Fonterras Trading Among Farmers Launches, But I Still Don't Understand It

I've blogged about TAF before here and here. We now have a bit more information on how it will play out in practice. But to be fair, I still don't really understand it and this view has been expressed by many observers in the media and the industry. It is not fully understood and some of the reason for this is Fonterra themselves don't know exactly how the governance will work, as they are still undertaking a review.

My thoughts;

Will farmers sell some of their shares into the fund?
I think they will, there are lots of farmers who have very high debt levels, the drop in the forecast payout is making many farm budgets drop into the red. I think many of these farmers would sell 25% of their shares into the fund and use the proceeds to pay off debt.

The dividend portion of the shares is estimated to return net 4.2%-5%, farmers will be paying 7%-8% interest on their debt, so they make a greater return by reducing their debt. 

Farmers can only sell 25% of their shares
I think this is because farmer shareholders want to retain control. From my perspective, I felt the ability for a farmer to supply Fonterra without having to buy shares is an advantage of TAF. Lets say I was planning to milk 100 cows with a mobile cowshed. In order to supply Fonterra I will need to buy about $170,000 worth of shares @$4.52/share. Thats $170,000 that I will have to borrow from the bank. If I retained these shares I would receive the full farm gate milk price plus the dividend component of .32 cents/share. On current forecasts that would be a total payout of $5.25. My interest bill on the shares will be 170k @7%/38000kgms = .31 cents/share. The dividend component pays the interest of the shares.

If I could sell my shares into the fund then I would not have to borrow $170,000, but I would only receive $4.93/kgms. From a cash flow perspective the two options are the same. But I would have to forfeit any capital gain on the shares.

I would be prepared to accept that in order to not have to borrow the $170,000, because as a farmer starting out. I don't have the ability to borrow lots of money as I don't have any land to offer as security. By not having to buy shares I reduce the amount I have to borrow by 50%.

At the moment, I would buy shares for $170,000 and sell 25% for $42,500 and only need to borrow $127,500. Which is better than not selling any at all.

Well at least, thats how I interpret TAF to be. I'm not sure if I understand it peoperly though.

Sharemilkers buying shares
Willy Leferink from Federated Farmers said;

Many sharemilkers will be thrilled at the prospect of buying Fund units because units are convertible to shares, should a unit holder go farming in their own right.

It is an innovative means to build and broaden someone’s capital towards the ultimate goal of farm ownership.

If a sharemilker can make 15% on their money, why would they buy Fonterra shares that return 3%-5%. They would be better off to invest in cows.

Are these shares just like bonds?
These shares will probably sell like hotcakes. But I still can't see why an investor would want to buy shares instead of a Fonterra bond. Fonterra Bonds are yielding about 7% gross, which is the same as the estimated return these share will return. These shares have no voting rights and your capital is not secured like it is with a bond. Then investors also have to consider that the farmers (who have control and voting rights) benefit from a lower dividend and a higher milk price, which is 180 degrees opposite to what an outside investor would want. 
On the other hand they have the upside potential of Fonterra increasing its profitability and therefore increasing the dividend amount, which theoretically increases the total value of the shares as well. 

Fonterra consistently say that Trading Among Farmers is not about bringing in new capital, but about reducing redemption risk.

This whole trading among farmers is a ballsy move. I'm not a conservative person and I love change and the excitement of something new, but man, TAF is a complicated, long winded way of solving a problem (redemption risk) that wasn't even a big problem in the first place (in my opinion).

The inclusion of outside investors is common in corporates, but in a co-op I can only see it causing more tension. We've got tension among farmer suppliers and the directors and now they have added another party to the mix whose goals are at odds with the farmers. There are lots of other ways Fonterra could deal with farmers withdrawing or cashing up shares, without such fundamental and structural change.

Farmers are right to be a bit wary of this.

I hope it goes really well and Fonterra get held up as an example to the world.

What New Zealand Agriculture Can Learn From The iPhone

I've never owned an Apple product. I was tempted to buy a Macbook Pro recently, but the temptation evaporated when I saw the price tag. Now that the new Windows 8 ultrabooks with touch screens are here, my next laptop will definitely not be a mac.

This got me thinking about Apple and why they are so successfully. 

It goes without saying, Apple is a hugely successful company. When people analyse Apples success, they talk about Apples design focus, their pursuit of perfection, the innovative thinking, the drive to make technology simple or the Steve Jobs factor. All these factors explain why they have great products and such brand loyalty, but it doesn't explain why Apple is the most valuable company in the world.

This graph shows that if you consider an iPad a computer then Apple has 25% of the US computer market. Which is a huge percentage. But if market share was the key to financial success then HP and Dell would be just about as profitable as Apple. The fact is Apple makes just about as much profit as Microsoft, HP, Dell, Google & Facebook combined. 

The reason Apple is so profitable is that Apple have total control of their value chain. This means they control the design, manufacture, distribution, retail and after sales service of their products. This doesn't mean that they do all of these things themselves, but they certainly control it.

For the past 8 years I have been involved in the retail sector and I know a bit about the margins on electronics. On average a retailer will make a margin of 8%-10% on products such as televisions, computers & home theatres etc. Generally a manufacturer will have a recommended retail price that they expect retailers to follow, but the retailer is free to sell the item for whatever they like.

The next time you visit your local appliance retailer you will see that the computer section is filled with "Sale" or "Reduced" signs all over the PCs. A quick glance over to the Apple display and you will see no such thing. I have never seen an Apple product on sale at a discount. This is because Apple set the retail price of its products and the retailer can not sell it for anything other than that price, secondly Apple only gives retailers a 3% margin on its products. So the latest 32gb wi-fi iPad retails for $879.00, the retailer will get $26.37 including GST.

Why would a retailer stock Apple products if they only make a 3% margin?  Because Apple products bring customers too their stores. Apple can treat retailers like this because their brand is so strong and their products are popular. The retailer can try and make their money by selling you an extended warranty (never buy an extended warranty), the protective case, the charger or docking station. The accessories have healthy margins.

To become an authorised Apple reseller you have to jump through hoops, once you are approved, you are then fortunate enough to be totally controlled by Apple.

My point is Apple have total control of the retailers and they apply this same control to every aspect of their supply chain.

Samsung have been putting in a good effort to compete with Apple in the smartphone and tablet markets. Samsungs Galaxy S 3 smartphone sales are matching Apples iPhone sales, but total sales are not even half the story.

This research paper called: Capturing Value in Global Networks: Apple’s iPad and iPhone, is quite interesting.

The report outlines Apples supply chain and details where the money from Apple products end up.

Who captures the financial value?

Like the iPod, the iPad and the iPhone are big money makers for Apple. While other companies are thrilled to be part of the supply chain for these highly successful products, their benefit in dollar terms pales in comparison to Apple’s.

They go on to say 

In the case of the iPad, Apple keeps about 30% of the sales price of its low-end $499 16GB, Wi-Fi only model (and more if the unit is sold through Apple’s retail outlets or online store). We estimate that Apple keeps a healthier 58% of the sales price of the iPhone 4. In both cases, these are far greater than the amounts received by any other firms in the supply chain.

Apple publicly acknowledge that they make an overall margin of 40% on its products. This is an average across all their products. What this figure means is if a product retails for $1,000, Apple receives $400. 40% is high for consumer electronics company. Samsung has an average margin of around 16%-20%.

Assuming these averages are correct, Samsung needs to sell twice as many products as Apple does in order to make the same amount of money.

So how does Apple actually make these large margins?

Its because they control the whole process of their product. Apple design the products, they design and create the software, they source the components and have the products assembled in China. 
You can be sure that Apple will not pay more than they have to. 

An excerpt from the reports says:

we estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers.

(the estimated factory costs of an iPhone or iPad), the portion retained in China's economy is a tiny fraction....

 Apple are in control of the distribution of their products. This means they can control when every market receives shipments and this can be tied into their marketing and product release strategy. 
Compare this to the launch of Windows 8, because Microsoft generally don't make hardware (ignore the Surface) they are reliant on other manufacturers like HP, Toshiba and Sony to get their Windows 8 products to market. A quick wonder around Harvey Norman and Noel Leeming last week showed a distinct lack of Windows 8 touch screen laptops available in the week Windows 8 was launched. This would never happen with an Apple product launch. They keep it all in house and control all the releases.

But the biggest factor to their profitability is they control the retailing of their products. As discussed earlier they don't give up much margin to their authorised resellers, but the strategy of setting up their Apple destination stores has meant that they retain all of the margin that may have gone to a retailer. The Apple stores are hugely successful. In this interview with the Harvard Business Review. Ron Johnson, who was the VP of Apples retail division says;

Look at the Apple Stores, which have annual sales averaging $40 million per store in a category that in 2000 everyone said would move entirely to the internet. Today the Apple Stores are the highest performing stores in the history of retailing.

 In keeping with all other aspects of their business, they don't pay their staff more they have to either.
Apple also have their on-line store which is popular, they make it easy for customers to download their software from their on-line store therefore retaining the margin on software as well.

Whether a customer buys an iPad from a reseller, and Apple store or Apples on-line store. The fact remains Apple retains almost all of the retail margin.

Then there are the little things that people don't think about. Apple has designed its products to get the maximum amount of money out of its loyal customers. Take the battery replacement for your iPhone as an example. The iPhone is designed so that you can't open it, you have to send it away to Apple and have them replace the battery for you. Of course that will cost you $145, compared to $39.00 for a replacement battery for a Samsung Galaxy S3 where you just open the back cover and do it your self.
Then there are the accessories like the standard Apple mouse which costs $82, and that's not even wireless. The standard Microsoft mouse costs $25.
Then there is Apple Care which is Apples extended warranty program. An Apple care plan for an iPhone will cost you $132 and extends your warranty for an extra year to a total of two years. Which is another great way to extract more money out of their loyal fans.

Finally we get to the most obvious part of the supply chain, which is the retail price. Apple products are always the most expensive when compared to a comparable product. The iPhone 5 32gb model retails for $1199, the comparable Samsung Galaxy S3 retails for $1049. The iPhone 5 is 14% more expensive.

Samsung can probably build a Galaxy S3 for the same price as Apple can have the iPhone 5 built. They may even be able to do it cheaper as Samsung supply a significant amount of the components for the iPhone. But Samsung have to pay a margin to a retailer (8%) and then they also have a product that retails for 14% less than the iPhone. If you add these two figures up you get 22%, which is about the difference between Apples 40% margin and Samsung's 20% margin.

Even if the retail price of the iPhone 5 & Galaxy S3 were the same, the design of the supply chain dramatically increases the profitability of the iPhone, because Apple have more control of  the entire supply chain.

Apple can operate a supply chain in this manner because of the power of their brand. Samsung don't have the brand power to force retailers to sell you product for next to no margin, they can't also ask customers to pay the premium that Apple can. 

Samsung is a very broad brand, they do lots of things from supplying components to other brands, through to an entire range of household electronics and of course smartphones and tablets. 
Apple just do computers (iPhone & iPad are computers) and they make sure they do it very well and they own and control the entire process, from design through to the after sales servicing. They have designed the entire process to make them the most amount of money possible.


New Zealand's agricultural sector could do well to study Apples business model and supply chain design. I'm really struggling to think of a major NZ agribusiness that even attempts a vertical supply chain.

Fonterra is New Zealand's economic saviour, but Fonterra is a commodity supplier. It is equivalent to a Korean company that supplies a component to Apples iPad or iPhone and receives less than 7% of the final retail price.
The red meat sector is in the same, farmers are relegated down the value chain and as a result receive only a small fraction of the retail price.
Australian dairy farmers are at the mercy of the supermarkets because they don't control their supply chain. The same is true for our UK dairy farming friends too.

Is it possible for New Zealand's agricultural sector to have a vertical supply chain?

Why does Fonterra stay as a commodity supplier to the world? 

How can sheep/beef farmers control their value chain?

The answers to these questions are complex and the solutions are not easy. If it was easy it would have happened long ago. But if it can be done, it has the potential to really boost the New Zealand economy.

Steve Jobs picture from www.uproxx.com

Mobile Milking System: Alternative to Sharemilking?

The third area the mobile cowshed can be useful is by providing an alternative to traditional sharemilking.

3. Alternative career pathway

Dairy farming in New Zealand has always had the share farming system. This is where young farmers with limited capital partner with land owners to operate a dairy farm. Traditionally the farm owner/operator gets to the point where they don't want to milk the cows every day any more and they employ a 50:50 sharemilker. 

The sharemilker provides the cows and runs the farm and the farm owner provides the land. They basically split the farm income & 50:50. 

Financially, sharemilkers can do quite well. They make a return on capital of 15-20% and use the cashflow to buy more cows and grow their business.

This has worked really well over the decades. But dairy farming has changed quite dramatically over the past 20 years.

As the figures above show the since 1990 the number of Hectares in dairy has increased by 69%. Over the same period the number of dairy farms has decreased by 21%.

In 1990 the average herd size was 160 cows, today the average herd size is 322.

Sharemilking is still a good option but, as farms get bigger and the ownership structures become more corporate, there are less and less sharemilking positions around. This is especially true in the South Island. This article tells the story of sharemilkers not being able to find a sharemilking position in Canterbury.
As farms get bigger, the sharemilking positions get bigger too which requires more cows, which means more capital is required by the sharemilker.

Lower order sharemilking or contract milking has become popular. This is where the sharemilker does not actually own any cows or only owns a small percentage of the herd. These LOSM take a cut of the income and pay a portion of the expenses. These positions are still a good way forward and contract milkers can make good money without having to make an initial investment in cows.

The graph below shows the traditional dairy regions of the Waikato & Taranaki, having the highest percentage of 50:50 sharemilkers. These two regions have a much smaller average herd size than Canterbury and Southland. Canterbury and Southland represent where dairy farming is going in the future, because this is where the the main growth has been over the last 10 years. These regions have an average herd size of over 500 cows and as the graph show sharemilking does not feature as highly as it does in the North Island.

Sharemilking is important because it allows a self employed business person to grow their business and create wealth for them selves. Often the real innovation and productivity gains are made by sharemilkers who are driven to succeed and grow their business.

To me, a dairy industry made up of employee managers working for a large scale corporate or syndicated dairy farms would be a tragedy. I'm not saying we are there yet but in 20 years time the industry will be.

So its important that young farmers can invest in their own farming business, make money and eventually buy some land of their own.

Currently a sharemilker needs to find a dairy farmer who has a converted dairy farm and who is also looking to employ a sharemilker with the correct amount of cows for the farm. As I said before these people/positions are becoming rearer. 

A quick read of the sharemilker financials from  Brown Glassford & Co show that the average Canterbury irrigated sharemilker has a total farm capital of over 2 million dollars and has a herd size of 758 cows. Not many entry level position here.

The mobile system has the potential to make small scale dairy farming profitable. Small scale dairy is where young farmers with limited capital need to start.

With the mobile system a young farmer only needs to find a land owner who is willing to either lease some land or take part in a joint venture similar to a traditional sharemilking agreement. The only difference is the land owners land does not need to be converted to dairy.

This means a farmer starting out with 100 cows can joint venture with a sheep farmer or the they could lease some land from an arable or sheep/beef farmer and drive a mobile cowshed onto the land and start milking cows. At the end of the lease or joint venture agreement, the dairy farmer just drives the cowshed away to the next farm. Obviously the land will have to be suitable for cows.

It could be advantageous for both parties. As I have quoted in my earlier post the average operating profit of a sheep/beef farmer is $500/ha and the average operating profit of a dairy farm is $3,000/ha.

If a young dairy farmer leased some land from a sheep farmer for $1,000/ha. The sheep farmer has doubled their money and they don't have to do any work on that land. The young dairy farmer stands to make a 15-20% return on capital under this arrangement. Because unlike traditional sharemilking agreements they will receive 100% of the milk cheque.

So lets look at some financial data, as an example of how much money a farmer milking 100 cows on leased land can make.

There is very little up to date financial data available for small scale dairy farms, so I chose to base these figures on the client data of Brown Glassford and Co . The irrigated owner operator and irrigated sharemilker data is made up of farms with large herds of approximately 750 cows. As the herd size gets smaller the average measures such as per cow or per kgms can get distorted especially for wages. But the figures above stack up with my itemised budget and with the figures of a few of my smaller scale dairy farming friends.

The budget above shows that a farmer could make $46,800 before tax profit from 100 cows on leased land. Which is a pretty viable business for an one person.

Key points

$3.20 FWE

Some people may scoff at my farm working expenses figure of $3.20/kgms. The average for the 11/12 year was $4.14/kgms. The mobile system is a very basic low input pasture based farming system. Many Canterbury dairy farms (which this data is taken) have moved to a system utilising imported feeds, high stocking rates, high N fertilizer and cows grazed off over the winter. These systems have high FWE. I know farmers who operate low input systems with FWE around $3.00/kgms.

$5.50 payout (projected for the current season)

Interest & Rent

Based on a rental of $1,000/ha, which is at the top end of what irrigated land in Canterbury is being leased for. Interest based on $250,000 mortgage @ 7%.

Setup cost

The mobile cowshed required to milk 100 does not need to be expensive. A 10 cup herringbone design with a second hand plant will be fine and can be set-up for approximately $40,000. I have included Fonterra shares. But farmers can supply other dairy companies, such as Open Country Dairies or Synait, who do not require farmers to buys shares. This would reduce the set up costs by $170,000.

The other option is for a young dairy farmer starting out to joint venture with a sheep/beef or cropping farmer, by using a standard sharemilking agreement.

In this example the land owner will provide the land, the cowshed and the dairy company shares. The land owner will take a percentage of the milk income.

The sharemilker only needs to supply the cows, farm equipment and the labour.

The budget below is based on the budget above, but shows how it would look for both parties.

Both the land owner and the sharemilker make around the same amount of profit as in the previous example. The difference is that the set up costs are shared. In the leased land example the sharemilker pays for all the setup costs. In the sharemilking arrangement the sharemilker only needs to fund the cows, therefore the interest costs are lower.

This option is easily assessable for farmers with a small amount of capital. They will need to be able to get a loan for $100,000-$200,000 to buy 100 cows, which is an achievable target. From here they can build their herd up over the following years. 

From the land owners perspective, I have assumed that they have borrowed 100% of the setup costs. That includes Fonterra shares, cowshed, and other costs.. The budget shows an increase in profitability compared to running sheep/beef. If we refer again to the client data from Brown Glassford & Co and we look at the sheep/beef downlands/flatlands survey. We find that for the 2011 year, the benchmark group have a net farm profit of $263/ha and the average net farm profit is $144/ha.
The budget above shows a net farm profit of $1,181/ha. 

A point worth noting is that many of these sheep properties are not irrigated and may not be suitable for dairy. Therefore it may be unrealistic to compare Canterbury sheep farmers financial data with that of dairy as cows can't be milked on dryland properties. There are plenty of sheep/beef properties that are irrigated that are included in this data. But if we compare the Canterbury sheep/beef farmers financials to that of Southland sheep/beef farmers (where irrigation is not required), we find that the the net farm profit/ha is very similar. So we could assume that this operation is taking place on a irrigated sheep farm or a farm in Southland. The concept stacks up either way.

There are lots of unknowns with doing budgets on a project like this. For instance should the fertilizer costs be much higher to account for the lower fertility of a sheep farm? What will the farm working expenses really be? Will this system be cheaper to run or the same as a conventional dairy farm? The questions go on. No one will know untill it is tried.

I'm not saying that traditional sharemilking or contract milking is a bad idea, I'm simply looking at alternatives for young people who either don't have the funds to go sharemilking or can't get a contract milking job. The future of dairy is clear, farms are going to continue to get bigger and require more capital to setup. This trend is not going to make it easier for young farmers to progress into farm ownership. 

Maybe the mobile system is one way to provide profitable entry level options for young farmers. 

If you do what you have always done, you get what you have always got. 

Mobile Cowshed & Nitrate Leaching Of Dairy Cows

The second reason why I think the mobile cowshed can be helpful is with nitrate leaching.

2.Nitrate Leaching

It's not obvious at first, but after researching nitrate leaching I saw how the mobile cow shed can be used to create a farming system which leaches less nitrogen.

It's important to note that the major cause of nitrate leaching from dairy farms is the cows urine. The cows urine patch is a very concentrated deposit of nitrogen and the grass within the urine patch is not able to absorb all the nitrogen. The result is the nitrogen converts to nitrate in the soil and then moves down the soil profile into the ground water.


This table taken from a report for Environment Bay Of Plenty, it shows the nitrate leaching rates of various farming systems.

Most New Zealanders would not know that market gardeners have almost twice the amount of nitrate leaching of a dairy farm. Neither would they know that cropping farmers leach just as much as an intensive dairy farm.
These figures seem to go against what I had always been told about urine and nitrate leaching, because there is no urine on a market garden. The reason cropping & market gardeners leach nitrates is because of the high fertilizer use and the high amount of plant residue left in the soil, especially over winter.

Market gardeners and cropping farmers make up such a small amount of land area compared to dairy and sheep. The huge growth in the dairy industry has seen it take up much more of the NZ land area and the high profile of Fonterra has led to the public attention around the leaching of the industry.

Sheep farms leach much less nitrate than a dairy farm, this is due mainly to the fact that sheep produce a smaller amount of urine in each patch and the grass can absorb it better. Also many sheep farms will be on dry land with very low annual rainfall. This means that these farms will have low stocking rates and dry soils leach less nitrate.

If we look at a standard dairy farm. The cowshed is usually placed in the middle of the farm. The cows have to be within walking distance of the cowshed, so they can be milked twice a day. This means the cows are restricted to that one piece of land.

It's common for a dairy farm to have a stocking rate of 2.7-3.0 cows per hectare. These cows start grazing in paddock number 1 and they will rotate around the farm and be back in paddock number 1 in 20-30 days (depending on grass growth rates etc). This means that the cows are urinating on the same ground month after month, year after year. 
The result is the continual application of urine onto the ground is causing excess nitrogen to be applied to the soil.

With the mobile system, the cowshed is mobile. This means the herd of cows can be mobile too. Which means that the cows don't have to be on the same land year after year. Which can result in a reduction in the amount of urine that is being applied to the land.

This allows farmers to be flexible about how they farm their cows.

If we use the example from my previous post of a 200 ha sheep farmer diversifying into dairy by milking 100 cows, we can see how this principle can be put into practice.

These 100 cows will need 33 ha at a stocking rate of 3 cows/ha. 

So in year 1 the cows can be milked on a 33 ha block at the front of the farm, the cows just rotate around the 33 ha block as they would on any farm. In year 2 the cows can be moved to a new 33 ha block situated in the middle of the farm. In year 3 the cows move again to another 33 ha block. This can go on and on until the cows return to the first 33 ha block some years later.

Once the cows have moved off each 33 ha block, it can run sheep again.

The result is less nitrogen is being applied to the soil.

An alternative grazing option would be to just start the herd at the front of the farm and simply rotate around the entire 200 ha property. It could take the whole year for the cows to move around the entire property. Which has the same result of having less nitrogen applied to the soil by the cows urine.

Cows put nitrogen into the soil via urine. Crops on the other hand take nitrogen out of the soil. So it makes sense to combine the two farming systems.

If the farmer planted a crop on the 33 ha block once the cows had moved to the new block, in theory this crop could adsorb the excess nitrogen deposited by the cows. Wheat is a very nitrogen hungry crop and it has a root system that can go down 1.5 metres, so this could be an ideal rotation. The cows naturally apply nitrogen to the soil and the crops naturally absorb the excess nitrogen out of the soil. This type of system could reduce the crops need for nitrogen fertilizer. High fertilizer use is one of the main causes of nitrate leaching on arable farms.

It could be possible to plant a winter active type crop, which will absorb the nitrogen out of the soil over the winter period, which is when a majority of nitrate is leached. 

This is the basic concept, obviously the cows don't apply nitrogen evenly (if they did we wouldn't have leaching problem), so crop yields may be lower in this type of system. There needs to be a lot more work done to look into this type of system.

By making the herd of cows mobile, it allows farmers to move the cows around. They can use the cows ability to naturally add nutrients to the soil as an advantage. It allows farmers to move the herd away again before the cows nutrients become a disadvantage.

A traditional dairy farm could run this system at the moment, but it will require a reduction in stocking rates to account for the addition of the crops. This becomes uneconomic as a traditional dairy farm model is based on the entire farm generating a high financial return. A reduction in cows which return $3,000/ha and the addition of crops which return $700/ha will seriously reduce the income of a dairy farm, which will make it uneconomic.
That's the real problem with nitrate leaching reduction measures. Farmers know how to do it, they just don't know how to do it economically.

By introducing dairy cows onto sheep/beef & arable farms these farmers are making an increase in income, so the mixed dairy/cropping/sheep example above is profitable for these farmers.

I seriously believe, that the future sustainable growth of the dairy industry lies in the hands of the sheep/beef and cropping sectors. New Zealanders will not tolerate the continued expansion of intensive dairy farms, as we have seen in the last 20 years. The proposed nitrate leaching restrictions that we are seeing, is the beginning. I think the dairy industry can continue to expand, it just has to do it differently. 

The integration of dairy cows onto sheep/beef and cropping farms is one way the industry can expand, which adds wealth to New Zealand but it can do it with out the adverse environmental effects.

Sheep & Beef Farmers Can Diversify Into Dairy

In my last post I outlined how farmers around the world have been using mobile cowsheds for a number of years.

There are three main issues that I feel the mobile cowshed can help solve.

1.       Allows farmers to diversify into dairy

Figures obtained from accountant’s client data show that the average sheep and beef farmer in New Zealand makes an operating profit of $500/ha. The average dairy farmer makes over $3,000/ha in operating profit.

These two figures are the reason we have seen such a dramatic change in land use over the last 20 years.

These graphs by Beef & Lamb NZ gives a clear picture. 

Its clear to see that farmers are converting from sheep & beef to dairy. 

In the past the only way a sheep/beef farmer could milk cows is to undergo a full scale dairy conversion. This is an irreversible decision and a major financial commitment, so the decision to convert is not taken lightly.

The mobile system allows sheep/beef farmers to access the $3,000/ha operating profit, without having to complete a traditional conversion.

They simply buy some cows, Fonterra shares and a mobile cowshed. They just drive the cowshed into the paddock and start milking cows. The only permanent infrastructure that is required is a tanker track and maybe a stock water system. You could say it enables farmers to "soft" convert their farm. The conversion is easily reversible. 

Using the operating profit figures outlined above, we can look at a 200 ha sheep/beef property as an example of how diversifying into dairy can be of benefit.

200 Ha * $500/ha =$100,000 operating profit as a 100% sheep/beef farm.

If this farmer decided to milk 100 cows and they had a stocking rate of 3 cows per ha, they would require 33 ha.

33 ha * $3,000/ha =$99,000

167 ha * $500/ha = $83,500

                    Total    $182,500

By milking just 100 cows this farmer could increase their operating profit by $82,500/year, this is an 82% increase in profitability.

We have to be careful when dealing with averages, but our modelling shows that these figures are about right. Even if they are totally wrong and we half the profit from $82,500 to $41,250. That's still a great return.

I believe the ability to diversify into dairy can help with the difficult issue of farm succession, that so many sheep/beef & arable farmers are facing. The statistics tell us that the average age of a farmer is 58 years old. This Beef & Lamb NZ graph shows that average income of a sheep/beef farmer is $64,000/year. But in the last five years it has been much lower than that.

It’s difficult for these farmers, who are reaching retirement age to bring a son or daughter onto the farm with such a low level of cashflow. The addition of cashflow generated from a small herd of cows creates options for farmers who are struggling with this issue.

It's easy for a farmer to diversify into most farming classes. A sheep farmer can simply plant a few crops on his land or buy some beef cows and he is now diversified into three farming classes. He can increase and decrease the percentage of each class as he pleases, by simply selling one class of stock and buying more of the other.

The option of diversifying into dairy has never been an option because of the large amount of capital required to set up a dairy shed. It has always been a all or nothing type option.

The mobile cowshed changes this.

Updated:

Just to clarify; Operating Profit is before interest costs, depreciation, and tax. So in this example this farmer would need to spend $180,000 on 100 cows (@$1,800) and about $180,000 for 38,000 Fonterra shares(@ $4.52/share). So the farmer would need to invest about $360,000 and that is not including the cowshed. I haven’t put a cost for the cowshed because I don’t know how much that will cost yet. Let’s say that this farmer will need to invest $500,000 to set up their 100 cow operation. And let’s assume that they borrow 100% of the set up costs against the equity that they have in the farm land.

The interest bill at 7% interest will be approximately $35,000. So this will need to be deducted from the $82,500 figure that I used before.

The reason I used Operating Profit is because that is a more reliable figure to compare the profitability of farming operations, as it does not take into account individual farmers debt levels as these vary wildly. People can simply do a quick calculation like the one above to work out their own borrowing requirements.

As a comparison a new traditional 15 aside herringbone cowshed costs about $400,000. The farmer will then need to buy cows and shares on top of that.

In the example above, the farmer can simply unconvert the farm by selling the cows, Fonterra shares and drive the cowshed to a new buyers farm. You can't do that will a traditional cowshed.

The Mobile Milking System

A few years a ago a friend a showed me a picture of a Belgium farmer milking a small herd of cows in a paddock. The farmer was using a portable cow shed. It dawned on me that a cowshed can be totally mobile.

I now believe that a mobile cowshed has a huge amount of potential, particularly for young farmers.

For the last year I have been working with Dr Ian Domigan and the Farm Management Department from Lincoln University, to investigate how the mobile cowshed could fit into New Zealand farming systems. We completed a pilot study earlier in the year which can be found here on the One Farm website.

Below is a mobile cowshed that is being used in Ireland. It is a 15 aside herringbone cowshed and it moves after every milking.

Here is a video of the cowshed in action.

This is another mobile cowshed that is being used in Argentina by a farmer called Luis Peluffo. It’s a bit different to the Irish example but the cows are milked in the paddock and the cowshed moves after every milking.

How Does It Work?

Rather than the cows going to the cowshed the mobile cowshed goes to the cows. The cowshed is simply parked in the paddock and the cows move from the current break (or paddock) through the cowshed and directly onto their new break of grass.

There is a separate trailer which contains the vat, milk cooler, and all wash up facilities. Once the cows have been milked the machine is washed and the portable vat is taken to the main vat located by the tanker track.

The cowshed runs on a generator, which powers the vacuum pump, lights, water pumps, chiller unit and water heating.

The feedback I have had from farmers around the world using mobile cowsheds is that the cows associate milking time with getting fed. They learn that moving through the cowshed is the way to getting onto their new break of grass. So cow flow has not been a problem.

The effluent issue is solved in a different way than a traditional cowshed. In a normal cowshed the cows are brought to the same central holding yard twice a day and all the effluent is collected. That effluent is then spread using some type of irrigator.

The mobile cowshed is moved after every milking. The cows will gather at the entrance of the cowshed. The farmer may put a portable electric fence around the herd to stop them wandering off. The cows then move through the cowshed over the next 1-2 hours (depending on number of cows and the size of cowshed). At the end of milking the cowshed is moved to the next break. So the cows are not standing in the same place twice producing effluent. For the rest of the season the cowshed should not be parked in the same place twice. The resulting effluent discharge, will be the same as a herd of cows standing in a gate way or a mob of beef animals being run through a set of yards.

I have had a few meetings with Environment Canterbury and they have said that this dairy system will may require a resource consent. This is because dairy farms need to obtain consent to discharge effluent onto land. With the mobile system, effluent is not being collected. So you don’t need to discharge it. The view is that this system in the same as a beef farm from an effluent perspective.

I believe there are three areas where the mobile system can be useful. 

1. Allows sheep/beef & arable farmers to diversify into dairy without having to do a full dairy conversion. This equates to an increase in cashflow.
2. Allows farmers to move their milking herd to different areas of land. This opens up a whole new world of farming systems, that can reduce nitrate leaching from a dairy herd. Such as integrating a herd of cows into a cropping rotation. 
3. Provides an alternative pathway to farm ownership. Sharemilkers can partner with sheep/beef & arable farmers, providing additional sharemilking opportunities and cashflow for land owners.

I'm hoping to get the funding together to trial a 200 cow operation, using a prototype mobile cowshed.

So what do you think? Do you think this is a good idea?

I'm keen to hear peoples opinions.

Lucerne Based Dairy Farm- More Feed, Less Irrigation, Less Nitrate Leaching

Richard Campion is a lecturer at Lincoln University; he presented a paper to the 18th International Farm Management Congressheld in Methven last year. His paper was titled “Utilising Lucerne Potential For Dairy Farming”.

In his paper he modelled the Lincoln University Dairy Farm using 90% lucerne and 10% winter crop. His report states that the ryegrass and white clover pastures at the Lincoln University dairy farm produce on average 17,000kg DM/ha/yr. Irrigated lucerne stands have been shown to produce 24,000kg DM/ha/yr. But the interesting point is that Lucerne has far greater water efficiency than ryegrass. For this reason irrigated lucerne can grow 25% more dry matter than pasture and it can do it with only 1/3 of the water that ryegrass needs.
So if a dairy farmer changed their irrigated pasture system to a lucerne based system, they would reduce the water required for irrigation by approximately 65%. This is a massive potential saving.

Purely from a water efficiency perspective, lucerne has a clear advantage over ryegrass pasture. This has implications from the environmental perspective such as dairy’s water footprint as well as from a cost saving point of view.

I worked on a 800 cow irrigated dairy farm in Canterbury, the power bill just for the irrigation pumps alone was $200,000/year. This is quite high because the water was very deep, the Canterbury average is closer to $60,000/year. If a farmer could reduce their irrigation power bill by two thirds, then that is a significant saving.

I read about farmers being praised for their water use efficiency by using moisture meters and other tools that allow them to irrigate much more efficiently. Which is great, but surely these farmers would be only achieving water savings in the order of 5-10%. A lucerne based dairy farm should be able to make a 65% reduction in water use!

Water efficiency is not the only advantage of lucerne. Because it is a legume it fixes its own nitrogen and therefore does not require nitrogen fertilizer like a ryegrass based system does. The average Canterbury dairy farmer spends about $80,000/year on nitrogen fertilizer. The lucerne system has the potential for significant fertilizer savings. Because lucerne does not need nitrogen fertilizer, this has an environmental advantage as well, as nitrate leaching is the main form of pollution from dairy farms.

Lucerne has a root system far greater than a ryegrass pasture. It is not uncommon for lucerne to have a root depth of 2-3 metres compared to 20-30 cm for ryegrass. For this reason lucerne roots can absorb nitrates further down the soil profile than ryegrass can, this means a lucerne stand should leach less nitrate than a ryegrass paddock. Lucerne is in fact used to clean decontaminated soils around the world.
As farmers look for methods to decrease the amount of nitrate their farms leach, lucerne must surely be an option.

Richard points out that a lucerne system will have to be managed quite differently and is quite a departure from a conventional dairy farm.

Bloat can be an issue with lucerne feed but this can be addressed with bloat drench or boluses. Richard suggests that raising all young stock on lucerne will enable them to become much less susceptible to bloat as a adult. He recommends not breeding from cows that get bloat as well.

lucerne requires care with stock on wet soils as the crown can be damaged, but this is true of ryegrass as well. A lucerne system will have to have some other form of feed in the spring as lucerne will not be ready to graze until October and the wet spring conditions risk damaging the plant.

As farmers in Canterbury look to the future, they can be sure that the battle with nitrate limits and the competition for water allocation will increase. A lucerne based dairy system will have to be managed differently, but the potential advantages especially the water efficiency and the plants ability to absorb nitrates must mean it plays a part to solving these two issues.