A time for reflection

As we look back over the last six months, it becomes abundantly clear there is need for change in our dairy farming philosophy and practices. To think 2016 was just ‘bad luck’, ‘mismanagement by processors’ or whatever we may write it down too, is not reality. We live in a violent world, and dairy markets are not immune. Add to this, 2016 saw the collapse of the third milk processor in the last twenty years. We are vulnerable!

As producers of a raw food, we either adjust to become viable in an unpredictable market, or disappear. To define viability, we must be profitable at a low milk price. The last three price crashes (over seven years) possibly defines 30c/litre as the benchmark. Borrowing through a low milk price to survive in the optimistic view of better/normal (??) future dairying economics has proven the death knell for many. The repetitiveness milk price falls have invalidated this as an ongoing strategy.

From observation, there are two outstanding causes of financial grief in dairy farming: 1) productivity – production per unit investment, either cows or land. Although many attack labour cost first, it is ranked at 9% of production cost and not a major ongoing drain on productivity. 2) Debt. It has been said that the Australian dairy industry has not prospered in recent years through profitable business, but inflation. But inflation has been the driver of debt. Equity so eagerly promoted by lenders takes little evidence of ability to repay into account. Servicing the interest component of debt has been the primary lending criteria under the umbrella of equity. Of course this is not the sole domain of the dairy industry, but a national problem.

It’s perhaps a time to take a leaf from grandpa and grandma’s book on ownership as the highest goal to prosperity; the ability to weather storms, and not just survival with injuries. In this case, a legacy of reduced productivity from cost reductions to fertilizer, grain and the like, and worse, more debt!

As a service provider to the dairy industry in the arena of productivity/nutrition, we can only make casual comments from observation on the debt-side of viability legacies. Doubtless, most land under dairy production has a market value that is not correlated to the economics of dairy farming. Gippsland has inflationary pressure due to its proximity to Melbourne. Western Victoria had the Blue Gums. Our limited exposure to Northern Victoria only appears grief upon grief over the last ten or more years due to politicising of water.

The question is: does our investment in land provide an equitable financial return? I have suggested on numerous occasions to clients to set up their dairy business as two businesses: 1) a cropping enterprise which sells forage to a value adding enterprise. 2) The value adding enterprise of converting feed dollars to milk dollars through dairy cows. This would attribute production costs for each enterprise specifically to that activity, and not a muddied puddle of income and expenses.

There is no doubt in my mind this would eliminate, or at least reduce, cost/return inefficiencies created by emotional business decision making. Suddenly information like yields/hectare, return on fertilizer investment, pasture renovation/crops investment/returns, all related to land investment would be eagerly measured. Likewise, in the value adding enterprise’s interest in feed conversion efficiency, milk income, fertility would also come under intensely measured scrutiny. The division between farming lifestyle and farming business all too often becomes very blurred.

Both are possible, but need segregation and discipline for future prosperity. A new generation coming into the dairy industry from outside will surely utilize such structure as the only avenue to farm ownership. A review of our land-ownership mentality is probably well overdue. Doubtless, a new generation of agribusiness dairy farmers will utilize leasing of land as a viable alternative, seeing ownership as a place to invest accrued profits.

Productivity is far more our area. As we assess monthly ration analysis after farm visits, through our Key Performance Indicator grid, frequently surprising shifts in profitability become evident that would not be known without this process. Sometimes these shifts cannot be addressed immediately, however, but are a driver of future decisions on feed and/or feed production formally presented in an annual Feed Budget which is built on a summary of the previous twelve months’ ration analysis. We call this a Feed Budget Post-Mortem. It highlights our successes and failures in both feed production and conversion to milk, and serves as a basis for planning feed strategies for the following season.

Indicators

Litres are first with comparison to the same month last year, and a Client Range for that month. As a generalisation, litres drive profit simply due to dilution of fixed costs. In the case of land/pasture yield, land must produce a return on capital investment. In terms of cows, maintenance energy cost to keep her alive. You can add to this fixed cost, milk harvesting, breeding, veterinary etc. etc., but all these can be variable according to management which does not escape scrutiny.

Feed Cost lt obviously can impact the statement above that litres drive profit. However, far more often the fixed cost of maintenance energy is the greater influencer of Feed Cost/lt due to income being correlated to litres.

Income Over Feed Cost is a natural progression from the above two indicators, and a product of their relationship. Perhaps the most underrated issue in IOFC is the relationship between litres (income) and Feed Cost/lt is that this is not linear; quite the opposite. It is concave or convex. To clarify this, another way of saying this is that this relationship is not addition/subtraction, but multiplication. There is a multiplier effects as litres or Feed Cost/lt vary and can produce violent shits in profitability, which as above, pass unnoticed without this data.

Milk Solids is an obvious paradigm. Like all indicators, we compare the same month last year and Client Range. Both nutritional and seasonal issue can come into play here, certainly in the comparisons. However, in regard to litres drive profit, litres can vary significantly, but solids tests do not vary anywhere near the potential shifts in litres. Hence, milk income is far more likely to rise through increased litres than any possible reduction in solids due to litre increase. In fact, we are finding we can manipulate milk solids tests more and more through nutrition apart from genetics.

Dry Matter Intake, Energy Density and Energy Partitioning, NDF (fibre) and Protein are directly taken from the ration analysis for discussion with the farmer, their implications, their potential for improvement, and finally, their relevance to the Feed Budget plan for the following season.

Health Data: An ongoing record is kept of milk fever, ketosis, displaced abomasum, metritis, mastitis, abortion, lameness, deaths and manure score, and is critical assessments of both nutrition and management. Transition failures are highlighted in milk fever, ketosis, metritis and possibly mastitis. Although we don’t compile fertility data due to its difficulty to track, however, we can make value judgements in regard to fertility based on these Health Data statistics. Mastitis is a massively costly disease to our industry in both immediate treatment costs (est. at $400/case) and it can be related to transition failure as a susceptibility cause, but plays havoc with fertility due to immune function-related systemic inflammation. The two drivers of dairy profit are feed and fertility. All the above Key Performance Indicators are simple breaking down these two drivers into manageable information.

John Lyne is a dairy production specialist with Dairytech Nutrition