Monday, February 25, 2013

To Feed The World, We Need To Fix The Politics, Not The Environment

They say there will be 9 Billion people in 2050. The popular question is "how can we feed that number of people?"

There is literally not a day go by where I'm not confronted with some sort of report, program or video about the challenge of feeding the world.

The common theme is we need to increase agricultural productivity to meet this massive demand. The view that we have limited resources that will make food production more expensive or difficult in the future is widely popular.

Some people who belong to the environmental movements, like to use the growing demand to push their causes, one such cause is to promote the vegan lifestyle as less cattle will reduce CO2 emissions. 

Businesses also jump on the band wagon, because it allows them to get subsidies that keep their business profitable when it otherwise would not be, solar panel manufacturers spring to mind. 

Other people are advocating genetic modification as the answer to the worlds food problems. This is often promoted by the GM companies or farmers. I wonder if both groups real interest is just to make more money.

It seems to me that no matter if you are politically to the left or right, environmentalist or smoke bellowing capitalist. All these groups can use the claim that "we have to feed the world" to meet their particular agenda.

I don't believe we have a food production problem. At least not in the sense that the earth can't produce enough food.

The real restraint on food production is political. It's the policies of governments that restrict the production of goods & services, of which food is one.

Zimbabwe Take my former home country, Zimbabwe. In the 1970's it was hailed as the bread basket of Africa. Yet the agricultural output of that country today is a fraction of what it was in the 1970s. This is despite all the technological advances that have taken place over the last 30 years.
This from Wikipedia
The University of Zimbabwe estimated in 2008 that between 2000 and 2007 agricultural production decreased by 51%.
Robert Mugabe is to blame. The president of Zimbabwe has created an environment in Zimbabwe where doing business/farming is very difficult and investor confidence has evaporated.

The single biggest initiative that Mugabe undertook was the "land reform programme". It was essentially a plan to expel white farmers from their land and redistribute it to Africans (aka war veterans from the 70's war of independence). I'm all for promoting more African land owners, but there are much better ways than this to do it.

The result was nearly all the farmers with the capital and knowledge were driven from Zimbabwe. These were the farmers that produced Zimbabwe's exports.

My Uncle was one of them. He purchased a cropping farm as a young man, the farm supported a whole village of African workers and funded many of their children's education. The farm was effectively closed over night.

The farm is now derelict, with the irrigation system, the buildings & other infrastructure all in disrepair. The farm now occupied by subsistence farmers.

The environmental conditions have nothing to do with the reduction in Zimbabwe's agricultural output.

Ukraine The Ukraine is another example of political decisions harming production.
This article from the Kyiv Post explains:
Ukraine is naturally endowed with 42 million hectares of agricultural land, 25 percent of the world’s richest black-earth soil, favorable and predictable climate conditions, and warm sea ports as well as other transportation links relatively close to export markets.
Yet, for example, the nation’s annual grain yields remain below the Soviet era, while former republics Russia and Kazakhstan now exceed those levels, according to the International Finance Corporation, the for-profit arm of the World Bank.
The article goes on
an October 2011 IFC survey found. It takes 375 days to deal with construction permits and 274 days to get electricity, according to the World Bank’s 2012 Doing Business report.
 And since Ukraine doesn’t have a single agency approach to food safety, agricultural producers must deal with multiple compliance regulations and messages from various government agencies.According to the IFC, only 1 percent of 13,000 food businesses have implemented global food standards such as HACCP, and 77 percent of agribusinesses interviewed in the IFC survey had no idea what GLOBAL.G.A.P standards were.
“Outdated product quality standards are one of the main barriers keeping local agricultural commodities and food products from gaining access to foreign markets, European in particular,” stated the IFC survey findings.
The Ukraine is famous for it fertile dark soils, yet the country is producing less grain than it did as a communist state. 

Farmers are held back by red tape and horrendous bureaucracy from government agencies more concerned about their power and jobs than the economy.

I read a story a while back, of a farmer who bought a tractor in Europe, disassembled it and brought it across the border as "parts" and then reassembled it again in the Ukraine. This was because he could not get a permit to import a tractor.

Import tariffs simply discourage technology uptake by Ukrainian farmers.

The Ukraine doesn't need the latest ground breaking agritech, it just needs some basic equipment and sound management.

Massive production gains can be made in the Ukraine, if the political problems can be fixed.

Canadian Dairy Industry The Canadian dairy industry cartel is another example of how government regulations restrict reasonable production by using subsidies and tariffs.
This article by FullClip Finance explains
Canadian dairy is a cartelised industry in that it is comprised of enterprises which restrict competition — through both import tariffs and output quotas — to fix the price of their products. 
OECD figures indicate that the amount that Canadian consumers over-pay for dairy products hovers around $3 billion (CAD) annually; we pay twice the world average.
If I were to wake up tomorrow and decide that I want to buy my own cow and charge my friends a buck for every litre of milk, someone would most certainly show up at my door and inform me that what I’m doing is illegal because I haven’t been issued a government quota. Lacking the $30,000 necessary to purchase such a quota, I would be forced to sideline my entrepreneurial ambitions. As for buying milk for my personal consumption, I’m not willing to take my chances of buying cheaper milk in Vermont only to have a 300% tax slapped on at the border.
Again Canadian dairy produce could flourish by simply adjusting government regulations. 

Argentina is another example of government policy getting in the way of agricultural production. This article from elaborates

What does all that mean? Well, take a look: once the breadbasket of the world, Argentina’s wheat exports are sinking – indeed, the International Grains Council forecasts its 2012-13 wheat exports will be half the previous season’s levels.
Argentina’s romantic image of gauchos roaming the plains herding the cattle destined to become sizzling steak endures, but beef production is 25 per cent lower than it was three years ago and Argentina has failed to meet its Hilton Quota of high-quality beef to the European Union.

I could find examples all day long of government policy restricting agricultural production.

So I conclude, traditional growing areas of the world may be finding it difficult to continue to increase productivity, but thats not an indication of the planet not being able to sustain a larger population.

The view that the planet is maxed out and producing all it can is just not true.

Monday, February 18, 2013

A Telling Quote About Co-ops

“There seemed little room for entrepreneurial creativity; virtually every decision was politicized.  The most politically active members controlled the co-op with the own personal agendas, and much more energy was focused on deciding which companies to boycott than on how to improve the quality of products and services for customers.  I thought I could create a better store than any of the co-ops I belonged to, and decided to become an entrepreneur to prove it.”
This  quote is from Whole Foods CEO John Mckey. The quote is from his recent book Conscious Capitalism and Forbes has run an article about John and his book, which I found interesting.

John was a hippy in the 60s and 70s and was involved in a commune and various food co-ops.

It appears he became disillusioned with the co-ops and started his own natural food store which grew to be the now famous Whole Foods Market.

The quote made me think of New Zealand's most famous Co-op, Fonterra. 
“There seemed little room for entrepreneurial creativity; virtually every decision was politicized.  The most politically active members controlled the co-op with their own personal agendas"
Those words jumped out at me and I thought of Trading Among Farmers, which took Fonterra about 5 years to get through.

It highlights the major disadvantage of the co-op structure. Any "entrepreneurial creativity" has to be scrutinised by the members of the co-op and voted on.

Entrepreneurial creativity with the potential to produce high margins  by its very nature is risky, untested and unknown. For this reason it often does not get implemented.

Even if the managers of the co-op are able to try a few different things, they are voted out by the co-op members if the decisions are not popular.

For this reason, co-ops tend to be low risk low margin commodity businesses.

It's probably best they stay that way too.

Saturday, February 16, 2013

The Carbon Neutral Dairy Farm. Is It Possible?

What does a dairy farmer have to do to become carbon neutral?

There has been much wailing and gnashing of teeth at the prospect of agriculture being included into New Zealand's Emission Trading Scheme (ETS). 

So I thought to my self, what would a dairy farmer need to do to become carbon neutral?

But first, why would a farmer what to be carbon neutral?

Some may say because it's the right thing to do for the environment.

Others will want to eliminate any tax paid on the carbon they emit. 

Other people will say that, being carbon neutral gives that farmer a wonderful point of difference in which to differentiate their products.

In order to avoid getting into a debate about whether climate change is real or not, I'm going to approach this from the marketing angle.

If a New Zealand farmer could produce a carbon neutral dairy product, then it should be able to fetch a sizable price premium and hopefully a greater profit.

This isn't a post about whether New Zealand should have an Emissions Trading Scheme (ETS) or even if agriculture should be included.

Rather this post is about what would a farmer have to do to be carbon neutral, what would it cost and can they make a profit from being carbon neutral.

What are the emissions from a dairy farm?

Its quite easy to calculate a farmers emissions and then simply buy carbon credits, but thats too easy and not much fun, and I doubt consumers will pay a premium for that story. 

The best resource on agricultural emissions and off setting options is this report by PA Handford and Associates.

To understand how to become carbon neutral we need to understand what emissions a dairy farm produces. There is carbon, nitrous oxide and methane.
1kg of methane emitted into the atmosphere is the same
as for 21kg of carbon dioxide.  Using the same scale, 1kg of nitrous oxide has the equivalent effect of 310kg of carbon dioxide.  Approximately two thirds of agricultural greenhouse gas emissions are as methane and one third is nitrous oxide.
As I understand it, there is no way of absorbing methane or nitrous oxide from the atmosphere, but we can absorb carbon from the atmosphere via trees and plants. So if a farmer emitted 1 kg of methane & 1 kg of nitrous oxide then they would need to offset (absorb) 321 kg of carbon to compensate. Because of this, these three emissions are combined into what is called a CO2-equivalent or NZU.
Dairy Farm case study  
This case study is based on a South Waikato dairy farm producing 210,000 kg milk solids (2007/08) from 535 cows on 178 ha.  Included in the operation is a 40 ha dairy run-off, 140 yearling heifers and 120 rising two year old heifers.  

As you can see from this table the emissions from fuel and electricity is a fraction of the total emissions. For a farmer to try and reduce those emissions by using solar power and wind turbines etc, will look like your're environmentally friendly. But will not have a great effect on the total emissions.

The big producer of emissions is the cows via nitrous oxide and methane.

The total emissions are 1929 tonnes of CO2 or NZU. This figure needs to be absorbed or sequestered. 

The carbon cycle

From what I can gather, trees need carbon to grow. As they grow they absorb carbon via photosynthesis. At 30 years of age a pine tree will have absorbed a certain amount of carbon and it will be contained in the tree.

If you were to chop the tree down at age 30 and burn the tree for fire wood, then all the carbon that has been absorbed by the tree, will be released back into the atmosphere. Which leaves you in the same point as you were 30 years earlier. Like wise if the tree falls down and decomposes, then over time the carbon will be released into the atmosphere too.

But if the tree is made into framing timber (for example) and used to build a house then the carbon stays locked in the wood. Which is what we want.

So how many trees to we need?

The report states,
However we have chosen a conservative figure of 22 tonnes CO2 /ha/yr for radiata pine. This has been calculated based on indicative forest sequestration tables for pruned and thinned radiata pine plantation on medium fertility site (Paul et al., 2008). By way of comparison we have chosen to use the average rate of 3 tonnes CO2 /ha/yr for reverting native bush, as described in the look up tables.

1 ha of 18 year old pine trees will absorb 22 tonnes of carbon per year. The above dairy farm has total emissions of 1929 NZU per year.

1929/22= 87ha!!!!

Wow! This farmer will need to have 87 ha planted in pine trees that are at least 18 years old, in order to be totally carbon neutral. That's 48% of the total farm area will need to be in trees! 

But its more complex than that too, because a hectare of 18 years old pine trees are absorbing the maximum amount of CO2 of its life. A stand of 5 year old trees is only absorbing a very small amount of CO2 and 10 year old trees are absorbing well below 22 tonnes.

So this farmer will also have to plant additional trees every year for 30 years and establish a mixed age forrest

For example this farmer would need to have 87 ha in mature forrest, they would harvest say 5 ha every year and then also plant 5 ha per year. This way they will always have 87 ha in forrest at any given time.

How do the numbers look?

A logical way for a farmer to approach this situation, is to buy 87 ha of trees. I'll assume that they are 18 year old trees, just to make things simple.

Lets say they buy some cheap land with a forestry block on it for $25,000/ha.

25K*87ha= $2,175,000

Assume that a 50% deposit of $1,087,500 is paid and the remaining balance is serviced over 30 years.

$1,087,500 @ 7% interest = $86,820/year.

This farmer needs to make an extra $86,820 to cover the cost of being carbon neutral. The farmer also needs to get a decent return for their investment, I'll assume a 25% return is appropriate return for such an investment.

The return on capital of 25% for an investment of $1,087,500 = $271,875/year.

The farmer will also need to bring in an extra $86,820 to cover the P&I of the loan.

So a total additional income of $258,695 would be required to meet the additional cost and a return on capital of 25%.

Assuming production stays the same at 210,000 kgms/year then the farmer would need a payout of $8.20 which is a 26% increase on the base payout of $6.50.

Which is actually quite possible, I think a 26% price premium is achievable.

Lets look at it another way.

Fonterra's milk brand, Anchor is selling for $2.30/litre at my local supermarket.

Our dairy farmer receiving a payout of $6.50 is actually receiving $0.52/litre for their milk. In order for this farmer to receive an additional $258,695, they just need to receive an additional 0.11/litre for their milk.

Lets pretend that Fonterra is selling this farmers milk as, carbon neutral milk. The farmer gets an additional $0.11/litre, I'll assume the processor/Fonterra adds an extra $0.11/litre to the price and finally the supermarket also adds $0.11/litre to the retail price.

Together they have added $0.33/litre to the price, that makes the final retail price $2.63/litre of milk. 

Even if I have underestimated my numbers, there is still lots of room to increase the retail price to compensate.

Organic milk is currently selling for over $3.00/litre.


What I wanted to show with this post is that it's not out of the realm of possibility to produce a carbon neutral dairy product and its not necessarily going to be obscenely expensive to produce either.

Obviously there are many questions around finding an appropriate forrest etc. For the record, I don't believe a pine forrest is a good carbon sequestration crop. Simply because it takes over a decade for it to start really absorbing carbon. There are a number of other plants/crops that can sequester the same amount of carbon/ha as a mature pine forrest, but can do it at 2-5 years of age. I'll post about these options another day. 

No one in agricultural circles are even contemplating a 100% carbon neutral product. All the talk is about how paying a small percentage of their carbon emissions is simply increasing costs with no benefit, and I agree. It is simply a cost increase with no increase in benefit.

To be partially in a ETS system is a half way compromise from a marketing standpoint. You have a cost increase but you can't go to carbon conscious consumers and ask for a premium price for your product, because you're not carbon neutral, or even close to being carbon neutral.

While the numbers above are a bit rough and ready, they show that being carbon neutral is possible and it would only require a 20-30% increase in retail price. Which is really quite achievable.

If you look at any product category, there is the cheap brand, the middle of the road brand, the expensive brand and the bloody expensive brand. The two most expensive brands will often be selling their products for 100-200% more than the mid point brands.

Lets look at eggs, mid point brands sell for .45c/egg and free range brands are selling for $1.00/egg. Thats an 122% increase in price.

For milk, all you need to do is get a 20-30% premium to make it worthwhile.

What would a carbon neutral block of cheese sold in London be worth?

Imagine the brand power and the story that could be told of a little country at the bottom of the world where the farmers use an integrated forestry farming system, that can produce a carbon neutral block of cheese. That gets shipped it to the other side of the world and still be affordable.

Well, affordable to rich people at least.

Thats pretty hard for farmers in other countries to copy.

Milk powder in a brown bag shipped to china is pretty easy to copy and pretty low value too.

Regardless of what you think about climate change. There is lots of opportunity and big margins out there for low carbon products. 

Saturday, February 9, 2013

Are Dairy Farm Workers Well Paid?

I often hear dairy farmers say "farm workers work hard, but they are paid well too"

Well are they?

I thought I would look at three scenarios and compare them to a few jobs in town. 

They are:

Entry level dairy farm worker 

18 years old
1 years dairy experience
No tertiary qualifications 
Is likely to break things/crash things/stuff things and generally do stupid things at any time with no reasonable explanation.

Herd manager/experienced dairy farm worker

25 years old
3-4 years dairy experience
No tertiary qualifications
Good understanding of pasture management
Competent operating all farm machinery
Can run farm unsupervised for a week if given good instructions

Farm Manager

25 Years old+
Competent at all aspects of running a dairy farm
Can manage staff
Can plan all aspects of farm management such as wintering, mating etc
Capable of financial budgeting

The three aspects of a dairy job that are important are, the total wage, the hours worked and the value of the accommodation provided.


Housing is provided on a dairy job, simply because most farms are a long way from towns or villages where rental houses may be present.

What constitutes accommodation varies wildly from, a one bedroom prefab placed in the middle of the tanker track. To a typical New Zealand style 3 bedroom home.

Laing Homes have been selling a lot of these 3 bedroom houses as farm worker accommodation.

They are 84 square metres which is small by NZ standards for a 3 bedroom house, but they are ok. They are warm and keep the rain out.

They cost about $120,000 installed. Which includes everything such as services, drive way & council documentation.

I'll assume one of these houses is used for our calculations.

So what is this accommodation worth?

Whats the rental of a three bedroom house 30 minutes drive from the closest town worth?

We could say that it costs the farm owner $120,000 to build, interest at 7% equals $8,400/year.

Or we could assume the farm owner is like a land lord and should get a return for the investment.

A 10% yield from a total investment of $120,000 equals $12,000/year.

I'll take a figure halfway between the two and say that the 3 bedroom home is worth $10,200/year or $196/week.

If we look at townships surrounding Christchurch the rental rates for a similar home would be about $300/week. Which is in post earthquake conditions where rental properties are in hot demand.

The Total Wage

I'll assume the following yearly salaries. I think they are about right. Please leave a comment if you think they are wrong.

Entry level dairy farm worker

Herd manager/experienced farm worker

Farm Manager

Total Hours Worked

I visited a friend from my university days over the Christmas holidays. He is a farm worker on a 800 cow dairy farm near Oamaru.

He arrives at the cowshed at 3:30 am. One worker get the cows in and the other washes the vat and gets the shed ready for milking. He has 1 hour for breakfast and 1 hour for lunch and finishes at 5:30 most days.

Thats a 12 hour day when you take off 1 hour for breakfast and 1 hour lunch.

While these hours are not uncommon, I'll assume that a 12 hour day is the top end of the hours worked range.

At the mid point of the range I'll work on a 5:00 am start and a finish time of 5:00 pm, with 1 hour for breakfast and 1 hour for lunch.

Thats a 10 hour day

The bottom of the range I'll work on a 5:00 am start and a 5:00 pm finish but assume a 2 hour lunch.

Which is a 9 hour day.

I'll assume a roster of 11 days on and 3 days off.

I'll compare the farm workers wages to those of the building industry. This is because they are both outdoor practical type jobs and people could slot into either industry quite easily.

I would love to compare other sectors but I'm short on time.  

The building wages have been sourced from the Hayes 2012 Salary Guide.

Wage Comparison- Entry Level Dairy Farm Worker

At 55 hours per week the dairy worker is $0.50 cents above the minimum wage, which I would classify as a low paid job.

If this person is working a 66 hour week the hourly rate is $11.68. If they work a 60 hour week then the hourly rate is $12.85. Both rates are below the minimum wage. Which is illegal. 

At 50 hours per week this person would be earning $15.42/hour which I would classify as an ok pay rate for the skill level.

I am yet to find a dairy farm worker working less than a 50 hour week, if they exist then let me know. I won't be holding my breath though.

I have included a hourly rate before and after rent costs as this allows us to compare with a dairy worker more accurately.

I have assumed that the building cadet and the McDonalds staff are renting a three bedroom house and split the rent with 3 flatmates.

The McDonalds wages are based on a standard crew members rate, which is achieved after about 6 months of service.

Clearly McDonalds is a low paid job!

The building cadet and farm workers total package after rent is very similar with the farm worker receiving $63/week more than the building cadet. But the farm worker is working 10 hours per week more than the builder.

So on an hourly comparison the builder is paid $1.71/hour more than the farm worker.

Wage Comparison-Herd Manager

I have assumed that the builder and the herd manager have a house to themselves. This means the builder has to pay full market rental of $300/week.

Here we see that the herd manager is earning about $200 more per week than the builder of a similar experience. 

When we look at it from a hourly basis, we see that a herd manager working a 55 hour week is doing much better than the builder who works a 45 hour week. 

But if they worked 66 & 60 hours/week, then I'd call that average pay. At 50 & 55 hours/week, I'd consider that to be well paid in my books.

If you were my friend in Oamaru working an average 66 hour week then he would be better off as a builder, because he could earn the same money, but work a whopping 21 hours less.

Of course we haven't included the option of the builder working a 55 hour week. Which would increase his pay.

Wage Comparison- Farm manager

Its quite possible the managers house is likely to be the old farm owners house and would be a much better house than the Laing home used above. So the house value may be more than I have used.

Anybody managing a 800 + cow herd will not be working less than 60 hours per week and depending on staff numbers and the ability of the employees, it is quite possible that they regularly work 70 hours or more a week. (I know because I have done it!)

So, is $28.91/hour based on a 60 hour week, considered well paid?

This manager will be running a business with an asset value of over $10 million dollars and will be responsible for managing farm working expenses of over $1.5 million dollars and they will be managing a team of 4-5 staff.

Compared to the building foreman, the managers package looks more attractive, but again it depends on the hours worked. Even at a work week of 65 hours the farm manager is doing better on an hourly rate than the builder.

But I wonder if a farm manager of 800+ cows is better to be compared to a site manager as opposed to a foreman.


To clarify, I'm talking about wage & salary employees. Not contract milkers or share milkers. Share farmers are self employed and can work what ever hours they like. An employee only has their wages to show for their time They don't benefit from capital gain of stock or a rise in the milk price. For this reason I think the hours worked is important.

Another point is, there are many varied employment conditions on farms and building sites. I think the examples above represent typical conditions. 

So, are dairy farm employees well paid?

I would say that based on a normal work week of 50 hours they would be well paid, but unfortunately a 50 hour week in the dairy industry is as rear as hens teeth.

At the entry level I would say farm staff are low paid and it is common place for these employees to be receiving less than the minimum wage. These are the positions that are being filled by imported staff such as the Filipino workers.

These workers would be better off working as a labourer in the building industry.

Herd managers are about even with a builder of a comparable experience.

Farm managers are about the same or slightly better off than their counterparts in the building industry.

I would disagree with the statement that "dairy farm workers work hard, but they are well paid". 

I think they work hard and get average pay.

But as you can see its not that hard to get the wages into the well paid zone. If farmers could knock 2 hours off each work day, then their employees would be in the well paid zone.

Almost all other professions have some sort of hourly rate and hours worked are monitored. The dairy industry is based on working until the job is done. The result is a culture of excessive hours.

A few final points

Just a quick note, I had a bbq last night and there was a guy who was a private in the army. He left the army a year ago and got a job in forestry. He is paid $22/hour up to 55 hours, everything over 55 hours is paid at an overtime rate. 

Another friend is a labourer for a construction company in Christchurch. They are looking for more labourers who will be starting on $20/hour.

I was also talking to a friend who has an agricultural contracting background. He said junior staff will start on $18/hour and the operators of the bigger equipment will be earning $30/hour.

It's clear to me that dairy farm staff have options, often paying better than the dairy industry or providing better hours of work and sometimes both. 

Dairy farmers have to compete for good staff and the fact that the industry rely so heavily on international staff is an indication that their jobs are not as attractive as other jobs. 

As the Christchurch rebuild begins to take off, I can see an exodus of farming staff flocking to the city to take these unskilled positions.