Sth Is dairy farm conversions certain to slow

PITA ALEXANDER
Last updated 08:47 27/05/2014

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What would you say are the biggest potential risks to the New Zealand economy?

To my mind they might follow this order: foot and mouth disease; another global financial crisis; a major hiccup to the Fonterra brand; the European Union untangling or China's imports reducing substantially.

Any one of these five points would be painful on either side of the fence.

The dairy industry now accounts for about one third of NZ exports and with tourism is probably our only world-class industry.

Is one third of our NZ research and innovation involved with the dairy industry? Maybe it is. If not, it probably should be.

The nutrient issue is going to slow down dairy farm conversions in the South Island almost for certain. Maybe this is a good thing as the benefits of consolidation for a period in almost any industry is underrated.

The milksolid production for an average cow or each grazing hectare on many owner-operator irrigated Canterbury dairy farms has not increased as much as you might think over the past five years. This shows up clearly in our specialist farm accounting annual surveys. Production data in both these cases is sound, but maybe within five years or so Fonterra will need to focus even more on getting some of its increased milk supply for processing from suppliers in other countries.

For years and years it has been the ability of Kiwi farmers to grow grass and produce milk at a low cost which has carried the day. During a low milksolid payout this is almost certainly still valid.

The nutrient issue though is going to bring some focus on whether backing off cow numbers for each hectare of land is the way to go, plus altered farm management to compensate as opposed to major spending on herd homes and the like. I feel there is going to be some real focus on both of these issues over the next few years.

As the past 40 years have shown, capitalism is marvellous at getting people with horsepower into gear when the price of something, whether it is gold, oil or some other commodity, is high because these people then innovate with other alternatives to cream off some of the profit.

Genetically modified seeds and plants are well and truly entrenched in many countries but some, like the EU, are still very opposed to the concept. A good example is how rice has been modified to cope better with floods, droughts and different soils and the benefits of this are coming through. Rice is the staple food for about 20 per cent of the world's inhabitants.

The nutrient issue may underpin the dropping of sheep numbers at least in the South Island. At a certain point, perhaps somewhere around 25 to 27 million sheep in NZ, our freezing works are going to have a major over-capacity problem. The scarcity of lamb may well hold up the per head value, but it won't answer this potential works problem.

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As New Zealanders we moan about new start-up companies being bought or taken over by overseas shareholders and NZ being the loser. I am involved in a few of these and understand why and how it can happen. Many of the people involved in a start-up early on work their tail off and are worn out physically, mentally and financially and if someone comes in with a chequebook at that point they will sell readily. The chequebook often does not need to be that substantial and I cannot see this broad concept altering for the foreseeable future.

Many people around the world with virtually no skills and no desire to upskill are going to find they will be replaced by robots and technology over the next 15 years. This could apply to 10 per cent of people in the world, particularly in the large cities and particularly when the costs of technology get lower. Masses of unskilled labour in the world's cities are heading for a major problem with this issue.

Economic growth for NZ means economic growth inside agriculture. You can kick this around as much as you like, but that is the reality of our economy. Research and development and innovation inside NZ agriculture needs to be efficient and monitored. We close down the research, development and innovation chequebook at our peril. NZ needs to educate more of its people in the science, engineering and new technology areas and strongly encourage this with dollars in some form or other. NZ could operate with much fewer accountants, lawyers, bankers and real estate people. We also need to accept that overall annual NZ health, welfare and education costs will almost certainly rise at a faster rate than inflation.

I feel it is hard to see how food prices around the world won't increase over the next 20 years. There may be peaks and troughs with regard to prices and production but the trend line will be clear. Several key countries right now are making big moves to guarantee their staple food such as rice and wheat. Genetically modified seeds have already had a major effect with this influence likely to gradually increase further. Many countries want to ensure they can control a major portion of their people's food requirements and some are purchasing/leasing huge areas of farm land in South Africa and some other countries to control this issue.

Now more than ever, we need to educate our teenage school children about financial literacy, income and expense budgeting, capital budgeting, financial management, prioritising, income tax and generally giving them a grounding for when they leave school because so many of them come to all sorts of grief between high school and the real world. You could argue that all of this should happen over the kitchen table and for some it does. Equally, it's obvious for many that it does not. I talked to my own two children about their capital budget when they were 10 years old and it doesn't seem to have done them any harm. When you really get down to it understanding the concept of compounding interest just has to be more useful in later years than even the most colourful of Shakespeare's plays.

*Pita Alexander is a specialist farm accountant at Alexanders.

- Waikato Times

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