'Be tight like me' on costs, farmers told
There were no excuses for farmers to increase production costs during a high payout year, a leading Waikato dairy farmer says.
Instead, dairy farmers should look harder at their costs during seasons when the payout was high, Mark Townshend told farmers at a P3 Dairy Trust focus farm field day at the MacInnes' dairy farm near Ngatea.
That was because rural service providers would be tempting dairy farmers to spend money, he said.
"You're going to lose that battle unless you're tight like me, or you're very disciplined in your approach.
"Now, more than ever, look at your costs."
Farmers should not pay more than 5 per cent of the value of milk solids for any products they purchase, he said.
"With an $8 payout, you can't be paying more than 40 cents. That still makes perfect sense."
The advice comes as Fonterra announces a new forecast for the 2013-14 season this week. The forecast sits at $8.30 per kilogram of milksolids, with an estimated dividend of 32 cents per share.
Townshend had seen at least eight cycles of very high and low milk payouts. It was no fluke that both good and bad payouts never stayed high or low for more than 12 to 18 months.
When New Zealand's milk production dropped by 3 per cent last season because of the drought, it pushed the international price of milk up by 50 per cent.
Conversely, during a good production year, the milk price can be expected to eventually drop.
Production also increased when the price was high, but that burned off demand in the market place.
"The next thing you know, you've got too much product. What happens then? The price crashes and what happens when the price crashes, you produce a bit less."
It resulted in some farmers leaving the industry, causing a shortage and more customers wanting to buy the product because of the low price.
"It's a perfect supply-and- demand thing."
The longer the payout stayed high, the worse it would be for New Zealand, he said.
If the payout stayed at its current level for two years it could result in countries such as the United States - which had five times the milk production of New Zealand - increasing their milk supply.
A 2 per cent increase in US milk production was the equivalent of a 10 per cent in New Zealand, he said.
He welcomed milk price volatility and saw it as an opportunity, not a problem. That volatility would also dampen US milk supply.
Now was also a good time to retire debt, he said. When the market was this bullish, repaying debt put farmers in a good position if they needed to grow their business when the payout was lower. "For smart operators, that's worth doing," Townshend said.
He also urged farmers to invest in their local communities. It was local businesses that suffered the biggest impact when there was a downturn.
"When you have a drought or a low payout, farmers do all the moaning and your local businesses take all the pain."
He believed successful farmers would have to build a line in their costs of production of maintaining their community.
"You will have to invest in your communities if you want to have the best schools, the best communities and all of those things."
Dairy farmers should be extremely happy with how this season has progressed, he said. "You're never going to get it this good in terms of a good, average season and a payout."
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