8 West Coast South Island Dairy
The West Coast South Island dairy farm
This commentary describes the collective dairy industry’s perspective of the 2005/06 season, and the outlook for the 2006/07 season on the West Coast of the South Island. The typical West Coast dairy farm milks about 310 cows, producing around 96 000 kilograms of milksolids on 155 effective hectares. Farm size and cow numbers have gradually increased during the past ten years. The number of dairy conversions has now stabilised, with most easily convertible land for dairying now carrying dairy cows.
Key points
- 2005/06 was a good season. Long periods of settled weather and consistent pasture growth led to improved production levels. Total milksolids supplied to Westland Milk Products increased by just under 13 percent over the 2003/04 season.
- Dairy cow numbers on the West Coast continue to increase. Cow census data indicates that cow numbers will increase by 10 000 to 133 000 on 61 000 hectares in the 2006/07 season.
- Increased production levels and good pasture growth resulted in the 2005/06 net cash position being double that achieved in the 2004/05 season.
- The generally mild weather conditions through the summer and autumn have led to above-average pasture growth rates, and most farms are approaching the winter with good pasture cover levels, good stocks of supplements, and adequate cow condition.
- The Westland Milk Products/West Coast Regional Council “Working Together – Environmental and Economic Sustainability” agreement has formalised joint activities and areas of concern.
Physical factors
2005/06 has been an excellent season for pasture growth. A mild and dry winter and spring reduced supplementary feeding requirements and increased pasture covers through the later winter/early spring period. Milk supply to Westland Milk Products met the target of a 13 percent increase over the 2004/05 season. Around 10 percent of this increase was the result of increased cow numbers, and the rest came from improved per-head performance.
The good weather conditions continued through most of the season, only turning wetter and cooler in April, when the last half of the month was dominated by heavy rain throughout the region. Pasture growing conditions through the autumn were excellent and many farmers were able to maintain per-cow production at stable levels for six to eight weeks.
The good winter and spring created expectations of a good season for many farmers. Pasture covers at calving and supplement levels on most farms were such that most farms started the season with high expectations for record production. With farm and herd sizes continuing to lift, continued growth was anticipated. There was a noticeable decrease in cows standing off wet paddocks and supplement use was lower as a result.
The good pasture growing conditions through the spring period led to earlier than normal harvesting of supplements, and to successive harvesting of supplements through the spring and summer period. However, these conditions also impacted on pasture cover over the summer months. Overall, the quantity of supplements on hand for the winter and spring is adequate, but the quality of some will limit its flexibility of use.
Stock health did not pose too many problems this season. The difficult mating season in the 2004/05 season extended the calving period in some instances, with corresponding challenges to maintain pasture quality.
In contrast, mating for 2005/06 has been more straightforward. West Coast vets report empty rates of 5 to
20 percent, which is similar to last season. The variation is mostly dependent on the date that mating ceased. There does seem to be a move toward removing the bull earlier in order to compact the calving spread, and these farmers tend to have higher empty rates. However, it appears that whilst the range in empty rates was wider than in other seasons, the average empty rate was not a lot different to the long-term average.
Nitrogen use has been constant throughout the season, with smaller quantities being applied more often. Annual applications of 100 to 130 kilograms of nitrogen per hectare are now typical, with more farmers using the ‘trickle’ application of 25 to 30 kilograms of nitrogen per hectare behind the cows after each grazing. With soil temperatures staying above 10 degrees Celsius through into May, nitrogen applications continued through to the end of the season.
Once daily or 16-hour milkings have again been used strategically by a number of farmers seeking to match feed supply and ease labour issues.
Financial position of the farm
Review of 2005/06
Revenue
Westland Milk Products’ advance is expected to reach $3.60 per kilogram of milksolids by the end of June 2006. Indications are that a further $0.55 per kilogram of milksolids will be paid over the winter months. A final payout level in the region of $4.05 to $4.15 per kilogram of milksolids is expected.
Expenditure
Farmers continued to meet full maintenance expenditure, together with some strategic capital expenditure, mainly on land development and improvement. Financiers continue to be supportive of farm expansion and have been willing to accommodate overdraft and term loan extensions to obtain better economies of scale. Continued increases in both electricity and fuel prices are causing some concern, as both are part of the necessities of farming. Essential maintenance expenditure is likely to be met over the coming season, but discretionary expenditure is likely to be monitored closely until later in the season, when a better indication of the markets and the season can be gauged. The effect of increased interest rates as term loans on fixed rates mature will start to filter through budgets, but should be accommodated by increased production levels and the corresponding increased cashflow.
Net result
The model budget improved its net cash position by just under $55,000 for the 2005/06 year. This is more than the previous season’s result and reflects controlled increases in production and expenditure. Continued development and targeting of production increases remain the focus of most dairy farmers. These objectives will require targeted capital expenditure.
Review of 2005/06
Revenue
Herd size on the West Coast will continue to increase. Westland Milk Products’ cow census data predicts that cow numbers are set to increase by 10 000 in the 2006/07 season, to 133 000 cows being milked on 61 000 hectares. Farmers are budgeting on production levels on a par with the long-term average. Production is expected to increase 6 to 7 percent per annum over the next 10 years.
Suppliers have already been told that the advance will be at a similar level to the 2005/06 season, and to budget accordingly. An interim advance has not yet been announced, but is expected to be on a par with the previous season’s advance of $3.00 per kilogram of milksolids, with indications that a final payout in the region of $4.05 per kilogram of milksolids should be used in financial budgets.
Expenditure
A number of costs have been steadily increasing over the past few seasons, with labour and fuel costs showing the most dramatic increases. Added to this is the fuel component in most products and services available on the West Coast. A lot of these costs are fixed and cannot be controlled by the farmer to any great extent. Farmers are borrowing more than they have in the past, so if the payout remains relatively static, these cost increases will squeeze many budgets.
Most dairy farmers will continue to budget for full maintenance expenditure over the coming season. The improved financial position means strategic capital purchases are likely, especially on aged plant and machinery. Where term loans at fixed interest rates are up for renewal, the effects of the higher interest rates may start to filter through budgets.
Net result
The likely net cash position for the 2007 year will be similar to the initial 2006 budget: a surplus of approximately $30,000, with the budgeted production set at the level achieved for the 2005/06 season.
Issues and trends
Labour problems are still tending to be an issue in the dairy industry on the West Coast. Some farms, especially those with a poor employment reputation, are still short of labour. Low national unemployment levels are forcing farm owners to either employ below par staff or pay high wages to attract and retain better staff. As a result, there seems to be a trend towards more automated milking processes, such as automatic cup removers and automated drafting. Once again, with pressure on budgets, there has been a trend towards employed staff rather than utilising sharemilkers.
Average farm size continues to increase as farmers continue to bring more land into production and conversions to dairying continue. Westland Milk Products expects six new suppliers for the 2006/07 season. Increased farm size results in economy of scale, but also exaggerates labour problems.
There is also concern that the current practice of valuing farms based on production is forcing an emphasis on productivity, rather than profitability. Some farmers have invested heavily in on-farm systems enhancing their production base, such as meal feeding systems and small scale irrigation systems, rather than examining the profitability of their farming system.
The downsizing and combining of rural schools means there is a continuing trend for many children to receive their secondary schooling outside the district. For a number of families, this added financial pressure could result in cost-cutting in the farming operation.
Many status quo budgets for farm purchases are being completed for financiers based on a payout expectation of $4.00 per kilogram of milksolids. If a likely payout of less than this figure is announced, this could have significant implications, with financiers becoming less bullish. For some, a breakeven budget will move towards a non-viable operation. Such an announcement would also affect the inflow of funds to the West Coast in the way of farm sales. When Westland Milk Products’ payout is predicted to be lower than Fonterra’s, the flow of funds from outside the West Coast for farm sales to proceed tends to slow down.
During the season, Westland Milk Products contracted Rabobank to report on their capital structure, most notably the current share value of $1.50 per share. Shareholders’ opinions on a satisfactory price varied from lower to higher than $1.50. At the annual general meeting held in late October 2005, the Rabobank report was received and as a result of that report a ballot vote was taken, with 77 percent of attending shareholders voting in favour of retaining the $1.50 G class share.
Westland Milk Products continues its expansion, with plans in place until 2012. At that time, the projections are for 150 000 cows in the supply area, with a processing capacity of four million litres per day. Capital structure and share value will be reconsidered at this time.
The West Coast Focus Farm continues to attract good numbers to its regular field days. It has now been running as a focus farm for just over a year and is proving to be a good forum to update West Coast farmers on farming initiatives taking place throughout the West Coast.
Canterbury Meat Packers Kokiri continues to operate at close to full capacity for most of the season. It now has a bobby calf processing chain, which is utilised later in the season for processing ewe mutton. With a reducing beef cattle herd on the West Coast, cattle are trucked in from outside the district to provide the kill numbers needed to ensure efficiency.
The good production season has resulted in an active real estate market. Enquiries and sales have been steady and properties have been selling at around the $20 to $23 per kilogram of milksolids mark. Strong interest continues from outside the West Coast.
Agricultural education activities have continued at high levels, with AgITO training courses and agreements at good levels. This reflects the continued growth in the dairying sector on the West Coast, together with an improved public perception of farming.
Westland Milk Products and the West Coast Regional Council have a number of shared strategic goals, and have signed a working agreement to work closer together to achieve an economic and environmentally sustainable dairy industry on the West Coast.
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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