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 2^nd 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.  

The Dairy Industry Restructuring Act

The Dairy Industry Restructuring Act (DIRA) has been getting a lot of attention lately, from the discussion on the price of milk through to Trading Among Farmers. That’s because the diary industry restructuring act is the foundation piece of legislation that allowed Fonterra to be formed.

I have one major issue with it, but first some background.

Prior to Fonterra or before 2001, the dairy industry was made up of a number of dairy Co-operatives spread across the country. These Co-ops supplied both domestic and export dairy products.

But all milk that was exported had to go through the NZ Dairy Board, who controlled all the marketing and distribution of NZ milk into export markets. So an individual NZ company could not negotiate deals directly with customers in a foreign country (Craig Norgate gave it a crack though).

Fonterra was formed when the two largest Co-ops, Kiwi and NZ Dairy Co-op merged with the marketing board and most of NZ other small Co-ops. Fonterra now accounted for over 95% of all milk collected in NZ. The DIRA was passed to allow this merger to take place. It now meant that anybody or company can export milk out of NZ independently.

But the government were concerned that this merger would create a monopoly player in the domestic market, who could exploit that position and NZ consumers could end up being over charged for their dairy products. So provisions were made in DIRA that required Fonterra to supply 600 million litres of milk to competitors. This would allow competitors to buy milk from Fonterra at “the farm gate” price, who could then process the milk and compete in the domestic market. Therefore ensuring there was plenty of competition.

In the 10 years following the formation of Fonterra, we have seen plenty of milk processors in the NZ market, producing all types of dairy products from milk to yogurt etc.

If we look at liquid milk as an example, most of the milk in the brands we see in the super market is purchased from Fonterra under DIRA. Meadow fresh which is based in Christchurch and owned by Goodman Feilder, simply gets the milk delivered to its factory by Fonterra tankers, where it is processed and put into a Meadow Fresh bottle. Fonterra’s Anchor brand competes directly with Meadow Fresh as they are both aimed at the same price point. Both brands contain exactly the same milk. The supermarket home brands price there milk at a cheaper rate. There are also a few smaller processors like Klondyke and Al & Sons. So it is clear that there is competition in the New Zealand market.

Further proof of the existence of competition is there is nothing to stop any dairy farmer in NZ from pasteurising their cow’s milk and selling it to the NZ consumer. Many farmers have done it in the past. Likewise, there is nothing stopping any start-up company from creating any dairy product and selling it. They simply call Fonterra and tell them how much milk they want and where they want it. So there is competition in the domestic market.

We have also seen export based dairy companies come onto the scene in the last 10 years. Synlait, Open Country Cheese are two early examples. These companies are export based businesses and as far as I’m aware they don’t provide any product to the domestic market and if they do it will be a tiny fraction of their total business.

These two companies are entitled to DIRA milk from Fonterra as well, even though they have their own suppliers and in Synlait’s case they process milk from their own 15,000 cows as well as their own suppliers.

Now both these two independent companies have at every opportunity argued for the reduction of the “farm gate” price of milk that they pay Fonterra. There are endless submissions to government and a healthy amount of lobbying of government ministers takes place. These two processors among others jumped into the recent “milk price” debate that raged, as consumers complained about the rising cost of milk.

They claim that Fonterra are artificially raising the “farm gate” milk price because their processing division essentially accepts a lower return on investment than a normal competitor would. The recent claim is that the farm gate milk price is 40-50c/kgms higher than it should be, and that a normal competitor would not or could not pay this price and still make a suitable return.

This is where the “war of words” between these companies and Fonterra is focussed.

I don’t believe the farm gate price is over inflated, in fact I believe that it is actually quite a cheap method of acquiring milk.

I’ll comment on the “farm Gate” milk price at a later date.

But my main concern is, why does DIRA allow an export based company buy DIRA milk from Fonterra. The main concern of regulators back in 2001 was that Fonterra would have a monopoly in the domestic market and stifle domestic competition. So the provisions within DIRA that we discussed above, were designed to allow this domestic competition.

We now have a situation where these two companies are taking “cheap milk” from Fonterra processing it and then essentially competing with Fonterra in international markets. If one wanted to get all sensational about it we could put it like this; the NZ government has legislation that allows 2 foreign owned companies to come in and buy cheap milk from Fonterra and then compete against Fonterra internationally. From a NZ Inc perspective it makes no sense!

There has been a huge public response to Shanghai Pengxin buying the Crafar farms. Shanghai Pengxin have stated that they will build a processing plant to process their milk, but it is entirely possible that they would be eligible to buy DIRA milk as well, which I find to be totally backward thinking, as Fonterra and its farmer shareholders should be making the margin from the final processed milk not a foreign owned company.

I believe that a simple amendment needs to be made to DIRA, that DIRA milk is only available if it is destined for the NZ domestic market. There does not need to be competition for raw milk destined for international markets. The Commerce Commission and the NZ government only need to worry about competition in the NZ domestic market.

The Government of NZ has no greater task than to support our export sector and protect the businesses that earn our foreign money, Open Country and Synlait are included in this group.  I have no problem with companies competing with Fonterra, that’s healthy. But if an independent company wants to export dairy products then they should get their own milk supply.Both Synlait & Open Country have their own suppliers anyway.

I can’t think of an example anywhere, where a company is required by legislation to supply product to competitors.

Water Quality and Dairy Cows

The dairy industry has is coming under increasing pressure around its environmental impact on NZ water ways. I have noticed in the past 2 years the calls to reduce the impact of dairy farming have reached fever pitch.

The term “Dirty Dairying” has been around for a while now and I’ve seen more than a few vehicle’s with the bumper sticker “Fonterra stop shitting in our waterways”. The public perception is that dairy farming is bad for our water ways.

So I thought we would look at the science behind water quality and determine what the facts are. As we all know that facts are often the first casualty in public debate.

This presentation to ministers by the commissioner for the environment Dr Jan Wright is a very good summary of how our water ways are getting contaminated.

I will summarise her presentation, but if you have a spare 20 minutes, give it a quick look.

There are essentially 3 types of pollutants that affect our water ways:

• Sediment -as a result of erosion and flooding, where large amounts of soil and gravel etc get washed into the water ways.

• Bacteria- from animal and human waste being discharged into the water ways.

• Excess Nutrients-when Nitrogen and Phosphorus find their way into the water ways.

Dairy farms main pollutant is Nitrogen from excess nutrients. This graph shows how much nitrogen is leached per ha from the different farming classes. Interestingly Horticulture is the worst offender, but Horticulture makes up a very small area so the overall effect is not as great as the dairy industry. You can see that a dairy farm leachs on average 50kg of N/ha/yr, which is less than horticulture. I have seen data that show vineyards leaching 80kg of N/ha/yr.

Public perception is that cows standing in unfenced water ways and waste from effluent systems is the biggest cause of nitrogen pollution from a dairy farm. But it’s not. It would be great if it was, because those two issues are relatively easy to fix.

This graph shows 85% of dairy Nitrogen pollution is a result of Urine. But this is not urine from cows standing in a stream urinating or urine from dairy effluent.

We hear so much about dairy shed effluent, but dairy shed effluent is collected while the cows are being milked, which accounts for 4-5 hours of the day. The remaining 19-20 hours the cows are in the paddock, urinating.

Research has shown that the cow’s urine from the unrine patch is the main culprit. When a cow urinates the urine lands in an area about the size of a dinner plate. The nitrogen in that urine patch is equivalent to 800kg nitrogen/ha. To put that into perspective a dairy farmer would apply around 200kg of nitrogen fertilizer per ha per year and that would be done over 4-5 applications. Many farmers apply much less.

The grass within that dinner plate sized area is only able to utilise a small fraction of the nitrogen in that urine patch. The nitrogen then converts into nitrate form which is water soluable. The nitrate attaches to the water molecules and leach through the soil profile.

Once the nitrates are below the grasses roots then there is very little that can stop the nitrates filtering through the soil profile and into the water table, which in turn reaches our water ways.

There is a lot of research going on by scientists to better understand nitrate leaching and ways of combating it. Nitrogen inhibitors are a recent development. The inhibitor is sprayed onto the land. Trials show that considerable leaching reductions can be achieved, but on farm results are reported to be less effective. 

The reason the councils are concerned about the increase of dairy farming is that the nutrient leaching will increase. If a sheep farm is converted to dairy the average nitrogen leaching will increase by 30kg/ha.

If the current level of growth in the dairy industry continues at 3-4% per year, then cow numbers could quite possibly be double their current levels in 15-20 years. I don’t think the wider community will allow there to be 12,000,000 dairy cows without major restrictions.

At this point in time the industry does not have a commercially viable answer to the nutrient leaching issue. There are certain farming practises that are worse than others, that can be minimised. But as a whole there is no silver bullet.

Inductions

The north island has begun calving and the south island will begin in August. Not only is calving the busiest time of year for farmers, but it is also the time when that thorny subject of inductions rolls around.

So what are inductions?

To fully understand it we need to understand how the dairy farming year operates. The dairy farming year is based on grass growth rates. The cows are dried off over the winter as this is the time when grass growth is at its lowest. Cows feed requirements drop dramatically when they are not lactating. Farmers plan to have the cows calve when the grass starts growing again, which in the South Island is about mid-August.

Ideally farmers want the cows to all calve over a short space of time as this means the cows have a longer lactation. You would prefer a cow calved in 10^th August rather than 10^th September as you will get an extra months milk.

Obviously, the date a cow calves is dependent on the day she conceives. A cow’s gestation period is about 283 days long. So to calve on 10^th August she needs to conceive on approximately the 10^th November.

A cow starts her oestrus cycle again, about 40 days after she calves, but this can be longer if she is under weight or stressed or has a complication like a retained placenta. So a cow that calves in October won’t be able to get into calf until at least mid-December (if everything goes well).

Cows that calve into October are considered to be late. So farmers look through their mating records and identify the late calving cows and call the vet in, who injects the cows with a hormone injection which causes them to calve early. Obviously the calf is pre term or premature and they do not survive.

The end result is that the cow has calved early and she has time to start cycling again and get in calf in or around that mid-November mark, which means she will calve within the desired period next season.

Inductions are not pleasant and the practise is often highlighted by the media and critics of the dairy industry to beat dairy farmers up with. It’s also used by our trading partners as a reason to inhibit our exports or at least the they threaten to.

I remember 20 years ago standing at the calf shed with my Mum. She was saying that dairy farmers would not be able to induce cows soon, which pleased us both as neither of us like it. But here we are 20 years later and we are still doing it.

So what percentage of cows are induced in New Zealand?

I recommend that you read this paper written by Marv Pangborn,Trafford & Keith Woodford on inductions. According to their paper

the New Zealand Veterinarian Association has stated that only 3% of the national herd was induced in the season just finished, with 98% of farms being under 15%(Benny 2011).

So the New Zealand Veterinarian Association say 3% of the national herd was induced.

New standards were introduced in the 2010-11 season by the NZ Veterinarians Association (NZVA), Dairy NZ, Dairy Companies Association of NZ (DCANZ) and Federated Farmers. In the 2011-12 season the level of inductions within an individual herd will not exceed 8% reducing to 4% in 2012-13.

The industry has introduced its own guidelines to reduce the number of inductions in any one herd.

Inductions can be a way of covering up poor animal husbandry practises. If a farmer has a poor conception rate which leads to a lot of late calvers, they can cover up the mistake by inducing all the late calvers. You will find that cows that are stressed, under fed and underweight, who also have to walk long distances are less likely to conceive. So the moves by the industry to reduce inductions to 4% on any individual herd should begin to eliminate this.

I'm not comfortable with inductions; I can understand why it is done though. The paper by Pangborn and Co outlines the additional financial costs farmers face by not inducing. It’s interesting reading.

Which brings me to the point of this post.

I saw a reference to the latest abortion figures in NZ, the other day and it turns out that the induction rate of human foetuses is at 19%. So 19% of all human pregnancies are induced (aborted) as compared to 3% in the dairy industry.

Now this is not a post on the morality of abortion, you can all make you minds up on that issue.

People need to be consistent in their attitude though. If you are against inductions in cows then I can understand you being against inductions in humans. Likewise if you frown on the dairy industry for inductions then be consistent and frown on the abortions of humans.

I was listing to Sue Kedgley on Newstalk ZB a year or so ago. She was speaking on behalf of the Greens and laying into the dairy industry about this video. The interesting thing was that at the same time, the Greens were promoting a bill that would allow abortions to be conducted up to 20 weeks gestation. I couldn’t believe the hypocrisy of it.

I can’t think of two more comparable situations. The dairy industry terminates the life of a calf that is inconvenient and unwanted to the farmer. That calf would either be slaughtered at 4 days old or slaughtered later in life as a beef animal. Abortion is the termination of a human life that is considered inconvenient and unwanted, except at some point between foetus and birth it becomes illegal to terminate a baby. It's certainly illegal to terminate a baby after its birth as is confirmed by this case in Australia recently. 

Surly a human life is worth more than a calf? I find in inexcusable for someone to be against inductions but be in favour of abortion.

Anyone who holds this view and publicly criticises a dairy farmer for inducing 3% of their herd, but defends abortion should be called up on their hypocrisy.

Just for the record; at Milking on the moove, we will not be inducing any cows. Our plan for a dairy industry that is attractive to young people does not include inductions. Mrs Herud and I adopted our first son and I encourage the adoption of all unwanted babies in NZ.

Time To Ditch The Roster

I've talked about hours worked in my last post and how I feel that the long hours are the main cause for the dairy industry’s inability to retain good people.

But the total hours worked is a little bit simplistic. It’s more than that. The hours worked on a dairy farm are also “unsociable”, which means that when you work on a dairy farm it is difficult to be social and socialise.

Apart from the long hours worked, the main culprit is the “staff roster”. Look at any advertisement for a dairy position and the roster is quoted, 6 on 2 off, or 11 on 3 off etc. Rosters work well for employers because it’s easy to work out and manage.

But the roster doesn’t suit the 20 year old who wants to go out on the town and chase the ladies on his days off, because no one is in town on a Wednesday and Thursday night. And it sucks to be stuck on the farm on Saturday night getting txts and pxt from your mates telling you how club xyz is filled with hot backpackers from Germany, Sweden and Brazil, or that your mates new Skyline is proving to have remarkable acceleration but rather poor traction characteristics.

Nor does the roster suit the family who want to go to church on Sunday, because only once in a blue moon does their rostered days off fall on a Sunday.

It doesn’t suit the young school leaver who excels at netball. Because netball is every Saturday morning and even if she could make it every Saturday she’s far too knackered to want to run around for 60 minutes.

To a young employee and even the not so young, the ability to have a life outside of work is important.

The whole western world has revolved around the weekend, that’s when everything happens. The kids sport, the rugby’s on, the home show, the craft show, the boat show, wild food festival, Warbirds over Wanaka etc. The weekend is when your friends are off shooting or fishing or helping each other install blow off valves onto their “sick rides”.

Unfortunately the weekend is often treated just like any other day on the dairy farm.

After 10 years of no physical activity, I have taken up social soccer. The team is made up of a mixed group of people, some work for the Waimakariri District Council (I know, shudder ), others are electricians, a painter, a builder, 3 or 4 university students, a draughtsman and me, a house husband masquerading as a farmer. All these guys work during the week and have the weekends off. One of the electricians is on call one weekend a month, but only if needed.

It’s a fact that none of these guys could play sport at 2:00pm every Saturday afternoon, if they were employed on a dairy farm.

I believe weekends should be reserved as special days so staff can have time out with family and friends. If farmers can do this, then I’m convinced a majority of staffing issues will disappear.

How can this be achieved?

Every farm is different; the staffing on a 200 cow owner operator farm is quite different from that of an 800 corporate farm. The solutions will be different.

A few simple practical ideas of mine are:

Have a core team of staff, who only work Monday to Friday. (Obviously calving time will have to be different)

The only tasks to be done on the weekends are milking, that means no feeding out, no messing around moving calves or moving the effluent spreader, just milking.

All feed and supplements should be set up or fed out in advance on the Friday and clearly marked on the white board/map. The effluent spreader should be shifted etc. This means that the only jobs to do on the weekend are getting in the cows and milking them.

Employ relief milkers for the weekend’s and have one of the permanent staff “on call “as backup

.

Milk once a day on the weekends.  I know I know that might hurt production, but we should keep an open mind. Has anyone tried it? Will dropping 2 milking’s out of 14 really make a difference?

If we farmed with that sort of mind set that weekends are important and implemented a few simple practises like I mentioned above, then there is no reason why relief milkers could not do the weekends.

I can just hear farmers reading this will be saying to them selves “this guy has got his head in the clouds”, “we’re not made of money". But I would point out that the "town" business that I am involved in, spends 25% of it turnover on wages. Café's generally spend 30% of turnover on wages, construction spends 30% and dairy farms spend approximately 10% of turnover on wages, which is on par with supermarkets.

At the end of the day what I am really saying is dairy farmers need to spend more money on staffing to make the conditions similar to what people in town work. It really comes down to more money being spent on extra staff and a change in the way the working week is structured.

The dairy industry is asking people to make a big sacrifice by not having regular weekends off. The simple fact is employees have a choice where they work and the long list of “Dairy farmer worker wanted” ads in the newspaper tells me that people are voting with their feet.

Dairy farming has so much to offer it can be such a great career. If the industry could just make a few changes it could be a profession people want to work in.

The Elephant In The Room

I do not like to talk about how people hated their time on a dairy farm. But after 15 years involved in the dairy industry I think I have a pretty good understanding about happens on many farms.

I represent the people who have been dairy farming and have left the industry, because that is what I did. I looked at my options and decided that there were better opportunities out there, than dairy farming.

I’ve seen and read a lot of stuff over the years on dairy staffing issues, most written by dairy farmers or those closely associated to the dairy industry. Much of it is not objective because of the simple fact that they are current dairy farmers. They are still dairy farmers because they obviously don’t have a problem with the way things are currently. Therefore most of the conclusions that are made are overly positive and miss the mark, in my opinion.

If you want to know why people leave the dairy industry, it makes sense to ask the people who have left.

For the last 10 years I have read reports about employment relations on dairy farms, I’ve heard experts at discussion groups and field days talk about the issue, I’ve read the dairy exporter for years and I’ve poured over the Dairy NZ web site. There is a lot being written and said about time management, communication skills, goal setting, HR compliance, performance management, how to communicate with your foreign employees etc  but in all this time I have only heard or read of three people who actually mention the great elephant in the room.

That’s the NUMBER OF HOURS WORKED.

The terms “work life balance” and “time off farm” get mentioned all the time in reports, articles and at field days. But no one actually gives it any real priority.

I thought I would outline all the dairy jobs I have had in the past and explain my experience so you can see where I am coming from.

My first real job that was not on my parent’s farm was when I was 17 years old in 1997. It was for a sharemilker who lived next door. During the summer, I would have to be on farm at 5:00am and I would get an hour for breakfast and an hour for lunch. If all went well I would be finished afternoon milking at 5:30. So that was a 10.5 hour day. I would get every 2^nd weekend off.

I worked for the same employer (who is a good bugger) in between university study and after uni for a number of years and the hours stayed much the same.

After university in 1999 I went to work on a dairy farm in Dunsandal where the hours were around the 60 hours per week.

In 2009 I took a manager’s position on an 800 cow dairy farm owned by a large corporate. I got 1 day off every week, but as manager you were still responsible for the farm on your day off. I ended up working 80 hours per week.

I relief milked on a property near Invercargill at Christmas 2008 on an 800 cow farm. The sharemilker employed two staff and was waiting for a Pilipino. The person who got the cows in was getting on farm at 3:00 am in order to have cups on at 4:30. They would finish milking and have 30 a minute breakfast and 30 min to an hour for lunch before heading out to get the cows in at 1:00pm. Milking finished at 6:00pm. This worked out to be a 13 hour day if they got an hour for breakfast and an hour for lunch (which they didn’t). The two staff would alternate getting the cows in so every day was not a 13 hour day. If you didn’t get the cows in you got an extra 1 ½ hours’ sleep and did an 11.5 hour day (Yeah). I later learned the sharemilkers wife left him and went back to Holland.

Gillian Searle did a study called “The reality of a career in the dairy industry” for her Kellogg Rural Leadership Course in 2002. She conducted a survey of dairy farm employees.

The survey found:

60% of respondents had been in their current position for less than 6 months.

45% of respondents received 2 days off a fortnight.

58% expected to work more than 60 hours per week in the spring.

63% expected to work more than 50 hours per week in the summer.

55% expected to work more than 50 hours per week in the autumn.

Over 90% of people said they enjoyed their job or nearly always enjoyed their job.

One of Gillian’s conclusions were:

The primary weakness of dairy farm jobs for employees under the age of thirty are the

long hours of work.

My old lecturer at Lincoln Rupert Tipples has done a lot of work in this area and has published quite a few papers. Here are a few excerpts:

Dairy farming is often seen by young people as hard, dirty work with long, unsociable hours. Wilson & Tipples found the dairy farmers/dairy farm worker population worked longer hours than the New Zealand working population; 40 percent of employees, 45 percent of employers and 49 percent of those self-employed without employees worked over 60 hours per week compared to 10 percent of the total New Zealand working population working more than 60 hours per week. (Wilson & Tipples, 2008). Certainly, long working hours are an issue.

In addition to the long working days, rosters are typically long. They are routinely 11 days on and 3 days off or 12 on and four off (Pangborn, 2010). These factors led a Caring Dairying project brief (2010) to suggest that many large dairy farms are not farming in a socially responsible way.

These two reports back up what my experience has been. That dairy farmer’s work long hours compared to the rest of the country.

I was staggered, but not really surprised to read the figure reported in Gillian’s report that 60% of staff had only been in their current job for less than 6 months! That shows a huge turnover rate of staff. I believe this figure because; again my experience has been the same.

After running my own business for 5 years I stepped back from the day to day running of the business and took a manager’s position on an 800 cow corporate dairy farm in 2009. I moved my family to this remote part of Canterbury and looked forward to experiencing and learning from a well-resourced and professional company.

When I got there in September, all but 1 of the original staff (who started in June) was still there. The manager had gone and a steady stream of farm hands had come and gone before I got there. On my first day at work, one worker announced after morning milking that was not coming back after breakfast. The farm was constantly under staffed, as soon as we recruited a new staff member another one left, leaving us under staffed, which again increased the hours worked for every one else.

I left after 3 months. It was no surprise to learn later that all the remaining staff had left by the end of the season.

The Dairy NZ “Go Dairy” website has a “day in the life of adairy farmer” page. The example day starts at 5:00am and finishes at 5:00pm, with an hour for breakfast and an hour for lunch.
Let’s assume we use an 11 days on 3 days off roster as mentioned above by Ruppert. So in the first 7 days of the roster they will work a 70 hour week (Mon-Sun@10hr/day) then the remaining week they will work 40 hours (Mon-Thur@10hr/day) before having three days off. So they work 110 hours before a break.

Even the web site designed to promote dairying (and you would think they would give a best case example) has a worker working a 10 hour day.

In 2004 I started my business in Invercargill and I employed a delivery driver. I would often get a call at about 4:30 in the afternoon from a customer wanting an item delivered. I would say to the driver “on your way home at 5:00, can you just do this delivery quickly?” After a few weeks our driver said to me “every time I do a delivery on my way home, I end up working an extra 30min that I don’t get paid for”. Now I was a bit taken back, on the farm I had always worked until the job was done. But I was concerned that the level of customer service would suffer if my driver was reluctant to do late deliveries. So I agreed that I would pay him for 40 hours per week and if he did any hours over that I would pay him time and half. A normal week for my employees is 8:00am to 5:00pm Mon-Fri with 30 min for lunch and morning and afternoon tea breaks. That works out to be 42.5 hour per week.

I let my staff manage their own workload, so as long as customer demand is being met promptly and they are achieving the various KPI’s that I measure. Then I don’t really care when they do it. When we are really busy in the winter months, I am always encouraging my team to conduct deliveries on Saturday mornings or do a few late nights if you need to in order to fit all the deliveries in. Sometimes they do.

The interesting point is over the last 8 years I have employed 5 or 6 delivery drivers and I can count on one hand the amount of times any one of them has worked more than a 47 hours in a single week. It’s not like they don’t have lots of work to do, because they do. They are free to work whatever hours they like as long as it is at least 42.5 hours per week. While not scientific, this example says to me that there is a point, where given a choice an employee will decide that the extra money is not worth the sacrifice of their free time.

The hours required by employers on New Zealand dairy farms is in my opinion the single biggest deterrent to attracting and retaining people in the industry. I believe until this issue is taken seriously by dairy farmers, they will continue to struggle to attract and retain good staff.


We need to be honest about these issues and talk about them. So feel free to let me know if you think I'm wrong? 

TAF Revisited

Obviously we all know that TAF was passed a few days ago. It's been interesting watching the debate from both sides.

I hope it works well, we won't know if it’s worked for another 5-10 years though.

The reaction from the fund managers is mixed. Some saying it’s a great opportunity; others like Brian Gaynor are a little hesitant. But what they all have in common is they are all going to wait and watch how the market is working. Which is prudent I suppose.

The other thing everyone is in agreement on is that no one knows what the shares will be valued at. This is what concerns me, will it be higher or lower than the current $4.52 per kgms. Who knows?

I’m in favour of a low share price. I think a high share price creates a large barrier of entry for up and coming farmers and it encourages farmers to supply rival corporate milk processors, that don’t require farmers to buy shares. Which is a bad thing as the strength of the NZ dairy industry is that the farmers are united. I would hate to see the dairy industry end up like the meat industry!

Redemption Risk

TAF has not got rid of redemption risk it has simply shifted that risk from the co-op (the collective) on to the individual farmers. Which isn't necessarily a bad thing because now Fonterra can supposedly do what it wants to do to implement its plan which will hopefully increase growth and profitability.

But if you are an individual farmer and you are decreasing production due to a bad season or you want to quit Fonterra, you have to go to the market and sell your shares to either another Fonterra supplier who is increasing production or to the fund that is made up of the outside investors.

If demand for shares is high then there is no problem, the farmer should have no trouble finding a buyer for their shares. The problem arises when demand is low for Fonterra share. What if there is not the demand from outside investors or if lots of other Fonterra shareholders are selling shares at the same time due to a major drought or something similar. Then the share price will be low. Which is what a market is, supply and demand etc.

That risk is now on the individual farmers balance sheets. If the price of the shares drops to be lower than the current $4.52, then hundreds of thousands of dollars will be wiped off individual farmer’s balance sheets and this will have implications on a farmer’s debt level and borrowing capacity.

If the industry continues to grow at 3-4% then there should be good demand for shares from existing farmers as well as from outside investors. The true test will be what happens when things are not all rosy. What’s going to happen in an environment of a falling payout. I would expect dividends to fall, therefore a falling share price which in turn means the value of a farmer’s assets are lower and one could expect a call from the bank wanting to discuss a revision of your loan to value ratios.

Maybe I’m being a little pessimistic, but what TAF has done is remove redemption risk from the Co-Op to the individual farmer. Farmer’s need to be aware of this additional risk and ensure their financial position is secure enough to withstand a reduction in the share price.

I’ll be interested to see what the banks are doing and saying about this issue, and whether they are adjusting their lending accordingly.

Attracting Young People into Agriculture

For the agricultural sector to be vibrant and healthy it needs to be able to attract the next generation of farmers. There are a few issues with attracting young people to farming in New Zealand, but they are different issues depending on the farming class.

As I mentioned in my last post, the average age of a sheep & beef farmer is 58 years of age, and I believe the main reason the next generation are not attracted to sheep & beef is the lack of profitability and cash flow, which in turn makes it difficult to progress into farm ownership.

The dairy sector has a slightly different problem.  I don’t believe the dairy industry has a problem of attracting people to take up self-employed roles, such as contract milking and share milking. There are more sharemilkers than there are sharemilking jobs at the moment.  The dairy industries progression path way has always allowed people to progress up the farming ladder.  While I do agree that sharemilking has its challenges and its future is by no means certain, the inability of dairy farmers to attract young people is not due to a lack of career pathways, like sheep and beef farming.

The main issue for dairy farmers is they can’t seem to attract and retain good quality employees. It’s important to distinguish the difference between a person working on a dairy farm as an employee and someone working as a self-employed dairy farmer. Dairy farmers are constantly struggling to find dairy employees. The gap has been partially filled by foreign workers from countries such as the Philippians and Brazil.

The question is why?

The sheep and beef farmers don’t have this problem, at least not to the same degree as dairy farming. Any farming position advertised that does not involve milking cows is swamped with applications. The positions I’m talking about are sheep and beef finishing positions, cropping, dairy grazing and general labouring positions on non-dairy farms.

My brother in law is a good example of what I mean. If you saw a picture of my brother in law, you would think he was straight out of a Speight’s advertisement. He’s got the RM Williams shirt, the moleskins, the boots, the belt buckle and most importantly a team of dogs! The interesting thing is he was brought up in town and he chose to go sheep & beef farming, that’s his passion.  His problem is every sheep and beef position that he applies for is swamped with applicants. This is for managerial roles as well as general farm hand positions. He has to compete with far more experienced applicants.

I got a txt yesterday to say he has reluctantly accepted a dairy job near Winton. He needs to pay the bills!

He is a good example of lots of people in the agricultural sector. They love farming but just not dairy farming. Working on a dairy farm tends to be a last resort.

Recently in a short space of time I have had three conversations that have really got me thinking. The first was my hair dresser, we got chatting and it came up that I was once a dairy farmer. She said “My partner worked on a dairy farm, just out of Oxford. He hated it and left after a few months”.

The second was a young couple we met one day. Over lunch I asked him what he did before his current job, driving a fork lift. He said he worked on a dairy farm for a year and then said “It was the worst thing we ever did”

The third was my doctor; he asked what I was going to do after I sold my business. I said I was going back into the dairy industry to which he replied “Isn’t that what you do when you can’t get any other job?”

There is definitely a big difference between a dairy farm position and a non-dairy position.

Over the next little while, I hope to delve into the reasons that I believe the dairy industry is not retaining good people. One of the main reasons I started Milking on the Moove is that I want to test, develop and promote farming practices that make dairy farming in New Zealand better. A dairy system that is attractive to employees will go a long way to making dairy farming better.

The Case for Converting to Dairy

Swiss academic Jeremie Forney, has been studying the non-economic reasons why Southland sheep and beef farmers converted their farms to dairy. I found his study interesting and was not at all surprised at the conclusions outlined in thenewspaper.

Jeremie found that the main reasons given by farmers for converting to dairy were farm succession and recognition of good farming.

But I can't help but feel at least one of these reasons is in fact a financial reason. In my experience the biggest reason a sheep or beef farmer convert their farm to dairy is to aid farm succession. The biggest hurdle for sheep and beef farmers in respect to passing the farm down to the next generation is cash flow.

The average sheep and beef farmer makes an operating profit of $500/Ha, on a 230 Ha property that equates to a total of $115,000. The farmer must then make principle and interest payments, tax, depreciation and drawings out of this figure. According to NZ Beef & Lamb over the last 10 years the average sheep & beef farm made a before tax profit of $65,000.

On the other hand a dairy farm makes an operating profit of about $3,000/Ha, so on the same size farm of 230 Ha the operating profit is $690,000 compared to $115,000. These two figures are the reason we have seen a shift from sheep/beef to dairy across the whole country but particularly in the South Island.

I don't really believe there is any other reason than this for a sheep farmer to convert to dairy. It’s purely financial. I don't think there is a “non-financial” reason.

The average age of a sheep and beef farmer is 58 years of age. When the time comes to pass the farm down to a son or daughter, cash flow becomes the issue.

With an income of $65,000/year to work with, it’s clear that there is not the cash flow to support the parents and the son/daughter. The issue is further complicated when there are more than one sibling. Even if the farm can support one sibling, and they go on to take over the farm where does that leave the other children? The children who do not take over the farm may feel that the sibling who inherited the farm has received preferential treatment, if the farm is put into a trust for example, and ownership split between the children this can cause the farming sibling to feel they are working hard for the benefit of the off farm siblings. It’s not really an option for one sibling to buy out the parents, because the amount of money needed will be in the millions.

Every case is different, but the farm succession issue is a big problem facing an industry of farmers who are nearing retirement age.

While families are dealing with the issues of how to pass the farm down fairly, it's easy to see that there are three options, 1. Make no change (as above) 2. Sell to a dairy farmer 3.Convert to dairy

1. As above this option can work, but cash flow may be an issue.

2. Sell to a dairy farmer

This is the path chosen by so many farmers. In Southland for example a sheep farmer could sell their 230 Ha for $25,000/Ha and get $5,750,000. If we assume they have $750,000 of debt, that they pay off, allow $1,000,000 for a new house in Central Otago, $3,000,000 to invest and live off the proceeds ( 4% return = $120,000/yr) and then split the remaining $1,000,000 amongst the children. If there are three children for example that means each child will get $333,333. Which is enoughto buy an average home debt free.

That is quite an attractive option and one many have taken. But the big downside is that the family farm is now gone, and it will be very unlikely that any of the children will ever get into farm ownership.

3. Convert to dairy

The other solution to the cash flow problem is to keep the farm and convert all or part of the farm to dairy. This option is more complex, but increases the options to bring the children onto the farm. But it is not plain sailing. It involves increasing the farms debt levels and running a dairy farm is very different to a sheep/beef property.

If we use the 230 Ha property from above as an example, the farm could carry 690 cows (3cows/ha). The farm has $750,000 of existing debt , they will need to convert the farm by building a cowshed, creating lanes, new fencing, improved water system, additional housing etc. This is likely to add up to $1,500,000. Then they will need to buy 690 cows at $1,800/cow, this equates to $1,242,000 and then on top of this Fonterra shares will need to be purchased. 690 cows producing 380kgms/cow = 262,200kgms *$4.52=$1,185,144.

So to add all this up:

Existing debt                    $750,000

Conversion costs              $1,500,000

Cows                                 $1,242,000

Fonterra shares                $1,185,144

Total Debt                        $4,677,144

So the new farm will now be close to the limit that most banks would lend up to. Most banks will lend about 60% of the value of the whole operation. This new operation will have an interest bill of about $300,000/year, which still leaves $390,000 to pay drawings, tax depreciation etc.

The skills required to run a dairy farm are quite different. Most sheep/beef farmers would not employ many staff. A 690 herd dairy farm would need about 5 full time staff. Managing staff requires some skill and secondly the lifestyle change cannot be underestimated.

On a sheep farm you can work hard all week long and then everyone can take a 3 day weekend to go and do whatever they want. The sheep can be just left in the paddock for a few days. But a dairy farm needs to have people on it every day to get the milking done. This aspect is what can make dairy farming difficult.

The never ending need to have enough people on the farm.