Grass greener when it saves cash
A sharp slide in Fonterra's forecast payout to $6 a kilogram of milksolids for the 2014-15 season from last season's record $8.40/kg is an opportunity for dairy farmers to refocus their business - particularly pasture management, says South Canterbury low-input dairy farmer Leonie Guiney.
"We have the best climate and some of the best science in the world to still be world beaters on utilising pasture. We can claw back our position as the most efficient dairy farmers in the world. People need to think hard about why they are in business."
Leonie and her husband Kieran Guiney, of Fairlie, were winners of the best low-input system in the 2014 Dairy Business of the Year and runners-up overall. Their 250-hectare, 900-cow farm recorded the lowest cost of production of all the finalists at $2.86/kg compared with the New Zealand average of $4.42/kg. The awards were based on financial figures from the 2012-13 season, when Fonterra paid a farmgate milk price of $5.84/kg, plus a dividend of 32 cents a share.
Their farm name Shamrock Fern Dairies reflects their varied backgrounds, with Kieran brought up on a dairy farm in Ireland and Wellington-born Leonie a former dairy-farm consulting officer.
Starting on the dairy farming ladder in South Canterbury in 2002, the Guineys now run four dairy farms near Fairlie. They began as contract milkers then moved into sharemilking two 700-cow units, buying their first farm in 2005.
"We saw opportunities to convert land around the Fairlie basin. There wasn't much dairying here." Another centre-pivot irrigated 800-cow farm was converted in 2007, followed by two neighbouring non-irrigated foothills properties.
"We leveraged ourselves heavily as we saw an opportunity. We have simple farming systems and we know how much profit they will make because of a very consistent cost of production. This gives us the ability to borrow quite aggressively when we see an opportunity that stacks up. So we grew really fast."
Staff, some from the sheep industry, have also grown with them, progressing from wages, to farm manager, contract milker, and lower-order sharemilkers. "My husband gets a huge buzz from creating opportunities for young people as we have expanded," she says.
The farm manager at Shamrock Fern Dairies during the year covered by the judging, Angus Lang, now married to Nicole, is lower-order sharemilking on another of the Guineys' farms. Both lower-order couples have been offered 50:50 sharemilking roles by the Guineys at the end of their current contracts.
While return on capital was judged as 7.2 per cent, compared with a national average 4.1 per cent, Guiney said the farm was valued at Mid-Canterbury prices. "In reality, we estimate our return on capital to be 10 per cent on current values and, when we buy land, we won't unless we see a return on capital of 12 per cent excluding capital gain - that's why we farm in what is considered a marginal area."
Milksolid production at Shamrock Fern was 381kg a cow and 1377kg a hectare, producing an operating profit of $4607/ha compared with a national average $1997/ha. The biggest difference between the Guineys' $2.86/kg cost of production and the average $4.42/kg is supplementary feed.
The Guineys' low-input, low-cost system is grass-based with strict limits on the amount of supplementary feed purchased.
"We milk off what grass we grow. We feed 300kg of purchased drymatter a cow in autumn to get lactation days, but feed no supplementary feed in the spring. Probably 20 years ago this was normal, but now we find it rare.
"Farmers are tending to chase production per cow, which doesn't necessarily translate into profitability. Our target is to grow as much grass as possible and utilise as much grass as possible. That doesn't always deliver maximum per cow production, but it targets profit."
Leonie Guiney said that, as a dairy farm consultant in Taranaki in the early 1990s, she learned from farmers to turn whatever the season delivered into cash to service debt.
"If you can generate a repeatable cash surplus every year then you can service debt. There is no business-growth advantage in making a massive profit one year and then making a loss the following year.
"We possibly forfeit some potential income in the big payout years, but we always make a profit irrespective of milk price.
"It's not about studying every single cost in your budget. Our farm policy delivers our cost of production, rather than a fine- tooth comb study of individual costs.
"Our sharemilkers and managers know they must have a certain grass cover at the start of calving to get through spring without supplements. This means drying off cows earlier in autumn than most people. So, while we are forfeiting some potential autumn production, we are not exposing ourselves to price volatility for purchased feed."
Their sharemilkers and managers understand and buy into Guineys' farming policy. They have a clear budget and performance targets, including calving on an average pasture cover of 2600kg of drymatter and going into winter with an average cover of 2300kg/DM. This is achieved by lengthening the grazing round from February. Cold winters and difficulty putting condition on cows during the coldest months mean cows need to gain no more than 0.5 of a condition score when winter grazed.
"This determines management policies in autumn and when cows are dried off. We don't prescribe how they do it, and our sharemilkers and managers decide the best day-to-day management to achieve this." A key tool used on all farms is a rotation length planner, to ensure farms do not run out of feed in spring.
Guiney questioned the need for farmers to over-intensify their systems by adding a lot of supplementary feed. "Do we need to push our milking season into the end of May or early June? There is no clear relationship between production per cow and profitability. It is easy to chase production when the milk price goes up, but farmers shift their cost structure up, often without even realising, and it never goes back to the original level when the payout falls."
The Guineys pay market rates for winter feed, but buy the whole crop, enabling them to allocate the feed themselves and so control cow intakes. The Guineys also place an emphasis on good genetics and breeding worth, so their Kiwi- cross cows deliver for their system.
The Guineys will host a field day on their farm in November.