The story of dairy is about the growth of this country - a pioneering industry that became the bedrock of the economy and a global leader.
The story of dairy is about the growth of this country - a pioneering industry that became the bedrock of the economy and a global leader.
Opinion
Innovation is needed to lift NZ dairy industry’s competitive position.
Investors love a good success story, and few local stories have the blockbuster appeal of New Zealand dairy.
The story of dairy is about the growth of this country - a pioneering industry that became the bedrock of the economy and a global leader.
In the past couple of decades, more people from outside farming have taken the opportunity to invest in this story.
However, it is useful to examine the basis on which this investment has been made. Investors have often been invited to "participate" in dairy, to "share the commodity story" with the promise of attractive returns from growing primary commodity demand and consequent capital growth.
But in recent months the dominance of New Zealand dairy as the world's most efficient producer has come under threat from offshore producers utilising scale and advances in technology to drive down their own costs of production.
New Zealand has little choice but to stay ahead. Far from markets, with a small domestic market and limited ownership of major offshore brands, it's questionable whether New Zealand will succeed as anything but a low-cost producer.
New Zealand's fate will depend on whether its farm production model can remain more efficient than the large-scale intensive systems increasingly used by its competitors.
These systems have several advantages over the typical New Zealand production systems.
Precision agriculture enables feed to be produced at a higher tonnage a hectare and lower cost per tonne, and they have better feed conversion efficiency.
Labour costs per unit of production are lower, as are management costs due to their large scale (New Zealand management costs tend to be high under the family farm model), and interest rates.
Making the issue more acute is that New Zealand is a relatively small producer, with around 3 per cent of global production. It sells into gaps in international markets, competing with low-cost producers, not the average cost in those zones.
It adds up to a serious threat to New Zealand's dairy sector. If our industry is to survive and thrive, it must innovate and take efficiency to a new level to regain its cost advantage.
This will require improvements in management, rebuilding a traditional strength in pasture management, and complementing that with advances in genetics, pastures, forages and new technologies for increased efficiency.
In the drive for efficiency, even smaller farms are moving towards the formalised business management and decision-making processes used by larger corporate operations.
The focus must be about improving medium-term performance, rather than just reducing costs and investment which will slow innovation and exacerbate relative inefficiency.
This highlights an issue - farmers will need to invest to increase efficiency, and this requires cash.
The expectations of investors in our top-performing farms should be no different to the top-performing companies on the NZX: companies operating in mature markets attracting investment by demonstrating an ability to outperform their competitors.
To see the leading edge, the annual Dairy Business of the Year competition - of which ANZ is a supporter - features farmers who are investing in on-farm management, pasture productivity and new technology to drive down the cost of production.
In the 2013-14 season, the top businesses achieved a cost of production of $3.13 per kilogram of milksolids (kgms) including depreciation and owner's labour. Many of the other finalists for the 2015 competition were well below $4/kgms and these farms have taken costs down much further since the high-income 2014 year.
The challenge is to see more farms achieving this performance.
Graham Turley is Managing Director Commercial & Agri at ANZ.
The gap between farms with average efficiency and the best usually comes down to something that is simple in concept but which requires discipline to execute - pasture management. Somewhat counter-intuitively, the more grass that is eaten by cows, the more it grows.
Industry organisation Dairynz is encouraging more farmers to apply pasture management to grow a tonne more pasture a hectare. As the best pasture managers grow about three tonnes more a hectare than the average, this is a realistic goal, almost entirely dependent on management skill.
ANZ's Privately Owned Business Barometer Dairy Insights Survey showed over half of the survey respondents were planning to invest more in pasture and forage, along with improved animal genetics and improved feed budgeting.
In the drive for efficiency, even smaller farms are moving towards the formalised business management and decision-making processes used by larger corporate operations.
The Dairy Insights Survey provided strong evidence that producers are moving away from intuition to a disciplined investment and management regime, assisted by sophisticated systems and financial modelling tools now available.
The research also highlighted the importance of benchmarking to measure high performance.
There are a wealth of benchmarks available in New Zealand dairy, but they are often used to justify cost structures, not set performance targets. We'll know we're truly making progress when agri-investors target profit outperformance, not just sharing in the commodity story - performance, not just participation.
