The Sheep Industry Out Perform Fonterra. True Or False?

Sheep farmers receive 44% of the retail price of their products. So if a portion of lamb retails for $100 the farmer will receive $44.

The sheep industry is struggling with low profitability. The last 20 years has seen sheep farms converting to dairy because they offer a higher return.

Among sheep farmers, there seems to be an attitude that their meat companies are doing a poor job of marketing & selling lamb, both domestically and internationally.

There is a cockiness among dairy farmers around the returns the dairy industry are making. They seem to think the reason for the industries success is because they have an outstanding level of awesomeness and that the people running Fonterra posess superior business acumen, compared to the sheep industry.

I often hear both sheep and dairy farmers comment that, if the meat industry could just replicate Fonterra, then the industry would be a success.

Please take the time to listen to this 5 minute radio segment from The Framing Show. It's worth it.

Every Friday, dairy farmer Jason Uden & sheep farmer Jeremy Rookes discuss the topics of the week. There is no clearer example of the difference between sheep farmers and dairy farmers than these two.

Jason is a stereotypical dairy farmer, he has the high pitched voice with the Waikato dairy farmer accent. But the thing that stands out the most is his confidence that the reason for dairy farmers success, is their talent combined with Fonterra's superior performance.

Jeremy Rookes would sooner go broke than don the blue overalls and gumboots, which tend to be the dairy farmers uniform. Milking cows would go against his principles. Jeremy feels that the sheep farmers are doing all they can "on farm" and are being let down by the meat companies.

These two farmers pretty much represent the attitudes of their respective farming groups.

How does the sheep industry compare to Fonterra?

If we have a look at how the sheep industry compares to Fonterra in terms of providing value to the farm gate level. The percentage of retail price that the farmer retains is a good indication of how hard the Co-op is working for the farmer.

It's important to note that both the major meat processors/marketers and Fonterra are Co-ops. So their purpose is to return profits to the farmer shareholders.

Aaron Meikle (@AaronJMeikle) is the central South Island extension manager for Beef & Lamb NZ. We had a conversation via twitter, where Aaron produced the graph below.

That figure surprised me. Thats a high proportion. Apple, which is the most valuable company in the world receives around 40% of the final retail price of it's products. Apple is a company that develops groundbreaking products and has total control of its value chain and it keeps 40% of the retail price. (although electronics do have low margins)

So for a sheep farmer to keep 40% is a pretty impressive figure.

The above graph shows the type of lamb product mix that is exported. In the 1970's 85% of exports were frozen carcases which were processed off shore into retail cuts.
Today a majority of the processing is conducted in New Zealand and the lamb is processed into prepackaged branded frozen cuts. Which is obviously much more profitable.


How does Fonterra compare?

I can't find any official numbers which deal with the percentage of retail that dairy farmers retain, but we can get a pretty good indication.

At a $6.00/kgms payout a Fonterra supplier will receive around $0.50 per litre of milk. The supermarket is selling 1 litre of Anchor milk for $2.60. So, the farmers share works out to be 19%, which is less than half the return the sheep farmer is receiving.


They tell us that the domestic milk price is related to the export milk price, so it's safe to assume that the price of milk powder is similar to the price of milk. I would assume that the farmers share of the milk powder price would be similar.

While these figures are just an indication, it appears that the lamb processors are returning double what Fonterra is returning to it's farmers.

Whole milk powder is a base ingredient. The major food companies like Kraft and Nestle buy the milk powder and turn it into more processed retail products.

If we looked at a chocolate bar or a tin of infant formula and we calculated the portion of the final retail price that the farmer receives, I would guess it would be well below 10%. 

If we look at the graph above, I would liken Fonterra to the sheep industry selling frozen carcases in the 1970s.

The sheep industry are doing everything they are supposed to do, they have stopped exporting unprocessed carcases and are now producing branded retail products.

If we did as Jason Uden continually suggests on The Farming Show, and put Sir Henry Van der Hayden (former chairman of Fonterra) in charge of the meat industry. I don't think you will see any change to the fortunes of sheep farmers. Fonterra seems quite happy to continue supplying commodity products.

I would actually say, dairy farmers should get whoever runs the meat companies and get them to run Fonterra!

Imagine if Fonterra gave farmers 40% of the whole milk powder price. The payout would be $12.00/kgms! What would the payout be if Fonterra gave farmers 40% of the final price of a tin of formula!

So why then, is dairy farming more profitable than sheep farming?

I don't really know the answer to this, but we could look at it from two perspectives.

1. MIlk is just worth more than lamb

Lamb is the final product, it can't be made into anything else. Lamb chops stay as lamb chops. I suppose wool offers the ability to become a much more high value product, so there is potential there.

Milk is an ingredient in so many products and can be made into a much more high value item. The reports of a tin of infant formula selling for $80 in China is an example. 

2. A kg of dry matter can produce more milk than it can lamb/wool

Aaron pointed out to me that 30 kgdm (kg dry matter) will produce 1kg of meat/wool and you could assume that 15 kgdm will produce 1 kgms. 1 milk solid is worth $6.00 and 1kg of meat/wool is worth about $5.00-$6.00.

So a dairy farmer only needs half the grass to produce the same revenue. So dairy is twice as productive.

Conclusion

So to conclude, the dairy industry is more successful than the sheep industry in a large part because, milk is in demand and worth a lot of money. Combined with the fact that more milk can be produced from a hectare than meat/wool.

The assertion that the Fonterra leaders are doing a better job than their red meat counter parts does not withstand scrutiny.  In fact Fonterra could learn a lot from the meat companies.

For dairy farmers to sit there, smugly taking credit for the success of the industry, is like a home owner taking credit for the rise in the housing market.

Having said all that, theres no doubt that consolidation of the meat sector will have benefits. But this is more around the supply of lambs than the marketing and sale of lamb.

Sheep farmers should be proud of their industry. They are doing all the right things. 

Unfortunately for the red meat sector, Fonterra is at the bottom of the value chain, it has lots of room for improvement. All they need to do is move slightly higher up the scale and therefore receive more of the final price and dairy returns will be well and truly outstripping sheep.

A Real Story About Inflation

My Uncle was a cropping farmer in Zimbabwe. He purchased his first farm as a young man and worked it for couple of decades.

Robert Mugabe decided in 2000 to implement his "Land Distribution Policy".

The mob of "war veterans" arrived one morning and the beatings began.

My Uncle and his family fled to South Africa. They eventually immigrated to New Zealand.

Meanwhile the farm was distributed between Mugabe's loyal supporters.

But the bank had a problem. There was still a mortgage on the property.

The bank started sending my Uncle letters to his address in New Zealand demanding payment of missed loan payments.

He replied, how can I pay the loan when my farm has been confiscated? To which the bank replied pointing out the finer points of the loan documents.

Eventually my Uncle got out the currency converter and entered his sizable loan balance in Zimbabwe dollars and converted into NZD. 

The balance worked out to be a few hundred New Zealand dollars!

So he just paid it.

Since the backbone of Zimbabwe's economy was evicted from their land the country went into hyper inflation. The value of the Zimbabwe dollar dropped so much that a loan in the millions could be paid off with a few hundred NZ dollars.

While my Uncle lost his life's work when his farm was confiscated he still has his credit rating in tact.

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

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

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

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

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

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

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

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

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

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

Zimbabwe Take my former home country, Zimbabwe. In the 1970's it was hailed as the bread basket of Africa. Yet the agricultural output of that country today is a fraction of what it was in the 1970s. This is despite all the technological advances that have taken place over the last 30 years.
This from Wikipedia

The University of Zimbabwe estimated in 2008 that between 2000 and 2007 agricultural production decreased by 51%.

Robert Mugabe is to blame. The president of Zimbabwe has created an environment in Zimbabwe where doing business/farming is very difficult and investor confidence has evaporated.

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

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

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

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

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

Ukraine The Ukraine is another example of political decisions harming production.
This article from the Kyiv Post explains:

Ukraine is naturally endowed with 42 million hectares of agricultural land, 25 percent of the world’s richest black-earth soil, favorable and predictable climate conditions, and warm sea ports as well as other transportation links relatively close to export markets.
Yet, for example, the nation’s annual grain yields remain below the Soviet era, while former republics Russia and Kazakhstan now exceed those levels, according to the International Finance Corporation, the for-profit arm of the World Bank.

The article goes on

an October 2011 IFC survey found. It takes 375 days to deal with construction permits and 274 days to get electricity, according to the World Bank’s 2012 Doing Business report.

 And since Ukraine doesn’t have a single agency approach to food safety, agricultural producers must deal with multiple compliance regulations and messages from various government agencies.According to the IFC, only 1 percent of 13,000 food businesses have implemented global food standards such as HACCP, and 77 percent of agribusinesses interviewed in the IFC survey had no idea what GLOBAL.G.A.P standards were.
“Outdated product quality standards are one of the main barriers keeping local agricultural commodities and food products from gaining access to foreign markets, European in particular,” stated the IFC survey findings.

The Ukraine is famous for it fertile dark soils, yet the country is producing less grain than it did as a communist state. 

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

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

Import tariffs simply discourage technology uptake by Ukrainian farmers.

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

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

Canadian Dairy Industry The Canadian dairy industry cartel is another example of how government regulations restrict reasonable production by using subsidies and tariffs.
This article by FullClip Finance explains

Canadian dairy is a cartelised industry in that it is comprised of enterprises which restrict competition — through both import tariffs and output quotas — to fix the price of their products. 

OECD figures indicate that the amount that Canadian consumers over-pay for dairy products hovers around $3 billion (CAD) annually; we pay twice the world average.

If I were to wake up tomorrow and decide that I want to buy my own cow and charge my friends a buck for every litre of milk, someone would most certainly show up at my door and inform me that what I’m doing is illegal because I haven’t been issued a government quota. Lacking the $30,000 necessary to purchase such a quota, I would be forced to sideline my entrepreneurial ambitions. As for buying milk for my personal consumption, I’m not willing to take my chances of buying cheaper milk in Vermont only to have a 300% tax slapped on at the border.

Again Canadian dairy produce could flourish by simply adjusting government regulations. 

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

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

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

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

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

A Telling Quote About Co-ops

“There seemed little room for entrepreneurial creativity; virtually every decision was politicized.  The most politically active members controlled the co-op with the own personal agendas, and much more energy was focused on deciding which companies to boycott than on how to improve the quality of products and services for customers.  I thought I could create a better store than any of the co-ops I belonged to, and decided to become an entrepreneur to prove it.”

This  quote is from Whole Foods CEO John Mckey. The quote is from his recent book Conscious Capitalism and Forbes has run an article about John and his book, which I found interesting.

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

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

The quote made me think of New Zealand's most famous Co-op, Fonterra. 

“There seemed little room for entrepreneurial creativity; virtually every decision was politicized.  The most politically active members controlled the co-op with their own personal agendas"

Those words jumped out at me and I thought of Trading Among Farmers, which took Fonterra about 5 years to get through.

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

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

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

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

It's probably best they stay that way too.

The Carbon Neutral Dairy Farm. Is It Possible?

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

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

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

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

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

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

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

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

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

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

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

What are the emissions from a dairy farm?

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

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

To understand how to become carbon neutral we need to understand what emissions a dairy farm produces. There is carbon, nitrous oxide and methane.

1kg of methane emitted into the atmosphere is the same
as for 21kg of carbon dioxide.  Using the same scale, 1kg of nitrous oxide has the equivalent effect of 310kg of carbon dioxide.  Approximately two thirds of agricultural greenhouse gas emissions are as methane and one third is nitrous oxide.

As I understand it, there is no way of absorbing methane or nitrous oxide from the atmosphere, but we can absorb carbon from the atmosphere via trees and plants. So if a farmer emitted 1 kg of methane & 1 kg of nitrous oxide then they would need to offset (absorb) 321 kg of carbon to compensate. Because of this, these three emissions are combined into what is called a CO2-equivalent or NZU.

Dairy Farm case study  
This case study is based on a South Waikato dairy farm producing 210,000 kg milk solids (2007/08) from 535 cows on 178 ha.  Included in the operation is a 40 ha dairy run-off, 140 yearling heifers and 120 rising two year old heifers.  

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

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

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

The carbon cycle

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

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

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

So how many trees to we need?

The report states,

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

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

1929/22= 87ha!!!!

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

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

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

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

How do the numbers look?

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

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

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

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

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

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

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

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

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

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

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

Lets look at it another way.

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

Well, affordable to rich people at least.

Thats pretty hard for farmers in other countries to copy.

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

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

Are Dairy Farm Workers Well Paid?

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

Well are they?

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

They are:

Entry level dairy farm worker 

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

Herd manager/experienced dairy farm worker

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

Farm Manager

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

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

Accommodation

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

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

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

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

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

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

So what is this accommodation worth?

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

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

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

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

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

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

The Total Wage

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

Entry level dairy farm worker
$35,000/year

Herd manager/experienced farm worker
$45,000/year

Farm Manager
$80,000/year

Total Hours Worked

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

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

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

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

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

Thats a 10 hour day

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

Which is a 9 hour day.


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

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

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

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

Wage Comparison- Entry Level Dairy Farm Worker

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

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

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

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

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

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

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

Clearly McDonalds is a low paid job!

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

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

Wage Comparison-Herd Manager

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

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

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

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

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

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

Wage Comparison- Farm manager

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

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

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

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

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

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

Conclusion 

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

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

So, are dairy farm employees well paid?

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

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

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

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

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

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

I think they work hard and get average pay.

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


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

A few final points

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

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

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

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

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

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

Actually, The $58K From 20 Cows Is Not That Easy

In my last post, How To Make $58,788 Per Year With 20 Cows. I talked about how a simple dairy can be set up for quite a small investment of just over $100,000 and the milk can be sold direct to the customer.

I hoped the post would encourage people to think differently about dairy farming and the possibilities available. 

It's certainly a good illustration of how profitable a business can be if it can retain the whole retail price.

Warning!

It's not quite that simple.

It's easy enough to buy a few cows and build a cheap dairy to process the milk. That's easy. There are plenty of experts who can design or build the components for you.

But the production of the milk is only a very small part of the equation.

There are many examples of farmers around New Zealand who have tried to process, market & retail their own farm products and either failed or simply decided to gave up, as it's just too hard.

There are a few who are successful, but they are a minority.

The skills required to produce milk or lamb are very different to those required to process the product and the skills to successfully market and retail the product are different again.

Processing Skills

The hygiene standards required to process a product are much greater than the average farmer has to deal with. I've heard of farmers complaining about the minimal and rudimentary hygiene standards insisted upon by Fonterra, they wouldn't cope with the requirements of many food producing businesses. 

There is no room for error!

Marketing Skills

You can spend $50,000 by putting one print ad per week in the Christchurch Press, and there is no guarantee it will help you sell a single bottle of milk. 

There are so many examples of marketing campaigns and product launches that fall flat or are simply not noticed.

All of the people behind these marketing efforts were convinced they would be successful.

Retail Skills

Customer service is hard work and unrelenting. Customers are demanding and often unsympathetic. They don't care the hours you work or the effort you put in. They care about them selves and if they feel your product is not good value or another product is better, they will switch.

You can give 100 customers in a row great service, but if you drop the ball on customer 101. They will let you know or worse, they won't let you know and instead tell their friends about it and tell facebook, twitter or that review site.

Farming Skills

There are approximately 11,000 dairy farmers in New Zealand. They all milk cows on grass the same way. They have over 100 years of collective knowledge to draw from. Combine this with farm advisors, fertiliser reps and accountants all available to give you information.

There is no excuse for a farmer to fail as they are surrounded by experience and knowledge.

There isnt really the same experience in the business world, as every product or business is different.

Who knows if your product is different and in demand by customers.

Microsoft were promoting tablet computers in the early 2000's and nobody bought them. Why did everybody want tablets when Apple made them?

Klondyke Fresh supply milk with no permeate in it, but do people really care?

Consistency

Maybe you have all the skills and your farm produce is much better than anything else on the market and maybe you're awesome at marketing and sales and maybe you have your processing sorted.

You might be fine for the first 6 months while its all still exciting. But what happens when you are sick or run off your feet for months on end or one of your staff leave. 

Can you maintain the standards? 

What happens when you (who does all the customer service duties) is sick for a week. Your husband, wife or son, who possess the people skills of a Tasmanian devil take over and rub 10% of your customers up the wrong way.

Happy Vally Dairies is an example of maintaing consistency.

The owners of a Southland dairy factory at the centre of a food recall say their business has been destroyed.

Frans and Jeanine Venekamp have decided to walk away from the factory after E.coli bacteria was detected in a sample of milk. 

The couple closed the 16-month-old business, Happy Valley Dairy Factory in Tuatapere, and laid off two staff yesterday.

The owners had gone away to the national cheese awards, when E.coli was detected in their milk. The NZFSA tried to call them but the contact number they had was not answered. They issued a full recall and alerted the media to ensure nobody drank the contaminated milk.

That day they got the most media attention of their lives, unfortunately for all the wrong reasons.

The brand was destroyed. 

The owners took their first break away from the business and one mistake by a negligent employee destroyed the entire business.

All the years of planning, the hundreds of thousands of dollars spent the hours worked, all destroyed by one person not washing their hands after going to the toilet or mud on someones boots getting inside the processing area.

If you had a choice, would you rather run 100 metres a day and get paid $100 or would rather complete a 100 metre obstacle course and get paid $500?

Thats how I think of it. 

Maybe its better to just get the tanker to pick up your milk every day and get paid $0.50/litre for your milk.

But there if definitely an opportunity to make $2.50/litre but you need to have the skills to complete the obstacle course and you need to be able to do it every day without fail.

If you can do that, then that just gives you the right to compete against the other brands.

You then have the opportunity to go up against the multi national food companies with marketing departments and legal teams and deep pockets.

Sounds like fun to me!