2010-11-03

The New Zealand farming system - Lecture notes Don Nicholson Farmers Forum China

The New Zealand farming system



Lecture notes from the Farmers Forum on Business Start-up, China Yangling Agricultural High Tech Fair, Yangling, Shaanxi, People’s Republic of China, 1 November 2010


Nín hǎo wǒ jiào Don Nicolson


As President of Federated Farmers of New Zealand and a fellow farmer, I am greatly honoured and appreciate the opportunity to participate in this symposium.


Let me start by introducing myself and Federated Farmers of New Zealand.


Federated Farmers of New Zealand was established in 1899 to provide farmers with the means to manage their off-farm risks. We are an independent union of farmers for farmers and comprise individual farms, farming families and allied industries.

While New Zealand has over 63,000 ‘farm holdings’, the working farms are thought to be around 27,000 – the balance being small holdings. Federated Farmers helps represent the majority of New Zealand’s working farms

Federated Farmers offers a variety of services and is literally the farming voice in every town hall when it comes to local and regional planning, in Government, when it comes to regulation or regulatory proposals and even overseas, where we can talk farmer-to-farmer.


Federated Farmers advocates for the four ‘P's' of production, productivity, progress and profit. We aim for policies which create the best platform for farming; sometimes that’s easier said than done.

As an organisation we led the campaign against subsidies and trade protectionism in the early to mid 1980’s. That saw a supposedly ‘left wing’ Labour Government work with supposedly ‘right wing’ farmers to phase out agricultural subsidies.

We now have the most open and honest farming system on earth.

Subsidies and protectionism distort markets by encouraging people to chase subsidies and incentives as opposed to farming profitably. Regretfully, with our emissions reductions policies, that lesson has been forgotten, as foresters chase ‘carbon credits’ instead of the cellulose value of trees.

What I do

I work, Tuesday to Thursday, on the sixth-floor office in a central Wellington office building. I tap away on a computer, spend most of my day talking with journalists, politicians, overseas visitors and staff to push forward the farmers’ agenda at a tactical and strategic level.

At Federated Farmers, farmers speak for farmers but they are backed by expert policy staff.

From Thursday afternoon to Monday, I work my 212 hectare sheep and beef farm, 760 kilometres from Wellington and 10,700 kilometres from where I am right now.

My week takes me from a paddock on my farm back to Wellington, where Blackberry in hand, I am constantly contactable 24/7, 365 days of the year.

I am also in my third and probably final year as President. I’ve learnt that Federated Farmers cannot be all things to all people.

The worst thing about being a farm leader is dealing with self-appointed experts who pontificate about farming, but who don’t farm themselves. They play up the negatives and deliberately play down the positives. Everyone has a view on farming but those who actually do farm have to fight for airtime and column inches against the misinformed.

That’s a key role for Federated Farmers – bringing honesty and integrity to the discussion.

It may come as a surprise to many in this audience, that, according to recent New Zealand media reports, New Zealand has supposedly one of the most polluted rivers in the western world, that we have a catastrophic loss of biodiversity and that we are a major emitter of greenhouse gases.

Frankly, if you believe what is said about New Zealand, you would think we are an environmental basket case. Consumers around the globe can watch New Zealanders rip into New Zealand’s farmers on-demand as well as on-line.

The truth is that we are none of those things.

Since we lifted subsidies, the farm environmental performance has improved immeasurably. Farmers have moved to optimal farming systems instead of chasing subsidies that rewarded the wrong behaviours – I’ll illustrate that shortly.

Frankly, subsidised agriculture harms the environment as well as economies. I am certain it is worthy of doctorial research.

Yet, as the author of the supposed ‘report’ that the ‘worst river in the western world’ claim was drawn from has said, the truth doesn’t make for sensationalist headlines.

We seem to have forgotten that New Zealanders have brought species back from the brink of extinction. In 1980, the Black Robin that was down to a solitary breeding female and four other birds, but has now recovered. The takahe was assumed to be extinct in 1930 only to be ‘rediscovered’ in 1948.

New Zealand does not, by the way, emit 99.8 percent of the world’s greenhouse gas emissions.

A sense of perspective is missing when per-capita arguments are used to parrot my Government’s ill considered emissions reduction policies. Open markets drive efficiency and New Zealand agriculture proves that. Distorted markets don’t. The climate change debate is also not prominent in Greece, Iceland or Ireland right now either.

The worst trait of the New Zealand psyche is an ability to find a grey cloud in every silver lining.

Yet my farm may be more efficient now because there are fewer inputs, tighter cost control and a resulting reduction in my risk curve.

But, after 30 years of sheep farming, I have decided to move to dairy grazing.

This reflects the ethos of Federated Farmers that the market is the best determinant of land use. Yet what my speech to you today is designed to deliver is an insight into the decisions that New Zealand farmers grapple with, inside the New Zealand farming system.

Inside the New Zealand farming system

I wish to first thank Source World Limited (www.sourceworld.co.nz) and Intelact Limited (www.intelact.co.nz) for helping me with this lecture.

New Zealand is blessed with leading edge agricultural consultancies, which advise on profitable as well as sustainable farming systems across arid, tropical and temperate environments. China, of course, has a mix of all three.

In New Zealand, we operate pasture‐based farming in a temperate climate.

But you can literally have too little or too much of a good thing on-farm with the same result; a drop in performance and productivity. One of the ‘arts’ involved in being a skilled farmer and it is an art as well as science, is to optimally manage multiple farm inputs as well as livestock.

Another issue New Zealand farmers face is a high proportion of variable costs we can’t control. These are typified by Government fees and charges, which explains why in the 2008/09 season, a New Zealand Ministry of Agriculture and Forestry report showed that farmers retained just 6.2 cents out of every New Zealand dollar they generated.

New Zealand farmers who want to optimise their farm have to engage in full farm business analysis. If they don’t, then a Chinese proverb is apt, “to talk much and arrive nowhere is the same as climbing a tree to catch a fish.”

Full business analysis provides the opportunity to unlock any farm’s potential and should:

§ Identify the strengths and weaknesses (areas of greatest opportunity) of your farm including a ranking of farm pasture

§ Provide the pathway to making faster and more consistent progress

§ Secure the support of all stakeholders behind an agreed business plan

§ Provide a comprehensive plan for your financiers and

§ Provide focus and confidence for the future.


A mix of both financial and physical measurements is important to analyse farm business performance and in designing a working business plan.



Along with producing ratios, which determine return on capital and equity, there is a need for ratios determining debt level and equity growth, cash movement and the degree of risk your farm is exposed to.



On the physical side, there is a need for ratios that describe animal performance as well as calculations of pasture harvest and feed costs split between pasture, forages and concentrates.



There is also a need for a number of staff ratios to indicate the level of performance there.



Understanding how quickly your profit can either increase or decrease due to changes in your trading conditions is another important factor. For instance, knowing the effect of any change in commodity prices or interest rates on your level of profit, is to better understand the degree of risk in your business.



Changes to your business can be prompted by comparing your own performance with your peers. New Zealand and Australian benchmarks are available and I am certain consultants like New Zealand’s Source World and AgResearch, are in a position to advise you in China.



Change, for the better hopefully, can be determined over time by recording your progress and then using this analysis as a spring‐board. A farm business analysis is one component of a larger farm planning model covering:



§ A vision and determining your medium term goals

§ Determining the present position of your business (i.e. full farm business analysis).

§ A Strengths Weaknesses Opportunities and Threats analysis (including benchmarking against peers) and

§ Developing a plan to move forward.



Critical numbers for farm business management



It is critical to the future success of your business that you find measures that record your level of profit, efficiency, risk, solvency and liquidity. There are five basic ratio categories for your toolbox:



§ Profit ratios: Return on money invested and bigger is better

o Return on Capital = Operating Profit (excluding lease costs) divided by the Value of Assets ‘Employed’ (owned and leased) in your business

o Return on Assets = Operating Profit (minus lease costs) divided by the Value of Owned Assets

o Return on Equity = Operating Profit (minus financing costs) divided by Equity in Business

o Operating Profit per Hectare

o Operating Profit per Animal (useful for sharefarmers in particular)



§ Efficiency ratios: Are the building blocks of profit and is not consistently correlated to profit because there are tipping points, where pushing the ratio too far will lead to a reduction in profit

o milk/meat production - which is a function of stocking rate

o pasture harvest - kilograms of dry matter per hectare (kg/DM)

o feed costs - pasture, forage and concentrate costs (cost per tonne of dry matter including purchase, variable and capital cost components)

o labour efficiency - stock per full time staff equivalent, management plus staff costs per stock

o core cost structure - including core per stock costs and core per hectare costs



§ Risk: Higher or lower and the degree of sensitivity to change

o operating profit margin – the percentage of each ¥ earned that is retained for debt servicing, principle repayments, taxation and ‘true’ profit

o cost of production – gross expenses (less livestock & other revenue) per kilogram of milk solids or meat kilograms per hectare/growth rate per day.



§ Solvency: Confidence in meeting financial obligations as they fall due

o equity percentage

o financing costs as percentage of Gross Farm Revenue.



§ Liquidity: Cash generated to sustain your farm business

o change in working capital

o operating surplus (operating revenue – operating expenses).



Relationship between Production, Profit & Risk



Understanding the relationship between the production system you choose to adopt and the resulting profit and risk profile of your business is a fundamental part of farm management.



For example, when a farm with low output per hectare increases production, there often comes an increase in profit. As production per hectare increases further, it reaches a point where there is a low correlation to increasing profit. Increasing profit is due to other factors, such as being well managed, having a low cost structure or lifting pasture harvest that is the engine of the New Zealand farming system. But then, as production lifts further, there comes a point where profit starts to decrease because to produce more, your costs increase to a point where it is no longer economic – this is often known as the law of diminishing returns.



There is a similar response curve with risk. The risk curve has its tipping point at a lower level of production than the profit curve, so that the farm system with the lowest risk, produces less per hectare than the farm system producing the highest profit. This relationship is illustrated in graph form related to dairy.



The risk graph may appear inverted as the Operating Profit Margin has been used as the risk ratio. This means that the highest point on the red risk curve is the point at which the business has the highest profit margin i.e. it keeps the highest proportion out of each ¥ earned.



For all farm businesses, there is a point on the production curve where the owners have set their goal result. This is personal but very important; some will prefer to be closer to the minimum risk point and others at the maximum profit point.



As commodity prices or major input costs change, the optimum profit and risk points will move. There is also a need for farm business owners to pick a point on the production curve, which suits their profit and risk profile. They also need to decide where commodity prices and cost centres are heading in the forthcoming year(s) as well.



This is part of the business planning equation.



Key Profit Drivers in a Pasture System



There are effectively five key profit drivers in New Zealand’s pasture based farming system:



Pasture Harvest

§ Measured as “tonnes of pasture dry matter harvested per hectare” – this is the engine room of the New Zealand farming system

§ The cost of pasture is heavily influenced by the amount of pasture harvested per hectare

§ Increasing pasture harvest usually reduces the cost of pasture

§ Reducing the cost of pasture reduces the average cost of feed and the Cost of Production

§ A Pasture Renewal Plan is essential for any farm with the ideal rate of renewal being ten percent of each farm annually. This maximises the benefits from new pasture for increased dry matter production, stock performance and improved animal health.



Production

§ Measured as “milk per kilogram of milk solid” or litres for milk but for beef and sheep farmers, kilograms per hectare and growth rates per day - these are perhaps an unreliable profit driver

§ Production has the highest capacity to be misinterpreted. This is due to there being a ‘tipping point’, whereby increased levels of production will result in first, a higher level of risk and second, a reduction in profit. These two ‘tipping points’ occur at different points on any production curve

§ Production can be increased by a mix of better feed, increased stocking rate and/or animal species

§ A higher pasture harvest provides the opportunity for increased production

§ Moderate to high stocking rates plus moderate production per animal are a feature of higher profit farms

§ Low stocking rates or low production per animal is NOT a feature of high profit farms

§ Conversely, a very high stocking rate does not necessarily translate into high output per animal – it’s about optimisation of your physical and material assets. It’s horses for courses.



Supplementary Feed costs

§ Measured as “forage cost per tonne dry matter consumed” and “concentrate cost per tonne dry matter consumed”

§ Forages have more cost elasticity -

o ‘home grown’ forages are the biggest opportunity providing crop yields are good

§ Concentrates have less cost elasticity -

o choice of feeds, including lower protein sources, is important

o diets must not be over specified with protein and minerals/vitamins/additives

§ The full cost of forage is on average at least 50 percent greater than their purchase price. If significantly more than this, then either the level of variable and capital costs or wastage becomes an issue

§ Concentrate costs on average are 15 percent - 30 percent greater than their purchase price.



Although it is important to understand the role of nutrition and the effect of the varying composition of feeds to performance, the primary influence of supplementary feed on profit is the basic cost of these forages and concentrates. As with pasture, this includes the purchase price (which should include any storage costs) plus variable and capital costs.



In addition the effects of wastage must also be quantified.



The most significant opportunity in pasture based farming to reduce forage cost, is to produce the forage on an area controlled by the business, such as the farm itself or a leased property. Crop yield is the second major opportunity to reduce forage costs.



In the case of concentrates, there is often less opportunity to produce this on-farm. There can still be significant opportunities through astute purchasing. There may also opportunities to reduce the effective cost of concentrates by eliminating potentially excessive use of protein, minerals, trace elements and other additives.



Labour Efficiency

§ Is expressed as stock (per hour, per week) against full time staff equivalents (FTE)

§ There can be high efficiency in all systems BUT there is higher labour efficiency on average where pasture fills a higher percentage of the overall diet

§ Capital improvements may also play a role by providing the opportunity to increase profit

§ Organisation of people around husbandry and feeding routines are critical.



The average level of performance for a dairy farm is most commonly 120‐140 cows per FTE, with the top 10 percent of farms running 160‐180 cows. There is also a number running over 200 cows per FTE. With sheep, a standard New Zealand farm will be 4,000 stock per FTE but up to 6,000 is not uncommon, when supplemented by casual labour.



Increasing stock per FTE provides a way for many farmers to lift profitability, as it makes labour more efficient on pasture based farms.



Although it may appear obvious that farms feeding higher amounts of supplement would have lower labour efficiency, it is wrong to assume these farms cannot have very high levels of labour efficiency. The most critical factor in labour efficiency is the business owner/operators intelligent use of resources.



Core Costs

§ Measured as Farm Operating Expenses (excluding nitrogen, supplementary feed, irrigation costs and labour) Per animal, Per hectare.

§ System costs as above are excluded for two reasons:

o so that different farm systems can be compared on the same basis and

o the two major costs in any business, supplementary feed and labour, have already been assessed with their own standalone profit drivers.

§ The level of core costs confirms the focus of the farm business operator

§ The high proportion of variable costs in a farm business increase the requirement for cost control

§ The expenses included in the Core Cost ratios are NOT farm system related

§ You are looking for costs that are more ELASTIC when trying to control costs - recycling nutrients, such as dairy shed effluent back to pasture, can be free fertiliser

§ For instance, fertiliser costs are INELASTIC, if based on scientific recommendations; you have to maintain soil fertility

§ The base cost structure will be regionally specific, hence the need for advice from the likes of www.sourceworld.co.nz and our New Zealand’s AgResearch

§ Cost control is a feature in all top performing businesses, farm and non-farm alike.



The level of core costs on pasture based farms also defines the farm - controlling core costs are integral to high profit farms. Businesses with a high proportion of variable costs have no alternative but to control costs if they are to be significantly profitable.



When the core costs are compared on a per animal basis, high profit farms normally have a lower cost structure than other farms, even though they will often have a higher level of production.



As I said at the beginning, pasture based farming has a high proportion of variable costs - normally 75 ‐ 95 percent of operating expenses. In a high variable cost business there are no significant opportunities to increase revenue than to reduce the impact of high costs.



Cost of Production



So to improve cost of production you need to do one or more of the following:



§ Produce similar volume but off a lower cost base.

§ Produce less but off a significantly lower cost base.

§ Increase the percentage of pasture in the diet of stock

§ Increase the efficiency of production.

§ Reduce costs in all areas without undermining pasture and production.



Opportunities for China in New Zealand and New Zealand in China



12 million Chinese are born every year and as the great American essayist, Mark Twain once advised, ‘buy land, they’re not making it anymore’.



Last month, New Zealand’s Fonterra signed an agreement with the government of Yutian County to lease sites for two potential Fonterra dairy farms. Fonterra already has a farm in Hebei province near Beijing – and is part of building an in-market supply of New Zealand standard milk.



The Chinese Government welcomes investment to improve the quality of farm performance in China.



On the whole, Federated Farmers, likewise, welcomes foreign investment into New Zealand so long as creates a real opportunity for New Zealand and New Zealanders. What I am talking about are Joint-Ventures, like those Fonterra is engaged in China upon.



As an organisation, we will be concerned if land purchases are excessive, given we cannot buy freehold land in China. Vertical integration is another concern. For example, where firms buy large tracts of our farmland, establish processing plants and ‘export’ complete product back to China.



It is unacceptable to us, if all we end up supplying is the land and some labour because value is lost from the New Zealand economy.



Yet, if you are looking to set up joint ventures with New Zealand in genuine partnership that helps grow the New Zealand economy, then I believe you will be welcome.



Supporting skill development in Chinese agriculture



I would also suggest that Chinese agriculture and national and local associations look towards working with New Zealand education providers, agricultural science providers and our farm consultants.



New Zealand’s AgResearch has the experience and expertise in every aspect of pastoral farming. AgResearch with its horticultural counterpart, Plant & Food Research, provide a technical means to work with ‘Dragon-heads’ and your excellent agricultural scientists to life production.



New Zealand’s farm consultancies, like www.sourceworld.co.nz, work internationally at the farm scale across topography and farm types. I say this because the most profitable pasture based farming systems look different between countries and between regions within countries, as well as within regions. It depends upon commodity prices, potential pasture growth, supplementary feed price and base cost structures.



Yet there is another dimension and that is education and training.



Creating farmers with good farm management skills and excellent production techniques is a key advantage to New Zealand’s success as an agricultural producer.



New Zealand’s Agriculture Industry Training Organisation, or AgITO, along with our excellent training providers can provide advice on systems and processes to build the skill base of Chinese farmers and farm workers.



Our Agriculture Industry Training Organisation delivers structured on-farm training to help people learn tradecraft while at work. Trainees gain qualifications through a mix of practical training on the job backed by theory-based study delivered by accredited training providers. It’s about imprinting good behaviour.



Allied to the Agriculture Industry Training Organisation are our two major rural polytechnics, Telford Rural Polytechnic and Taratahi Agricultural Training Centre. These are ‘farmer academies’ focussed upon core technical skills under a national curriculum leading to nationally recognised qualifications. They also provide a gateway to our University system, led by Massey University and Lincoln University.



I would encourage you to talk with them.



In summation



As a farmer to other farmers, there are really two ‘levers’ that must be pulled in your business.



The first lever is the output or revenue lever. To do this, you must first set the ‘right’ stocking rate for your farm as this provides the mouths to harvest a heap of pasture. Without the ‘right’ amount of mouths there is no opportunity to harvest a lot of pasture. By imposing sound pasture management on the ‘right’ number of stock to your farm, high pasture harvest will result. If you also impose sound animal husbandry skills, then the high pasture harvest will be converted into higher amounts of protein, either as milk, meat or fibre.



A soundly designed farm system will produce a heap of revenue off a moderate feed cost.



The second lever is the input or cost lever. To do this you need to exert disciplined financial management and tight cost control. This ensures the cost structure of the business is low. This combination produces a lot of pasture leading to milk production and/or weight gain per animal, off a low cost base.



This is the outcome required to be a high profit farmer operating off a relatively low cost base and with a relatively low level of risk in the pasture based system I operate in.



My final message is to end subsidies and trade protection. Only through that will the market truly work by freeing the good farmers from the poor.



I wish to thank AgResearch, Intelact and Source World for helping me with the lecture. Above all, I wish to acknowledge the gracious hospitality of the Farmers Forum on Business Startup Secretariat and of course, you, the Chinese people.



Toa chie and M goi.



Thank you.

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