Growing the Australian dairy industry is not all about farmgate price

ABC reporter Catherine McLoon has eloquently reported today on the Productivity Commission report into the Australian dairy industry found here

In a nutshell the Productivity Commission report says that without added incentives dairy farmers in Australia have no motivation to increase production.

“Productivity gains by farmers have underwritten profit in dairy manufacturing and sustained the industry in recent years.

“A lot of the context for this sort of inquiry has been an expectation that we will grow the industry as New Zealand has grown its industry,” Mr Harris said.

“If we are to do that, we will need to provide incentives to farmers to continue to take the sorts of productivity enhancing measures they have to date.

“That will probably involve improvements to the working relationship between manufacturers and farmers.” Says Commission chairman Peter Harris

It also says if processors want more milk and they do as the slide below shows they are going to have to get more creative and the commission believes quite rightly that paying an increased farmgate milk price is not necessarily the answer

Slide from David Lord’s CEO of Saputo’s presentation at PICCC 2014 Think Tank

In the first instance to the processors defense they can only pay what they get out of the marketplace. For those processors supplying the international market the export market is definitely a roller coaster. For example awesome returns last year now predicted to be horrendous in 2015/16 and that will flow back to the farmgate as the recent announcement by Fonterra NZ shows. See post from Milk Maid Marian here

‘Processors are paying the highest possible prices relative to the trading conditions. says David Lord CEO Saputo

On the domestic front we all know it’s a nightmare supplying a duopoly with the power that Colesworth have

At a farm level dairy farmers do tend to talk far too much about farmgate price instead of focusing on what’s left over when they take out all their costs. As we all know using the used car analogy it’s not what you get paid for your used car that counts it’s the price difference between the new car and the used car.

So how can the processors get creative and work with their farmers to ensure that they have enough money in the bank at the end of each month to make the investment in blood, sweat and tears worth it?

David Lord recently outlined the Saputo model going forward

According to Mr Lord

‘There are significant improvements to be made in efficiency gains over the way farm systems currently operate:

· Maximising individual farm performance and profitability;

· Effective extension programs that spread best practice and attract broad participation;

· Transitioning of farm assets into the hands of those who want to grow

The extent of the impact will be determined by decisions taken by farmers; debt / equity position, stage of life, optimistic / pessimistic outlook, quality of farm assets, appetite for change…

Also what struck me from this presentation is there is HUGE room for improvement in the way our dairy farmers are perceived by their processors

Slide from David Lord’s CEO of Saputo’s presentation at PICCC 2014 Think Tank

As you can see Mr Lord classifies his suppliers in this instance as

• Model Farm
• Reluctant Improver
• Resistant to Change
• Likely to Exit.

Mr Lord was asked by the audience how many of Saputo’s Australian suppliers fit into the ‘Model Farm’ category and if my memory serves me correctly his answer was 30%. No-one asked him his definition of ‘Model’ but I think the other classifications make that fairly clear.

It would very interesting to do a survey of all Saputo’s Australian suppliers and ask them which category they believed they fitted into

Mr Lord also made it clear that the processors needed to get very market savvy and focus on Australia’s areas of strength which are underpinned by our reputation for quality

Slide from David Lord’s CEO of Saputo’s presentation at PICCC 2014 Think Tank

Slide from David Lord’s CEO of Saputo’s presentation at PICCC 2014 Think Tank

So if all the other Australian processors perceive their farmers to be in the same categories as Saputo Australia and 70% are either reluctant Improvers, resistant to change or likely to exit how does the industry work with the reluctants and the resistants and support those likely to exit. Or better still how do we as farmers work with our processors to change those images and perceptions and descriptions of ‘reluctants and resistants” ?

I recently met with Dairy Australia’s new whizz kid in this space former private consultant Neil Lane and as it turns out Neil is putting together an extensive array of programs to help our Australian dairy farmers get fair returns for their efforts and very importantly have the capacity to ride the peaks and troughs.

I have invited Neil to provide an outline of his model with my readers.

According to Neil Dairy Australia’s new Farm Business Management program is still in development stage with a proposed roll out in early in 2015.

The planks will

1. Imbed farm business management and analysis principles across the industry so that we have consistent and correct use of terminology and metrics in farm business analysis

2. Offer capability building programs that will include a series of capability programs covering Farm Business Management skills required across the spectrum of Novice (thinking about applying of an ABN) through to Expert where a successful farmer looking to better utilise their skills and their balance sheet. This type of capability building would also be targeted across all sectors of the industry including but not exclusive to service providers, milk processors and researchers.

3. Provide better tools to help farmers manage their farm business. The first initiative planned will be an energy driven milk feed and milk budget that links to a cash flow budget.

4. Roll out DairyBase which is a queryable database that will house physical and financial performance farm data sets and allow for more detailed farm business analysis across the spectrum from individual farm level to industry analysis. This will help farmers to ask the questions they need to ask about their business and provide a tool which will allow them to benchmark their own business year by year against their own previous performance.

I look forward to sharing what is happening in this space to support our dairy farmers from both an industry and processor supported level with you over the next 12 months.

I look forward to the day when the CEO’s of our dairy companies talk with pride about all their farmers.

Lets not forget farmers have ownership of what’s in their control and it’s time we acknowledged we too have a pivotal role in determining our profitability and the way we are perceived. Profitable farmers are empowered and able to invest in innovation, technology, employ and give back to the landscape and the cows that underpin their business success. Market savvy farmers also realise how they are perceived plays an important roll in their leveraging capacity

Once we have a majority cohort of financially literate, confident and proud Australian dairy farmers (and only then) will we have a strong foundation for the Australian dairy industry to grow and grab the opportunities as they arise.

We are all in this together. Let’s embrace it

Some great food for thought can also be found at David Edgerton’s blog found here

Another great grass roots initiative to help build farmer capacity to ride the peaks and trough from from James Walker can be found here Agrihive