Nature's Blueprint Cow - Blog

Milk Prices are not the core issue threatening the sustainability of the Australian Dairy Industry

The recent adjustment in milk returns and potential for lower returns next season understandably has dairy farmers reeling. One does not have to spend a lot of time in Google to see there is a worldwide surplus in milk production. We have witnessed New Zealand farmers taking dramatic reductions in their farm gate prices and yet farmers here still believed the promises of high prices being maintained in Australia. No one wanted to face the facts that a price reduction was coming. Probably like when you hear there may be no Santa Clause – you will believe anything else to keep the myth alive.

The greatest insult to farmers is the disgraceful reasons given by Murray Goulburn. The Chinese market (notoriously the most unreliable market in the World) and the rising Australian dollar which can be hedged against and which is now back down to previous levels. So the CEO wheels out these pathetic excuses, wipes his hands of the industry and, no doubt, is now searching for another unaccountable highly paid position. He and other directors have a little egg on their faces which will disappear quickly. Incompetent and irresponsible with very little risk involved. On the other hand farmers take all the risks and some will not survive the current situation.

The damage, the unconscionable conduct of these corporate egomaniacs has done, to the value of dairy farmers’ assets and their livelihood, is unquantifiable!

The price adjustment is a problem. The real problem is the fact – in light of the World milk production situation – prices were set too high in the first place. This gave farmers more time to ‘run up’ more debt because $6/kg was still coming!

The unspoken in all of the recent events is that milk prices are not the core issue which has the industry on its knees. Cost of production (COP) is the core issue. Being coerced by Dairy Australia, milk companies and others farmers have been on the ‘production treadmill’ with a vision in the mind of high milk prices, prefect seasons and low grain prices – a combination which is virtually impossible.

Farmers have been brainwashed by unaccountable experts(Milk Factories, Dairy Australia, Consultants) into believing they had to be in a position to capitalize on this unrealistic scenario when it occurred regardless of whether they went broke in the process. The result: grossly overstocked farms; milking frail, inefficient genetics; purchasing enormous amounts of feed; borrowing against questionable capital gain; and being in a very vulnerable financial situation with no fall-back position.

More Milk: Factories paid high incentives for new milk supply and in some cases had large producers on higher returns that the average producer. And if you had been supplying for 20 years you received the base rate! As recently as last month Dairy Australia was quoted as saying Australia does not produce enough milk. And now they have rushed forward there Tactics for Tight Times campaign. It is hard to find a word to describe their irrelevance to the industry. Add to this the Government hype about free trade with China and all the talk about Infant Formula and (logically thinking as a farmer) if you were not ready to capitalize on what was coming; you were going to miss out in a big way. Well the current picture presenting depicts you will have to hang in a fair bit longer yet – if you can!

The tough seasonal conditions already had farmers under financial pressure without the recent news. Hear in lies the problem. Notwithstanding the recent seasonal conditions the modern way of producing more and more (regardless of cost) has put farmers in a very vulnerable financial position with no fall-back position. The ‘buying’ of production is the scourge of the industry. All focus on more production (regardless of the cost) and no thought for COP. By ‘buying’ production farmers have turned from producers to consumers. Farmers have been continually borrowing against (questionable) capital gain to finance and prop up frail, inefficient genetics in high input production systems. No margin is the problem. Now farmers have been called to account. Government handouts are not the answer.

Yes there is Hope – Crisis offers Opportunity: In life when a major change in mindset is required the catalyst is usually not pleasant. E.g. most reformed alcoholics did not just wake up one day and decide (although everything is ok) today I am going to stop drinking. There has to be a traumatic experience to enable the enlightenment of the mind. This is what is happening to our dairy farmers now.

The addiction to believing that producing more and more(regardless of COP) will result with more in the bank is deeply ingrained and will take a big jolt to change. Well here it is.

The price drop is the crisis, the opportunity is to open the mind to look from a different view. Less actually equals more. Less production equals less costs, more margin and more money in the bank.

The Way Forward: We must shift focus (a big shift) from production to margin. 5,000 litres at $0.10/L margin is much better than 10,000 litres at $0.02/L. Children at kindergarten would understand this yet grown adults do/will not. Problem is this goes against the years of brainwashing by vested interests. Sounds like common sense when you read the figures – difficulty is – as Bart Cummings said ‘The only problem with common sense is that it is not very common!’

We must dispel some industry myths:

1. The more production the less the COP/unit. The dairy industry is one of the very few production industries where this is the reverse i.e. the higher the production the higher the COP/unit
2. Productivity is not gained by producing more and more at any cost
3. Frailty is not dairy character
4. Expressing debt on a per cow basis when you are grossly overstocked is ludicrous
5. Focussing on producing litres is not very important when you are paid for milk solids
6. Believing , no matter, how it is worked out, 1 kg of grain returns 1.8L of milk – if this was actually the case farmers would have money in the bank to deal with their current problem
7. Grain being the basis of feeding topped up by grass is not grass based farming
8. Focussing on production in the U.S.A. Based on cheap labour, very cheap grain, insurance and subsidies. Australian dairy farmers have none of these concessions!
9. Complicated farming systems which afford no lifestyle are not how farming has to be
10. New Zealand is a low input dairy production system – now turned to a very high input system all because of chasing higher production and the result COP way above returns

For sustainability we must understand the following:

1. Productivity versus more production
2. Profit has little to do with production it has a lot to do with COP
3. COP is the only major part of the profit equation which a farmer has any control over
4. All decisions must be based around COP
5. Uncomplicated production systems afford lifestyle and margins
6. Efficiency of production is the key to sustainability
7. High cow herd economic function is vital
8. Frail cows of any size are a liability
9. Cows must be uncomplicated, productive and maintain good b.c.s. on limited inputs
10. Individual farm production levels must be in tune with the level which is economically possible from available resources – that individual farm
11. Grass must be the basis topped up by grain
12. Back to basics sounds scary, however, it is the only sustainable way forward
13. All farmers must drill down into all aspects of their business and identify the causes of the production cancer and the key profit drivers
14. Less equals more

Treat causes not symptoms: The current price reduction is only a symptom which is again highlighting how ‘sick’ our dairy production systems are. There are many other symptoms which farmers have dodged around. E.g. having to sell replacements to the Live Export trade is another common symptom. The present symptom released on the industry recently will clearly illuminate the systemic cancer in today’s dairy production system. That is if one is willing to take a look.

Sadly it is back to natural selection. Yes there is hope: those who can change (their mindset); learn from the experience and adapt; will survive and one day thrive. Those who cannot will perish.

And finally, the most successful farming venture I have witnessed is: Vested Interests Farming Farmers. It is time to reverse the stress.

John O’ Brien

Nature’s Blueprint Cow

Profitable Farming Systems

Copyright 2016

19.05.2016 by John O'Brien in Consumers Cow Farmer