By Prof of Agribusiness, Jacqueline Rowarth, University of WaikatoMonday Aug 24, 2015
Perfect storm’, ‘resilience’, ‘wriggle room’ and ‘belt-tightening’ are cop-out terms.
What rural New Zealand is enduring is serious and has ramifications for the whole country. Low payout, environmental extremes and increasing compliance pressures mean that it is quite difficult to know what to do for the best, and predicting the future has never been easy.
In The economics of just about everything, former economics professor at the Australian National University, Andrew Leigh, explains that to assess the accuracy of a prediction “economists typically use as a benchmark the naive assumption that next year’s growth rate will be the same as this year’s growth rate”.
Teaching a pet parrot to squawk this year’s growth rate will be “off” for next year by 1.1 per cent, whereas typical forecasters were off by 0.9 per cent. “In other words,” says Professor Leigh, “business commentators were only about one-fifth better than a pet parrot.”
The origins of the current problem are complex, but what is clear is that farmers in the dairy sector have, mostly, been behaving responsibly.
Analysis by University of Waikato Economics Professor Frank Scrimgeour has shown that in the last decade, operating and capital expenditure has been restrained over the last five years in comparison with the first five years when the dairy debt increased significantly.
DairyNZ (using data compiled by StatisticsNZ) reports that in the past 10 years, dairy farm input prices (excluding interest rates) increased by 3.6 per cent per year on average; the general rate of inflation was 2.5 per cent per year during this time. From June 2013 to June 2014, overall farm inflation was 3.9 per cent in contrast to general inflation of 1.6 per cent.
The biggest contributors to this inflation were stock grazing (over 20 per cent price change for dairy cows being grazed off farm) and electricity (almost 15 per cent). Supplementary feed costs increased by 7 per cent.
Media commentary that farmers who have taken on debt to intensify and now face high production costs, deserve what they are reaping, is unjustified. A benchmarking study of cost of milk production in 46 countries, released last year by the International Farm Comparison Network (IFCN) Dairy Research Centre at the University of Kiel, shows lower costs of production for a herd of 974 cows than for 348.
Although costs of feed were higher, labour costs were lower per kg of production — capital investment leading to improved labour productivity and economic growth.
In the Waikato, DairyNZ has put actual budgets from top farmers on its website to assist other farmers in benchmarking costs. At a $5.25 milksolid payout a System 5 (40 per cent bought-in feed) farmer has operating costs 8.5 per cent higher than a system 2-3 farmer (up to 20 per cent bought-in feed), but fertiliser costs are halved and profit per hectare is 212.6 per cent higher — $1705 per hectare in comparison with $802.
Professor Scrimgeour’s analysis incorporating the rising costs calculated by DairyNZ indicates that efficiencies and productivity gains have been achieved on farm.
“The rural service sector should now be looking at the costs and efficiencies of their service provision,” he says.
In addition, the processing and marketing arms of the primary sector — the co-operatives — need to re-examine their fundamental strategies. What is needed for resilience is a rethink of the value of food so that farmers are paid a fair price for their product. This requires acknowledging the value that is created in New Zealand pre-farm gate.
Despite the minimum wage, Holidays Act, OSH, and high environmental compliance requirements, New Zealand farmers are still amongst the lowest-cost producers per kg of milk solids in the world according to the IFCN study.
We should be able to market our product on the basis of pasture-fed, free range, clean and green … Nielsen’s report on Global Health and Wellness involving 30,000 consumers in 60 countries released in January indicated that ‘all natural’ rated as very important in 43 per cent of purchasing decisions and ‘ingredients sourced sustainably/fair trade’ in 35 per cent of decisions.
Hartman Executive’s January 2-15 issue reported an increase from 19 per cent to 28 per cent of shoppers between 2007 and 2013 looking for minimal processing. ‘Meat’ and ‘milk’ from New Zealand would appear to fit the bill.
Clearly, any opening sales gambit for New Zealand-produced food should be on the basis of production costs and fair returns. Auctions and undercutting other companies, in whatever sector, will only drive down prices for the New Zealand farmer.
Holding back product to increase demand has the opposite effect.
An intelligent parrot might indicate that smart marketing also has a part to play.