Is the traditional NZ dairy farm commercially sustainable?

Rural Dairy Farming

It’s a question those in the dairy farming industry have been asking, is traditional New Zealand dairy farming still a viable business opportunity? And what does the current dairy farm market look like?

As we all know, the past few years have been full of change for the major industries in our country. The dairy industry is no stranger to this. Fonterra has experienced a shake up, M.bovis has affected thousands of farmers and the media has often portrayed the industry in a negative light.

Understandably, many farmers around the country have been feeling pessimistic about the future of dairying.

But can we still look at Kiwi dairy farming as commercially sustainable? Yes – but it is changing.

Drivers of change in the dairy farm market

For years, dairy farming has been the backbone of the New Zealand economy. But, as with any industry, things have shifted. The industry has hit somewhat of a crossroads.

So what exactly has uprooted the traditional dairy farming industry?

Amalgamation

Over the past 20 years, many dairy farms have acquired adjoining land to form larger farms. With bigger farms now sitting at upwards of $10 million, it has led to a slower market with less active buyers due to the overall capital constraint.

This means many farms have remained on the market for a long time and the dairy farm market has stagnated to some degree.

Land use regulations

Land use changes and regulations have impacted dairy farms in many ways. With the development of policies such as the National Policy Statement for Freshwater Management, dairy farmers are under more pressure to put infrastructure into irrigation, effluent management and the fencing of waterways.

Global uncertainty

The global market has experienced major changes throughout the past few years. With political shifts, such as Brexit, countries within the EU have become more collective in their approach to importing. And as countries like Poland grow their own dairy industry, this has an effect on the global dairy market opportunities for New Zealand.

Lending parameters

For a long time, operating returns of 2-4% were acceptable in farming when capital growth was anticipated at up to 10% per annum and dairy farming was considered low-risk. But with things such as restrictions on land management, this has led to more emphasis on farmers to pay back debt which is challenging under an already constrained cash flow.

Static land values

Established farming areas with few other land use influences such as South Taranaki are approaching ten years of static land values. These areas may have been somewhat overvalued prior to the 2008 financial crisis, but they have flat-lined since.

On-farm productivity has crept up through genetic improvement and off-farm feed input systems, but the pastoral farming base has not lifted significantly in the developed areas since the 1990s. For example, in the Taranaki region, our estimates put the cost of grass (DM) feed grown on-farm as high as $0.35/kg DM at current land values.

What is working well in the industry?

While many farmers may be feeling pessimistic about the industry, there are many positives. The dairy industry remains a huge part of the New Zealand economy and will be for a long time. But in order to grow and evolve as an industry, what is often needed is a look at what is working and what is not.

What are the positives that we’re seeing in the industry?

Interest rates are at all-time low levels and milk prices are currently at sustainable levels, meaning dairy is still an economically valuable industry for New Zealand.

When looking more closely at the dairy farm market, we see that land values aren’t necessarily dropping, but have remained static. Since about 2010, dairy farms haven’t experienced the year-on-year growth they have had prior. But in the long term, that kind of growth isn’t sustainable for the market anyway.

The development of technology has also opened up new avenues for farmers to reduce costs and increase efficiencies. Technology such as automated milking machines and drones for pasture monitoring have freed up farmers’ time, and genetic improvement has strengthened production.

As the market becomes static and many larger farms struggle to sell, the future for moderate sized dairy farms to operate in New Zealand appears favourable. These farms support rural communities, provide a profitable business with a pleasant lifestyle and keep the system under the scope and grasp of our economy.

What needs to change?

Yes, there are many changes happening in the dairy industry and the traditional model is facing many challenges. But with change comes the opportunity for a positive shift in direction and growth.

But what needs to change for farmers to achieve this?

  • Change expectations about ROI. In the past, dairy farmers have expected to leverage gains in land value for large capital development such as dairy sheds. Moving forward this capital expenditure may have to be planned out of revenue saved.
  • Become a more cash flow positive business. As dairy farms are often family-run businesses, they haven’t always fit into the model of a typical commercial business. But in order for the industry to grow and for farmers to keep up with the changes, they need to shift their mindset to make farming a more cash flow positive business. Just like any commercial business, look at the annual return of your dairy farm. By looking at dairy farming through the lens of a commercial business, you can make better business planning decisions to increase cash flow.
  • Promote sustainability throughout your lifetime. With dairy farms often being a family business, it has traditionally been the case that farmers will look for a huge sell at retirement. This has often led to farmers putting in long hours and resources, hoping for a big return in the end. Just like any business, sustainability strengthens value. Shift your perception towards a more sustainable model, both economically and with your lifestyle. 

What should you do?

So what are the practical steps you can take to move your dairy farming business in a more commercially viable direction?

  • Get valued every 3-5 years. This will create a solid capital tracking so you can understand the overall health of your business.
  • Be proactive and get qualified advice. As farmers, you shouldn’t expect to be experts in the inner workings of business and the market. This is why having a team of qualified and active professionals is so important. Talk to your accountant, lawyer and valuer about where your business is at today and how you can start being proactive about forward-planning. Additionally, websites like DairyNZ  offer great tools and resources for business planning.

If you’d like to discuss the future direction of your dairy farm, or are looking for qualified advice on dairy farm valuation, talk to your local TelferYoung rural valuer today.


Posted 13 days ago