West Coast South Island
This commentary describes the collective dairy industry's perspective of the 2003/04 season and the outlook for the 2004/05 season on the West Coast of the South Island. The typical West Coast dairy farm milks about 260 cows producing around 80,000 kgMS on 120 effective hectares (ha) and has gradually increased in both farm size and cow numbers during the past 10 years. The number of dairy conversions has now stabilised, with most suitable land for dairying now carrying dairy cows.
Key Points
- The 2003/04 season was notable for extremely variable weather and was therefore a difficult one for farmers to manage.
- Milk production was up 17% compared with the previous year, made up of 8% from new supply and 9% from existing suppliers.
- Pasture cover levels are adequate going into winter due to warm weather through April and May, but ground conditions are wet, making pasture utilisation more difficult.
- Westland Milk Products is currently building an Anhydrous Milk Fat plant, while further projects for expansion are being considered.
Physical Factors
The 2003/04 season had a number of weather fluctuations. Although there was a slow start to pasture growth in the spring, settled weather ensured that pasture utilisation and early season production were at above average levels. However, the summer was cool and cloudy during December, and then January was dominated by longer warm periods and settled weather. Pasture growth rates were higher than normal which meant many farmers struggled to maintain pasture quality and more supplements than usual were conserved. The weather deteriorated in February to become one of the wetter months on record, although temperatures remained warm. Pastures remained very damp from then on, with on/off grazing needed in some localities during heavier rainfall periods to ensure that pugging was kept to a minimum.
Pasture covers through the autumn period have been good due to above average warm temperatures. However, wetter ground conditions hampered the efforts of many to harvest later cuts of supplement. A number of farmers were caught out during autumn with a reduced grazable area, declining pasture growth rates, and paddocks of conserved feed that became longer than desirable. These were eventually harvested, but supplement quality, subsequent pasture re-growth rates, and cow performance through autumn were all adversely affected.
Early season expectations of farmers were for an above average season. Average pasture covers at calving were such that most farms started the season on a high note. Early season supply to Westland Milk Products was almost 14% ahead of last season by mid-September. The average growth per existing supplier for the season was 9.5%, with new suppliers producing 7.5% of growth. Total milk supplied to Westland Milk Products was 17% ahead of last season.
Cow census figures collected by Westland Milk Products in November 2003 indicate that it is likely that around 8,400 extra cows are planned to be milked next season by existing suppliers and approximately 4,000 cows will be milked by 11 new suppliers. There are 10 new conversions for the coming season. This should see around 124,000 cows milked in the Westland Milk Products supply area for the 2004/05 season. Should the planned growth continue through next season, this will result in approximately a 50% increase in supply over the 3-year period to the end of 2004/05.
The move away from wintering cows elsewhere towards self-contained units has become more widespread. Farmers are looking to reduce feeding costs in the expectation of lower payouts for the next few years. In recent seasons, while payouts have been relatively high, more land has been developed and improved. This has provided some better on-farm grazing for replacement stock.
Stock health has not posed too many problems through the season. More preventative action seems to be taking place, with mineral supplements and other animal health products being more commonly used. In general, metabolic problems have been at normal levels during the season.
Autumn fertiliser sales on the West Coast were similar to last season, with the emphasis on ensuring adequate levels of feed supply through to winter. The amount of nitrogen fertiliser being used per farm has increased over the past 3-5 years, while other fertiliser use has remained constant. Annual applications of 100-130 kgN/ha are now typical, with farmers keeping each application to 25-30 kgN/ha after each paddock is grazed.
Once-a-day or 16-hour milking commenced earlier than normal this season to alleviate lameness that was exacerbated by wet underfoot conditions. A few farmers are considering once daily milking for part or all of the 2004/05 season, given the good results, and also a reduction in labour costs at a time when labour is in short supply, although industry participants believe this unlikely in this timeframe.
Westland will be collecting colostrum from approximately 170 suppliers in the 2004/05 season. Westland Milk Products is supplying the farmers with a separate colostrum silo. Westland Milk Products processes the colostrum into a variety of products, including health food additives and sports supplements.
West Coast Regional Council has taken a more proactive approach to the on-farm treatment of dairy shed effluent and the use of stand-off areas over the last few years. Farmers report a more constructive approach is being taken by the Council, rather than the inconsistent approach that farmers considered prevailed for a time. However, farmers are concerned that consent applications are taking longer to process than expected. They believe this is due to the spread-out geographic nature of the West Coast, and insufficient staff numbers within the council. This is a matter that the West Coast Regional Council is endeavouring to improve on.
Financial Factors
2003/04 Review
Revenue
The advance by Westland Milk Products for the 2003/04 season will be $3.60/kgMS by the end of June 2004. Farmers expect that a further 30-35 c/kgMS will be paid over the winter months, with a third to be paid in July and the balance in August. This will mean a payout level of around $4/kgMS will be achieved. With company shares at $1.50/kgMS supplied to be met out of this sum, farmers will need to carefully manage their finances over the spring period to ensure expenditure and production through the early lactation period is not disadvantaged.
With gross revenue for the year likely to be down on previous years by about 9%, income equalisation account deposits may be used by some to help manage existing tax liabilities.
Expenditure
Farmers continued to keep expenditure at levels to maximise production, even with challenging weather conditions in the latter part of the lactation period, and with the prospect of a reduced payout level. The expenditure patterns were similar to those prevailing when payout levels were higher in the past two seasons, which focused on improving pasture performance through re-grassing and land development, and capital items such as meal feeders. Because of this, many farmers have found themselves committed to ongoing levels of higher expenditure, which consultants and bankers note will make it more difficult to reduce costs during periods of lower payout.
Net Result
The model budget had a positive net cash position of $27,000 for the 2003/04 year. This is close to the level forecast for the season, but well down on the $55,000 generated in the 2002/03 season. This reflects farmer expectations of a reduced payout scenario, but also a commitment to maintaining expenditure at levels prevailing in previous years. Continued development, albeit on a reduced scale, and targeting of increases in production, remain the focus of most dairy farmers. Targeted capital expenditure is likely to take place to achieve these objectives.
Debt levels continue to slowly increase to fund share purchases and investment. However, equity is rising faster and viability is not under threat at the levels of debt most farms are carrying.
2004/05 Forecast
Revenue
Herd sizes on the West Coast continue to increase. Westland Milk Products cow census data from November 2003 indicates that cow numbers will continue to rise by just under 10% annually. The trend to changing the focus to that of improving per head performance also looks set to continue. The increase in herd size is occurring from an increase in stocking rate from an average of 2.1 cows/ha to 2.2 cows/ha, and an increase in the area being milked. Farmers are budgeting on production levels on a par with the long-term average.
Suppliers have already been told that the advance will be at a lower level to the 2003/04 season and to budget accordingly. Company information has suggested that a final payout in the region of $3.50-$3.70/kgMS should be used in financial budgets.
Expenditure
Despite the expected reduction in payout, most dairy farmers will continue to budget for full maintenance expenditure. Discretionary expenditure will most likely be kept to a minimum, at least until later in the season when a better indication of the markets and the season can be gauged. Similarly, capital expenditure is likely to be restricted to essential purchases only, targeting aged plant and machinery.
Net Result
The likely net cash position for 2005 is that it will be at a similar level to the 2004 result, with the projected increase in production compensating for the reduced payout level. Discrete reductions in expenditure should see financial performance held reasonably constant.
Issues and Trends
The performance and progress of Westland Milk Products continues to impress. Growth targets have been met, as have expansion plans. Further expansion is under way, with the on-site workforce set to increase over the next 3-5 years to meet this additional growth.
With the anticipated reduction in payout, the heat has gone out of the local real estate market somewhat, although enquiries and sales have been steady and properties have been selling at around the $18-$20/kgMS mark, according to bankers. Strong interest continues from other regions, with buyers attracted by the better return on their investment that West Coast dairy properties can offer.
A 3-year forage project is under way in conjunction with Crop and Food Research and local farmers. The primary funder of the project is MAF's Sustainable Farming Fund. The aim of the project is to investigate the viability of different forage crops for West Coast farming systems. Early indications are that locally grown maize silage is a potential solution for energy shortfall in the early lactation period.
Westland Milk Products are continuing with their policy of offering university scholarships to West Coast students intending to study in areas that will benefit the company long-term. Successful applicants are provided with funding for study, vacation employment and upon graduation, a full-time position with the company (if positions are available). This year, the second year of the programme, four further students have been awarded scholarships with two of last year's candidates also continuing with the programme. One of last year's recipients is now a full-time employee with Westland Milk Products in the research and development team.
Suitably qualified labour is still in short supply on the West Coast, as it is nationally. Farmers also need to accept that they will have to meet higher salary costs if they are to attract and retain the best staff. Some staff have been attracted to West Coast dairy farms from other areas due to the lower stock numbers and resulting lower stress levels.
Contact for Enquiries
Farm Monitoring Programme Manager
Monitoring and Evaluation
MAF Policy
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0623
Fax: +64 4 894 0741
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