Bridging the gap between meat and dairy profits

CONOR ENGLISH
Last updated 11:49 28/04/2014
TDN Farming
ROBERT CHARLES
NUMBERS GAME: Federated Farmers CEO Conor English.

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OPINION: There has been a lot of discussion recently about New Zealand's meat industry.

We all want more profitable and sustainable farming.

Meat farmers have been concerned that their gross incomes are a bit lower than dairy farmers' on similar sized farms. For meat, three numbers make bridging that gap challenging.

Firstly, the weighted average kilogram/hectare production for meat farmers across all land classes and regions for 2011/2012 was about 187kg/ha (lamb - 90.77, beef - 66.43 and wool - 30.16).

Now this is a very rough number as farms vary significantly from the high country to the coastal flats.

According to DairyNZ, the average kg of milksolids per effective hectare for the 2012/13 season was 988kg MS/ha.

Despite issues with assumptions made to get these numbers, such as supplementary feed and how runoffs are counted, the basic maths indicate that dairy farmers produce a reasonable amount more weight of product per hectare.

Secondly, again roughly speaking, both meat and milk receive about $6 per kg on average over the years.

So to make up the difference, either the meat farmer needs to produce significantly more kilograms per hectare than they do now, receive significantly more times the price per kilogram, or a combination of both.

The third number is the capital invested. There will be meat farmers achieving higher returns on capital than some dairy farmers. However, generally dairy farmers do invest more capital both on and off farm than meat farmers, so their gross income is therefore likely to be proportionately more.

Recently, I explained that it is unrealistic to expect a return from an asset you don't own. I can't receive rent from the neighbouring house if someone else has invested in it and not me.

So there is an issue about how much and where capital is invested. This is true for both dairy and meat farmers.

Some suggest overcapacity is a significant issue. The printing industry has the same issue and the market has dealt with it.

To make any progress it is going to take more than incremental thinking. Until meat farmers produce or invest more per hectare, or meat companies are able to extract far more significant returns from the market place, the relative gross income gap between meat and dairy farmers will likely continue. This is a similar situation to the gap in income between dairy and kiwifruit farms.

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Some great progress has actually been made by farmers and meat companies alike.

However we need to keep at it.

Conor English is chief executive of Federated Farmers. 

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