail Vickers; The Type Of Person The Dairy Industry Needs

The May 2011 issue of the Dairy Exporter has an article on Canterbury/North Otago Dairy Trainee of the year, Abigail Vickers.

At the time of the article, Abigail was 25 years old and in her second year as a dairy assistant. She has a goal of owning her own small scale organic farm, that doesn’t necessarily have to be involved in dairy. She already has 5 cows which she leases out, but would like to grow the herd to around 50 cows.

She entered the dairy industry to learn as much as she could about pasture management.

What a great example of a driven young person who has their act together. How many second year dairy assistants have started building up their herd? I don’t know many herd managers who have started building up their herd? She is an example of the type of people the dairy industry needs.

While she’s enjoyed working on both farms, she’s now looking at trying another farming sector to give herself some more time to pursue interests outside of work.
Here’s an example of a member of generation y, who the dairy industry dearly needs. But she wants more time to do things outside of work. One of the main characteristics of gen y, is they value time for activities outside of work. Obviously her two previous jobs do not allow her the time she would prefer. So she’s off to look around at other opportunities.

I wonder if she will return to working on a dairy farm. I bet she will continue to build her herd while working in another sector and then she’ll go dairying with her 50 cows and she'll do it her way. She’ll build the farm to suit her requirements and priorities.

I'm back on my soapbox preaching the same old sermon. The hours worked on dairy farms are turning off the best and brightest people.

If anyone knows Abigail, I’d love to hear how she is getting on.

Monday, August 27, 2012

Dairying With Gen Y

We can take this whole generation y & x thing a bit far. The characteristics that the researchers give us about the motivation and focus of particular generations are generalisations. There will be many members of Y-generation who don’t display any of the traits they are supposed to have. But when you read the list of traits and attributes I can’t help but believe them to be true.

So why bother with Gen Y?

Firstly, we have no choice. Someone needs to work and take over the family farms. If they don’t, then the farms will no doubt be run by corporate farmers, or even foreign investors (shock, horror). Even then they will need to employ Gen y to work on the farms anyway.

Secondly; the agricultural sector is going to get bigger over time as the global demand for food increases. Farmers are going to need more staff. Farmers are struggling to attract adequate numbers of staff currently.

Thirdly; y-generation are our children and grandchildren. We created them and really made them the way they are. So the least we can do is employ them, and the generation following gen Y will probably be worse!

I used the word “worse” in the last sentence, that implies that a gen y person is less productive or not as good as a previous generation. I don’t think that is the case, they are just different.

There needs to be a bit of movement from both sides. Gen y need to learn that the real world is a bit brutal and results count. Lofty ideals won’t get anyone anywhere, but the older generation need to move as well and they need to change the way they run their businesses and conduct themselves to suit the differing attitudes and expectations. The farmer who is a man of few words with the “I’m the boss, now go and do this and then do that” approach is not going to work well in the future.

If we look at professional rugby. The coaching styles and cultures have changed from 20 years ago. I wonder if Laurie Mains, or Grizz Wylie would be successful coaches in today’s game. You never heard the term “player power” in the 80s or 90s.

How do we fit y-generation into agriculture and specifically the dairy industry?  

Well I don’t think it is too difficult, because the environment that gen y appreciates is one that all generations will benefit from.
The main characteristics of Generation Y are:
Relationships are important                                                        Work collaboratively
Hands on learning style                                                                 What to be treated as equal
Like encouragement                                                                      Like consensus
What to be “involved”                                                                   Regular promotion/progress
What responsibility

Essentially they want to be treated as a “work mate” not an “employee”, they want to work together to solve issues and reach a consensus. They want to be involved in the decision making process.

So the employer really needs to be committed to ensuring they foster a work culture that incorporates the above characteristics.

An employer with the right attitude and the following initiatives, are really all that is required to make farming gen-y friendly.

  • Give staff responsibility.
  • Include the whole team in weekly meetings
  • Allow staff to teach others
  • Reduce hours of work.
One thing the dairy industry is able to offer, is fast progression. A new comer to the dairy industry can be a herd manager in two years, if they have the willingness to learn.
Even the newest employee can be given responsibility. Give them the job of keeping the teat sprayer filled or the cowshed walls clean. These are very simple jobs, but they give that junior person a bit of an identity. Make someone the “electric fence monitor”. Give them a fence tester and make it their job to ensure the power does not drop below a certain level. When it does it’s their job to fix it or delegate it to be fixed. Train a staff member to treat sore feet, and then make sore feet their responsibility. You then find this employee starts taking an active interest in all things that effect sore feet, from the lanes/races to stones on the yard. Another good example is the effluent spreader, make it one employees job to be responsible for it being moved and set up correctly. Evan though everybody monitors it and moves it, this particular employee has overall responsibility for it and they teach the other staff how to operate it.
Of course whoever is in charge is still monitoring these things, but the employee feels like they have a special role or job.

Proper team meetings
Most farms already have team meetings, but I suspect these meetings take place in the tanker track standing up, and the boss says “this is what needs to be done, employee A do this, employee B do that”.
A formal meeting held once a week inside for a duration of 1-2 hours is what I’m talking about. They follow a regular structure and the employer or bosses role is to be a facilitator.
At these meetings the employees accounts for their particular responsibilities. The employee assigned to the “electric fence monitor” role, gets up and talks about where the shorts were last week, if any and outlines what the staff need to look out for or check. The person responsible for the effluent spreader does the same. It’s their job to pull up other employees on mistakes or improper technique etc, not the employer. Of course the employer can direct the employee on aspects they want them to talk about prior to the meeting.
Pasture management is another good example. The employer will already know prior to the meeting what their plan is, such as move cows onto a 15 day grazing round, shut up paddocks 7 and 8 for silage.
But the way to approach this is to facilitate a discussion amongst all the employees to reach your intended plan. The boss asks questions, “whats our average pasture cover?”, “how much are the cows eating currently?”, “how fast is the grass growing currently”. “well it looks like we’re growing more grass than we are eating”, “I wonder if we should shut up a few paddocks for silage?”; “what do you think?”. While this discussion is taking place, someone should be writing all the figures and doing the calculations on a white board. This allows every member to learn how the farm is run.
All these questions are to encourage the whole team to take part in the discussion. It also makes them feel like they are directly influencing the management decisions. By giving each team member areas that they are responsible for, you are giving them responsibility and significance. By conducting a meeting where everybody is involved in every aspect of the business, you are also training the staff and making them aware of all that goes on at every level. This is a benefit for the long term.

Staff become the trainers
They say, the best way to learn something is to teach it. Let the staff train each other. It makes the trainer feel important and engaged, the other staff are more likely to listen. It also forces the teacher to think about what they are teaching more.
Let’s say the person in charge of the effluent irrigator is the 2IC. Approach him about a week prior and let them know that you want them to conduct a training session on common mistakes people make when shifting the irrigator. Write down what you want them to cover and then leave it up to them. Of course the boss is present at the training session to add to the training and ensure everything is covered.
What is happening is you are engaging your team members to own a portion of the management of the farm. This gives them significance and engagement.
 This stuff already happens on a lot of farms. But it’s important to ensure these initiatives are not rushed and are given the same importance as, say milking the cows. These initiatives won’t work when everybody is rushing around trying to get everything done or the team is going from one fire to another, which brings me to my last point.

Reduced hours of work
My experience on a dairy farm is, you rush all day and at the end of it you have never done everything that you needed to. If a team have just worked a 70 hour week and they then get asked to prepare a training session on the effluent irrigator or how to operate the silage wagon “when you have a free moment”. The team members probably won’t be too keen to jump on board. If the team meetings are rushed because everyone knows that by sitting around talking for two hours, it means they will be home two hours later. Then they are not going to buy into all this.

The task of focusing on the team is just as important as feeding the cows or milking the cows. Dairy farmers are still operating in the Stone Age when it comes to human resources. What I’ve outlined above is not “way out” or radicle thinking it’s just what businesses in town have been doing for the last 20 years.

An owner operator dairy farmer, with an 800 cow farm will have an asset base of approximately 7-10 million dollars and a turnover of 2.1 million dollars a year, but they operate an HR policy in line with a fish n chip shop.

If dairy farmers want their views to be heard and respected by the New Zealand public and want young people to view farming as being a professional career, then they need to actually be professional. Their are many top operators out there in the industry but they are the exception.

To conclude; staffing on dairy farms is a huge issue now. Employing staff from the Philippines to fill the gaps is a band aid fix. It does not address the core issue, which are people don’t want to work on dairy farms. The y generation with their “extra” needs are not going to be any different.

Friday, August 24, 2012

Facebook, Groupon. I'll invest in Agriculture Thanks

I have just read this article. I'm no investment guru, but why was I not surprised at the fall in share price of Facebook. Groupons share price is doing the same. I was shocked that Facebook purchased Instagram for 1 billion dollars!
It all comes down to the view that attention or eye balls on your site or app is worth $. Twitter is the latest company trying to figure out how to turn the eye balls into some sort of revenue.
At the end of the day, people can have their GPS enabled socially connected apps, they can be facebooking and Tweeting each other while playing Angry Birds. But it all becomes pretty insignificant when you haven't eaten for 2 days.
That's why agriculture will always be a great investment. We live in a time where most of us have too much food. But the future looks good for agriculture as food demand increases globally.
The problem is the great returns that can be made in farming are deminished by the interest bill required to own land. Land is seen as safe and a "blue chip" place to park money.
My feeling is to make money in agriculture, its best not to own land. The money is in the processing and marketing.
Ill be spending the rest of the day planning how I can be like Sam Morgan and launch a tech startup, which I can then sell for hundreds of millions of dollars. Then I can afford to be a hill country sheep farmer.

Wednesday, August 22, 2012

Unemployed Y- Generation. What an Opportunity for the Agriculture Sector

Brian Gaynors column in the Herald, this weekend addressed youth unemployment. Brian was saying that baby boomers are staying in employment and not retiring as previous generations have in the past. The affect is these boomers are retaining jobs which makes it difficult for young employees to find employment. The column has caused quite a discussion, with 85 comments as I write. Many baby boomers seem to be taking exception to what Brian says. 

Whatever the cause, we can't ignore the high youth unemployment rate of 17%. That's for people aged 15-24. People aged 15-19 account for 27% of NZ total unemployment.

Long periods of unemployment in the early part of working life has been shown to have a profound affect on people and leave a "wage scar" that stays with them for the rest of their life.

When I look at these figures I think, what an opportunity for the agricultural sector! 

We read about 1200 applicants applying for 200 positions in a supermarket. Surely the agricultural sector can offer so much more than stacking shelves and swiping bar codes.

Professor Jacqueline Rowarth writes a column in "Primary Magazine". In the Autumn issue she addresses generation Y, those born between 1978 and 1994. (As I was born in 1978, I'm a little shocked to find that I'm considered gen y!) 

As a group, these people have been parented with much more attention and praise heaped on them. As their parents strived to give them a better life than they may have had. Y-generation have grown up in a time where prosperity as prevailed throughout their lives.

As a result they have a lot of confidence and have high expectations.

Jacqueline references an american study that showed,
Gen y list "work life balance" as the number one career goal. They believe they have a high work ethic but there appears to be a difference of 30 hours per week between what a baby boomer and a gen y consider to be an "acceptable working week". 
Read my previous posts here and here.

Although work life balance is rated higher than income, gen y still believe they are entitled to a high income. 

Jacqueline goes on,
"members of y-generation do not believe they need to choose between having a balanced lifestyle and professional success. They want and expect, to be able to have both. In fact they think they deserve it."

Those attitudes are likely to be completely opposite to what your average baby boomer farm owner believes to be true. Baby boomers were brought up by parents who lived through the great depreciation, and two world wars, in a time where progression was much slower. "Work hard and do your time" is what I imagine the baby boomer motto to be.

Y-generation could be explained as "have your cake and eat it too". 

Jacqueline continues, 
"they want responsibility (although they have little experience) and challenge (which implies effort and persistence). But they also want quick rewards and they want to be valued "overtly". 

Y-generation expect to be promoted quickly and they want to feel included in the decision making processes. They love collaboration and interaction and consensus. They love to share ideas. They have a hands on style of learning. They value relationships and purpose more than money. They want to be part of something bigger than them, they want a cause to be part of. They value time over money so they can have a life outside of work.

Y-gen think short term where as the parents of the baby boomers were very long term thinkers. Many would stay in the same job or company for their entire life and then die 2 years after retirement. Gen-y have no such desire to stay in the same job for  
5 years let alone an entire working life.

Y-generation make up 21% of the NZ population. If agriculture is to attract this new generation then it needs to adapt to them. It doesn't matter if gen-y thinking is"unrealistic" or "away with the fairies". This is the way they are.

So why are so many unemployed? Maybe its partly due to baby boomers staying in the work force longer, maybe its baby boomer employers who prefer older employees who they "understand" better. Maybe its because gen-y are their own worst enemies.

Either way it is actually the responsibility of the previous generation to enable the next to progress. The boomers and gen-x need to adapt to gen-y to allow them to progress and gen-y need to be shown (in a gen-y way) the reality of how the world works.

I believe its the y generation who will cement NZ as the leaders of high value agriculture. I think they will take the innovation and productivity gains of the previous generations and combine it with their creative, connected, collaborative attitudes and begin telling the NZ story in some different ways.

So we have 21% of the population who are in low paid jobs or are unemployed. What a wonderful opportunity to attract them into agriculture.

All we need to do is create a work environment where they can collaborate with each other all day and get all touchy feely, allow them to make all the decisions, while giving them plenty of public praise and encouragement. We simply need to ensure that they, feel like they are saving the planet,while developing their skills. We need to allow them the flexibility to have lots of time off farm, while working less hours and getting paid heaps.


No sweat!

Thursday, August 16, 2012

Farmers Outstanding Work Ethic Results In Long Hours For Employees

I've blogged a bit about the high hours worked on dairy farms and the employment conditions. To summarise I feel that the high hours worked by dairy staff is the single biggest deterrent to retaining people in the industry.

But I want to be clear that the high hours worked are generally not the result of employers deliberately trying to take advantage of their staff. Its more a matter of dairy farmers expecting their staff to work as hard as they do or have done in the past.

If every New Zealander had the work ethic of your average dairy farmer, then the countries productivity would be a through the roof.

The dairy industry has allowed people to move from employees and into self employment via contract milking and sharemilking. Sharemilkers build up their businesses by starting out with a small amount of capital , which they use to buy some cows. They bank the profit from the first year and buy more cows and soon move onto a bigger sharemilking position. These cows have some heifer calves every year which adds to the size of the herd as well. The general goal over time has been to build up to a large sharemilking position bank the money for a few years and save for a deposit on a small farm.

The quicker a sharemilker can get to a economic size herd, the sooner they can get into farm ownership. So if you can drop a labour unit, you save $35,000 per year. If you value a cow at $1,800, then $35,000 can be used to buy 39 cows (borrow 50%). 39*380 kgms*$5.50 payout = extra $81,500 in revenue.

Its this attitude that has seen generations of young dairy couples across NZ working hard to grow their businesses and reinvesting the profit back into their business. This is a great thing.

A culture has developed throughout the industry of long work hours. The sharemilkers of the past who are now farm owners, can sit on their verandahs sipping gin and tonics while they watch their current sharemilkers working like crazy, and they think nothing of it. Because they did the same thing when they were younger. Its just the way it is.

I don't have an issue with that. If you are self employed then you can work what ever hours you like. Its your choice and theoretically you will reap the rewards of your work via increased savings, growth or value of your business/asset.

The problem arises when self employed people expect employees to work the same conditions as they do. As the dairy industry becomes more corporatised and farms get larger, a greater proportion of the dairy work force are employees. 

The difference between an employee and a self employed person are large.

A self employed person benefits from the increase in production or the cow price or an increase in the payout. Likewise they bear the brunt of decreases as well. They take the risks and the extra responsibility  and hopefully reap the rewards.

An employee only has their time in which they can be remunerated. It has no effect on them if the payout or production is up or down. They can take their labour anywhere they like and at any time (generally right at the end of calving). But they get 4 weeks paid leave, sick leave and they are supposed to get a minimum hourly rate.

The attitudes and goals of these two types of people are very different. Many employees find the financial risks and responsibility of being in business too great and prefer the security of paid employment.
On the other hand many self employed people view relying on someone else to provide your income to be risky.

Its different attitudes and world views. One is not better than the other, just different.

A very common view point expressed by farmers when the discussion of employment conditions are mentioned is that, employees may work hard and long hours but the dairy industry gives them the opportunity to progress up the system. That view is of a business owner thinking from their own perspective. The problem with that view is more and more dairy position s don't offer that opportunity and more employees are not looking to move up the dairy ladder, they just want a good job that they enjoy to support their family.

As the dairy industry relies more and more on employees rather than self employed share farmers, the dairy farm employers need to recognise these differing view points and provide working conditions that appeal to employees.

Tuesday, August 14, 2012

Great Little Co-Op

Great example of how Co-Ops give power to the producer. I love how these guys produce the raw product, process it and then sell it too. They control the entire value chain.  
You've got to give credit to the founder of the Co-Op. What a selfless guy. 

Hat tip to 

Sunday, August 12, 2012

Sir Paul Callaghan & Fonterra's Revenue Per Employee

Sir Paul Callaghan gave a presentation called New Zealand: A Place Where Talent Wants to Live. His main point was that many of New Zealand’s successful companies meet very small niche markets that are often very specialised. But these companies dominate this very small niche globally.
Part of the talk was to compare New Zealand companies by revenue per employee. The slide below shows that in order for New Zealand to stay at its current level in the OECD, we need companies that earn at least $120,000 per employee.

So if we invest in the wine and tourism sectors then we will get poorer as a nation.

Food Manufacturing achieves the required earning per employee of $120,000.

The manufacturing sector does well and earns around $240,000 per employee.

Fisher & Paykel Healthcare are doing well with $290,000 per employee.

Right at the top we have Fonterra with a very healthy (by NZ standards) earning of $350,000 per employee.

This got me thinking, how does a commodity producer have a higher revenue per employee than a high tech design company like F&P Health Care?
I would have thought that a company with a high revenue per employee, would have employees that were highly trained, working on high value design/research type jobs that generated high margins for the company. F&P Healthcare seem to fit this stereotype of mine, but Fonterra certainly doesn't.

What does Sir Paul mean by “Fonterra”? Is that just Fonterra employees or is that Fonterra’s supplier farmers as well.

Fonterra has about 9,500 employees and its 10,500 shareholder farmers employ approximately 32,000 people on their farms. That makes 41,500 employees in total. Fonterra’s revenue for the year ending July 2010 was 16,726,000,000. That equates to $403,000/employee which is higher than the $350,000 quoted in Paul’s graph. But it’s in the ball park as we don’t know what year’s figures Paul used. So I’m comfortable that “Fonterra” means Fonterra’s employees and their dairy farm employees as well.

To me, the figure of revenue per employee is an indication or measurement of how efficient each employee is, but it is also an indication on how much value each employee adds to the company. High tech research and design type jobs are well paid but they also generate high margins for the company.

Fonterra basically sells milk powder, which is a basic commodity ingredient to food companies around the world, who then process the powder into value added products like baby formula and chocolate. Fonterra sits toward the bottom of the value chain.
What this graph says to me (and tell me if you think I am wrong) is that a co-op filled with farmers who employ unqualified people to throw cups on cows add more value than the technically skilled, high tech manufacturers at Fisher & Paykel Heathcare.
We keep hearing how Agriculture won’t make NZ rich as it does not create high enough revenue or well-paid jobs, but this graph disputes that premise.

We need to be clear that revenue per employee is not an indication of the amount each employee is paid, but rather the value that the company earns per employee.

A high revenue per employee means one of two things; either milk commodity prices are very high resulting in a high revenue or dairy farmers are very efficient with their labour and have quite a low number of employees. As I've pointed out earlier on my blog the hours worked by dairy farmers and their staff is far higher than most "city" businesses.

So I'm leaning towards the theory that while Fonterra's revenue is significant, the revenue per employee measurement is higher than it really should be because most dairy farms are understaffed, in my opinion.

I'm also prepared to admit that I may be drawing a bit of a long bow with this reasoning, but it got me thinking. Hope it gets you thinking too.

Wednesday, August 8, 2012

Co-op vs Corporate

18 months ago I found myself feeding a baby at 2 am in the morning. This is when I first read James Parsons Nuffield report; SupplyChain Relationships and Value Chain Design. James is a director of Beef & Lamb NZ and I went to Lincoln with James but I doubt he remembers me.

I found myself at 3:30am last night feeding the latest arrival to our family, and I re-read James report again.

This paragraph jumped out at me.
While in the UK I was fascinated by one of the retailers’ latest trends. All the big retailers now employ ‘Agricultural Managers’ who are charged with building relationships with producers. They do this through developing producer groups, similar to the Waitrose model for lamb and are pitched to producers as being the ‘Collaborative Value Chain’ model covered in Section 2. I would liken it more to a wolf in sheep’s clothing. To lure these producers into the fold a carrot is dangled in the form of a price premium. Prices are calculated on a ‘cost of production plus model’, and benchmarking of individual producers’ costs and production is carried out by the Agricultural Manager. A focus on costs and benchmarking is a good thing on its own, and the producers are finding ways to improve, but here is the kicker: the retailer is gathering a huge amount of information it previously never had access to. As one Agricultural Manager stated proudly to me about a producer group: “I can tell you anything you want to know about the costs of production of any one of our 300 dairy farmers.”
That paragraph is very topical at the moment, as we watch the situation in the UK, where the dairy farmers are being squeezed by the supermarkets and processors. It’s an example of how the farmer has being relegated to the bottom of the value chain and has very little power to demand a fair price let alone a premium price.

I had a little crack at the independent processors in my last post, but I'm generally supportive of the independent milk processors in New Zealand. They have many advantages and are good for our economy. But we must be wary, because a dairy industry dominated by corporate processors will diminish the returns that dairy farmers receive.

Corporate vs Co-Op

The corporate model has a lot of advantages over a Co-op. A corporate is likely to be more innovative, faster moving, more efficient and statistically makes a higher return on capital than a Co-op. 

This Coriolis Research report showed that dairy Co-ops such as Fonterra, Murray Goulburn and Arla make around a 5% return on assets. Corporate dairy companies like Saputo, Kerry and Glanbia return about 10% and the dairy divisions of global conglomerates such as Nestle, Kraft and Danone make returns in the facility of 15-50%.

Corporates are started by driven entrepreneurs who have a vision or a unique solution to a problem. The entrepreneur and any other investors risk their capital in the venture but stand to make financial gains too. The whole reason for starting a new venture is to provide a new or better product or service, for this reason corporate structures are more innovative that Co-ops, in my opinion. They are faster moving, a corporate would not have taken 4 years to get a program like “trading among farmers” passed (yes, I know a corporate would not need a program like TAF). They would have researched the issue and then made a decision and then implement it. The Co-op has to bring a majority of shareholders with them. It’s often difficult to communicate complex business strategies to such a large group of small business people, but it is imperative that the Co-op has the support of its suppliers and going slow and making compromises is necessary to allow unity. This is a disadvantage in my opinion.

Successful companies often have a clear leader who is in control. They will have boards of directors, but generally speaking they call the shots. I’m thinking of Steve Jobs, Sam Morgan, Jeremy Moon, Geoff Ross are examples of this.

Co-ops tend to be more democratic as there is no real “founder” to lead the Co-op. Co-ops often start as a group of suppliers joining together. Leaders are generally elected and fired by the supplier shareholders. If we look at Fonterra they have 13 directors! Seems a lot to me? How on earth do they all decide an issue?

Cutting edge innovative products or strategies are often a little bit unconventional or have a higher element of risk to them (If they didn’t then they wouldn’t be innovative, because everybody would be doing it). I wonder if a board of 13 people who are answerable to their supplier shareholders is the best structure for innovation.

You don’t see entrepreneurs starting Co-ops. That’s mainly because the founding shareholders can’t sell a Co-op and get rich. Sam Morgan and his co-investors would not have profited from the sale of Trade Me to the tune of $700 million if they had set it up as a Co-op.

This is why I’m in favour of the Fonterra Co-op structure for the dairy industry of New Zealand. According to the NZ institute of economic research, every dollar of the milk payout, is equivalent to $270 dollars going to each New Zealander. So a payout that moves from 5$ to $7 adds an extra $540 to every New Zealander.

The co-op structure ensures that the profits from Fonterra are distributed to every shareholder farmer, who then distributes it throughout the community. The rural support companies receive some of that money, extra employment occurs, the local shops benefit etc etc.
If Fonterra was replaced by corporates there is no guarantee that the profits would be distributed to the farmer suppliers via the full milk payout and then further distributed throughout the New Zealand economy. The Co-op structure distributes that wealth so well. All profits of Fonterra are essentially passed down to the farmer via the dividend portion of the payout. The corporate structure has no mandate to pass any profit onto their suppliers; they will only pay as much as they have to for milk. Any profits would go into the bank accounts of the few shareholders and in the case of Open Country Dairies its Singapore’s Olam International Ltd and the Talley family. I don’t feel that the economic flow down is the same.

I have no problem with a corporate making money and making a return to its shareholders. But New Zealand farmers need to be aware of what their industry could look like if it is dominated by corporate processors and not Co-ops. Think the UK! Not all corporates operate ethically.

In short Co-ops are great for passing all the profits onto the shareholder farmers, this essentially keeps the farmer up the value chain. But Co-ops are not great at getting very far up the value chain. They tend not to own or produce the final consumer product, rather they supply the raw product or manufacture on behalf of the consumer brands.

Corporates can deliver greater innovation and growth; they create jobs and generate positive economic activity in their communities. But the direct financial rewards are confined to the shareholders and not passed down to suppliers.

How you feel about that, depends on whether you are a communist, socialist, conservative or a libertarian. 

Thursday, August 2, 2012

Why the Farm Gate Milk Price is Important

In my last post I talked about the Dairy Industry Restructuring Act (DIRA) and how Fonterra were compelled to sell competitors raw milk. These regulations were put in place because the government wanted to ensure that there was competition in the domestic market.

What has transpired over the last 11 years is the emergence of a number of large export based processors who are also buying regulated milk. I’m particularly referring to Synlait, Open Country Cheese, New Zealand Dairies (now defunct), Tatua , Westland Dairy Co-op and Miraka. These companies collect over 2 billion litres of milk from their own suppliers. Yet they are all eligible to receive regulated milk from Fonterra under DIRA.

The original provisions of DIRA were to compel Fonterra to supply 600 million litres of milk to independent competitors to ensure competition in the domestic market. There now is a very real possibility that there will not be enough DIRA milk left available for smaller processors who actually do supply the NZ market because the 600 million litre may be taken up by these large export based processors, who end up competing with Fonterra in international markets.

I feel pretty aggrieved that Fonterra has to supply regulated milk to companies that export their milk. But I feel it is really “on the nose” that these companies seem to be constantly campaigning to have the regulated price that they pay Fonterra reduced.

This year, Synlait, Open Country Cheese & Miraka have joined together and have made a number of combined submissions regarding DIRA and TAF. Their submissions claim that the farm gate price of milk that Fonterra charges competitors is too high. They claim that Fonterra are artificially elevating the price which puts independent competitors at a disadvantage. The main claim is that because Fonterra is a Co-op that they can increase the farm gate milk price paid to farmers and then reduce the dividend that farmers get to compensate.
The submissions are long and quite frankly a little bit complicated. There are counter submissions from Fonterra and other interested parties that all go into great detail and provide data to back up their various positions.

So is the farm gate milk price over priced? I don't know. 

But at the end of the day, you just need to watch what these companies do. Their actions give a fairly good indication if the farm gate price is too high.

      Why do the independent processors keep buying the milk?
      These companies are big, OCC is the 2nd largest processor in the country and they have a significant number of suppliers, who have left Fonterra to supply them. OCC are owned by the Talley family and Olam International from Singapore. Synlait is 51% owned by Chinese dairy giant Bright Dairy and has two driers, they own approximately 13 farms and have a sizeable supplier base too.

Both these companies have experienced boards of directors; they have in house accountants and chief financial officers. Make no mistake; they know exactly how much it costs to produce a litre of milk in NZ. If they could get it cheaper somewhere else they would. 
The fact that they still buy DIRA milk from Fonterra and they are buying larger quantities of it suggests that it’s not over priced.

Watch what they do, not what they say
Synlait are on one hand saying the DIRA milk is too expensive, but on the other hand they are attempting to sell 70% of their 13 or so dairy farms. Surely they wouldn’t get rid of their farms if they produced milk cheaper than the regulated DIRA milk, that they purchase?

It’s no coincidence that these three companies have corporate structures. They are owned by a small group of shareholders (compared to Fonterra’s 10,500 farmer shareholders). The whole purpose of these businesses is to make a profit for these shareholders and that’s fine, I applaud them.

It is in their best interests to have a low farm gate milk price, because that is one of their biggest expenses, if not their biggest expense. By consistently attacking the farm gate price that Fonterra pay their farmers and therefore charge for DIRA milk, they are signalling what their true intentions are. That’s for a lower farm gate milk price. This is no surprise, because that means the processor makes a bigger profit.

It raises a warning to the dairy farmers of NZ, if it was not for Fonterra being so well supported by the farmer suppliers of NZ, the percentage of the final retail price that farmers get will be much lower than what it is today. Because a corporate processor is in the business of making a profit for its shareholders and suppliers are not shareholders. Suppliers are a business expense, and corporates want to lower their expenses. The result being farmers missing out on the full value of the supply chain. 

We only need to look at the plight of many dairy farmers in the UK. The corporate supermarkets are making decisions best suited to its shareholders and reducing the amount paid to the milk processors. The milk processors which are also corporates are protecting their margins and reducing the amount paid to the farmers. As it turns out the farmers are being paid below cost. The farmers have lost total control of the value chain and are price takers. The same situation can be seen in many parts of the world. The Australian supermarkets using milk as a loss leader is another example which is a bit closer to home.

The farmers, who left Fonterra and now supply the corporate processors in New Zealand, need to open their eyes and see what the signals are. The constant lobbying of government and attacks on Fonterra’s farm gate milk price is an effort to lower the price that farmers get paid for their milk.

The irony is that it is only because the vast majority of NZ farmers stay with Fonterra that the suppliers of the corporate processors still have a comparable milk price.

To conclude, the shareholders and directors of the corporate processors are not bad people, I'm not suggesting that. It's just clear to me that all the lobbying and noise about the farm gate milk price by these processors, is simply an attempt to reduce the amount of money they pay for DIRA milk, which is clearly self serving.

New Zealand dairy farmers must ensure that Fonterra stays strong because a dairy industry dominated by corporate processors is sure to bring a erosion of the farmers share of the value chain.