Farms get bigger and fewer

Senior dairy industry figures are tipping larger farms will become even more widespread, raising significant issues for potential investors in the sector.

New figures supplied to the Business Herald by Statistics New Zealand indicate dairy farm numbers dropped from about 16,800 in 1994 to around 14,000 in 2002, while the number of bigger farms by land area increased markedly.

Dairy farms sized 200ha-plus went from 1834 to 2874; 400ha-plus from 351 to 674; and 600ha-plus from 102 to 244.

The figures reinforce numbers from Hamilton-based Livestock Improvement Corporation (LIC) showing a long-term trend towards bigger herds, which naturally require more land.

Between the mid-1970s and 2004-05, the number of cows went from just over 2 million to around 3.8 million. But the number of herds dropped by more than 6000 to just under 12,300, while the average herd size went from 112 to 315.

There has been a rise of about 45 cows per average herd since 2001-02 alone - in that time the total hectarage devoted to dairying has been roughly steady at just over 1.4 million hectares.

LIC's general manager strategic development David Hemara said that in 2002 about 10 per cent of herds had more than 500 cows and this probably increased to well over 15 per cent in the season ended in May.

Still, in 2004-05, two-thirds of the herds were between 100 and 349 cows.

Fonterra said the trend towards bigger farms carrying more stock meant average production per supplier rose from 90,000kg of milk solids in 2002-03 to more than 105,000kg last season, when the co-op had record production.

Industry leaders say the upsizing of dairy farm operations gives economies of scale and productivity increases. That helps combat factors such as a long-term decline in commodity prices and costs associated with implementing scientific advances.

Fonterra's director of milk supply Barry Harris said aggregation was a global phenomena and a trend he expected to continue in New Zealand.

As a generalisation, bigger farms helped increase the supply to Fonterra. "Productivity off the larger farms tends to be greater ... it's just a scale thing." Bigger farms were often better placed to afford new technologies and tended to operate in a more "commercial" manner, although Harris stressed Fonterra also had small suppliers who were very efficient.

LIC's figures showed herds in the 650-750 range were the most productive in 2004-05 in terms of average kilograms of milk solids per cow (334kg). Interestingly, the biggest herds - at 1000-plus cows - produced less on average (307kg), while herds smaller than 150 cows produced on average less than 300kg. However, these figures don't measure the relationship between input costs and productivity, or take into account different farming environments.

Meanwhile, LIC's Hemara also believed that, while it may slow slightly, the rate of aggregation would continue, supporting dairy farm prices.

He said it was possible there could be a further significant fall in herd numbers and a big gain in average herd sizes over the next decade.

If the average herd size went up to, say, 650 cows, then such a farm would cost about $9 million to buy, making it even harder for new people to come into the industry on their own.

That meant the prospect of more equity partnerships in farming and more "corporately operated and run" farms.

Chris Kelly, chief executive of New Zealand's largest corporate farmer Landcorp, also agreed more aggregation was coming and was needed for greater efficiency. He said New Zealand's status as a low-cost milk producer was challenged by South American countries and bigger farms helped control costs. "We need to squeeze as much cost efficiency as we can out of the business."

Dairy Holdings - with 53 dairy farms and eight grazing blocks in the South Island - is believed to be the largest corporate dairy farmer in the country.

General manager Colin Glass said it was clearly easier for big operations to expand given the purchase of another farm was less risky than for a small-scale supplier.

"I believe that the opportunities for growth within the corporate operators are perhaps a little greater because they do have the ability to grow in small steps."

However, Glass said it was possible some financiers could start seeing bigger operations as riskier because they increased exposure to one business.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said the advent of what he called "Queen St money" had been a significant feature of dairying in the last 10-15 years, with a lot of investment through companies and equity partnerships.

While 30 years ago the majority of farms were "family" operations, "now we've got a lot more companies owning farms where they've got a management structure which is in place as opposed to a family structure". That had helped increase career paths in dairying, Brenmuhl said.

Federated Farmers president Charlie Pedersen, a dairy farmer, believed it wasn't only "corporates" fuelling aggregation.

He suggested most average farms would be run by a farmer, with his wife helping. As they adopted new technologies they were able to increase their farm size. "They can physically handle more cows than that what you could 10 years ago."

Hemara noted many large farms had been developed during a surge of conversions in the South Island, which now had less than 20 per cent of herds but 30 per cent of the nation's cows. He said the average herd size in the South Island was around 470 compared to 280 in the North Island.