Breaking out of the milk powder trap: Why dairy may turn to barns
The next big thing for dairying in the South Island looks like it might be – indeed it may have to be – cows in barns.
Cue the sharp intake of breath, but Jeff Gould, a dairy farmer who runs 1100 cows by the Rangitata River near Ealing in mid-Canterbury, agrees.
Yes, he knows. Putting cows indoors? That is what other countries do. New Zealand prides itself in being all natural. Animals grazing free range in a field.
And it is regarded as the lower cost production model too. Our competitive advantage. Elsewhere they truck in grain for the cows, as well as having to pay for their housing.
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Yet Gould says there are a combination of reasons why hangar-sized sheds have to happen – not the least being the great water quality debate.
The experts say the number one action farmers can take to reduce the cow waste leaching from paddocks is to get the cows off them during the wet winter months.
So a handful of dairy farmers like himself have been building barns. And that trickle could become a flood – just the new way things are done.
Gould took the plunge five years ago after seeing barn systems in Canada and Australia. He also worked a year with them in England.
"The biggest issue I had mentally is I knew it would work financially, but it was getting my mind around the fact cows actually want to be inside. If we give them the option of in or out, they definitely want to be in."
Perhaps it is part of our national mythology, he agrees. Kiwis are tough outdoor types, so we expect our animals to be happy in all weathers. However, the South Island winters are pretty exposed. And in summer, the sun beats down on the Canterbury plains.
He remembers the day he was convinced. The herd was outside and looking miserable in the rain.
"I thought bugger this, so I put a whole lot of feed in the barn and we opened the gates." Gould still expected the cows would need to be enticed indoors.
"But they were bloody running in and just went and laid down. Didn't eat their feed. I realised all they wanted was their shelter. That was when I first really felt comfortable about it."
Other farmers are making the move too. But as one who has just built a 900-cow shed off the state highway near Rakaia says – not wanting to be named – the move is still too controversial to risk advertising the fact in the media.
Dairy is already under siege, he says. If the public gets a sniff, it will be another reason to bash the industry. "We'd get nailed."
And it is a sensitive issue even among fellow farmers. Who really wants to be told that here is yet another multi-million dollar investment they will probably have to make to keep up with an ever-changing world?
But there is a logic to it and people are positioning.
Construction firm Calder Stewart – looking for its next business opportunity after the Christchurch earthquake rebuild – has started a new division to supply free-stall dairy barn systems.
Ashburton-based manager, Donald Sutton, says four of his staff are about to jet off to see how it is done in Oregon and Holland. The company certainly believes that after irrigation, this is the next big infrastructure step for New Zealand dairy.
Again – for a combination of reasons, says Sutton – barns are looking the obvious way forward.
A big advocate of barns is Christchurch-based farm consultant and former Lincoln University agribusiness professor, Keith Woodford.
He is the guy taking the Calder Stewart team on its round-the-world trip and who has also been advising Gould and other South Island farmers making the switch.
Woodford says it is not just about barns. New Zealand's whole system of dairy production needs to be re-thought. And putting cows in sheds is simply a starting part of that.
Woodford explains. The New Zealand dairy industry has a structural economic problem as much as an environmental one, he says.
The public thinks dairy is bad for water quality. We have been chasing the "white gold" bonanza for a decade – milk production has doubled since 2008 – and that rapid industrialisation of the landscape is naturally doing damage to our lakes, rivers and streams.
But at least dairy is a guaranteed money-spinner for the country, right? Long-term – because of an ever-growing Asian middleclass to buy our dairy goods – New Zealand's heavy investment in cows is going to pay off?
Woodford frowns. Instead the hard truth, he says, is that what has happened is New Zealand has managed to corner the market in a commodity product – whole milk powder (WMP) – whose growth has probably already plateaued.
We have geared our national production system around an export niche. Two-thirds of New Zealand milk now goes to giant dryers like Fonterra's $500 million Darfield plant, opened in 2012. And we certainly own the world WMP market with 70 per cent of what gets traded internationally.
Yet Woodford says there are reasons why this is not a sound long-term bet – why other dairy countries aren't even that bothered with selling WMP unless they happen to have a milk surplus to dump that year.
Milk powder is fundamentally a developing world product, he says. And the explanation is obvious – logistics. "Whole milk powder keeps. So when you've got supply chains that are not very strong – your refrigeration is poor – then WMP is the ideal product to be importing."
Until 15 years ago, butter and cheese were New Zealand's main dairy exports. But then oil-rich developing nations, like Algeria and Venezuela, as well the Middle East, began paying decent money for milk powder.
Woodford says this has meant New Zealand has had some surprising top customers down the years. "At one stage around 2008, Venezuela was our number one market."
However when the global financial crisis hit that year, world oil prices tumbled and immediately all those buyers softened. Also they were steadily improving their cold store infrastructure and so were switching to fresh dairy products like extended shelf life milk anyway.
No one buys reconstituted milk if they don't have to, Woodford says.
Luckily for New Zealand, China then came along after the global financial crisis as a new buyer. Being a rapidly urbanising country with a still weak rural infrastructure, China had a sudden demand for imported milk powder. So off the sales went again.
And this is what we have been seeing for the past decade, says Woodford – the justification for all the farm conversions, irrigation schemes and new drying plants.
But we have ended up now hugely reliant on a single country's continuing appetite for our WMP, he says. China accounts for half of the powder we put on a boat.
"So really, we've positioned ourselves on being dependent on China going down an entirely different path to every other developing country. We're hoping they will in fact keep buying WMP after they are developed."
Instead, the inevitable looks to be happening already.
Woodford says even our 2013 "rock star" year was a bit of a freak. An outbreak of foot-and-mouth disease in China coincided with a drought and short-supply in New Zealand to send milk powder prices crazy.
"Yet since then, their imports have gone nowhere for four years." A sign Chinese consumers are moving up the food chain, he believes.
Woodford says when it comes to milk powder, New Zealand even managed to miss the boat on canned infant formula.
That would have been a valuable trade to corner with the Chinese. "Those imports have been going up every year at somewhere between 30 per cent and 60 per cent."
But while we do provide a lot of the raw product that European or Australian brands use to make their formula, Woodford says Fonterra was late to try to create our own national champion in its Anmum line.
And although nearly 200 small Kiwi start-ups did jump into the market, almost all have been swept away now that – for good food safety reasons – China has decided to deal with just a few strong international suppliers.
So you are getting the picture, Woodford says. The New Zealand dairy industry has been rather led up the WMP path, first with a burst of demand from the developing oil nations, then China creating a second surge.
It could have been different. Woodford says some of our other agricultural players – particularly kiwifruit and wine – have done a good job at establishing themselves as exporters of "developed world" products.
It probably helps they had no other choice. But originally Fonterra was meant to be doing this for milk – taking on the Nestles and other food giants.
But Woodford says as a co-operative, Fonterra has to return about 70 per cent of its profits to its farmer shareholders. It doesn't have the deep pockets it takes to establish international supermarket brands.
So early on it got side-tracked by WMP. "Back in about 2003, Fonterra decided it was about 50 years too late getting into the consumer business. It couldn't compete. So it would become a supplier of ingredients."
Woodford says the plan was New Zealand would sell milk powder with specialist properties, like the nutritional factors wanted in infant formula, or the particular qualities valued in making yoghurt and other dairy goods.
That at least would help lift us out of the WMP commodity market dogfight. However it was also a strategy that kept New Zealand locked into a commodity production model. Think about the celebrated pasture-fed Kiwi way, he says.
Our climate coupled with plenty of water means we can grow "rocket-fuel" rye grass. Great for milk production. But it goes through the animals quick time. This is why so much nitrogen comes out of a dairy cow's rear end, Woodford says.
Relying on pasture also means New Zealand's production is sharply seasonal. Milk is produced in bulk for half the year. The usual farm schedule is to keep the herd lactating for 260 days, then cram in calving during the off-season.
So Fonterra has had to build its processing infrastructure around that – dealing with an annual glut, then shuttering its plants in winter.
This in turn keeps pushing the industry back towards WMP as its ideal product, as it can be kept stockpiled in a warehouse and is not actually that expensive to produce.
"You can get away with not utilising a milk powder dryer 12 months of the year because they are relatively cheap to build," Woodford says.
However to get into fresh consumer dairy products, there would have to be a concerted national shift into year-round milking. A cheese or yoghurt factory is too big an investment to run part-time, he says.
Hence how the argument comes back around to the need to shift to barns, Woodford says. It is the way to deal with both dairy's environmental and structural problems.
Get the cows off the paddocks in winter or wet weather because that is when nitrate soaks straight of the urine and into the groundwater. It also means milk production is no longer so strictly tied to the seasons.
That then creates the opportunity to look beyond WMP and compete in value-added dairy products where the real long-term money is going to be.
STUCK IN RUT
Woodford agrees plenty might resist joining the dots like this. But dairy is stuck in one self-perpetuating rut and it only makes sense for the public to back it – given all the water quality concerns – if it is indeed going to move to a business model with a less obviously limited shelf-life.
It is not all gloom, Woodford admits. Fonterra is climbing the food chain with a number of new consumer initiatives.
Before Christmas, it launched two Anchor-branded UHT carton milk products aimed at the Chinese market – LiveUp, which has double the usual protein, and NaturalUp, which is certified organic.
Last year, it also ramped up its slice cheese production at its Eltham factory in Taranaki, and this year has brought forward the building of a carton-packaged UHT whipped cream plant at Waitoa in Waikato.
Woodford says particularly impressive is Fonterra's new $240m mozzarella cheese operation at the Clandeboye plant in South Canterbury. There are some clever tricks going on there.
"Mozzarella normally takes about three months to make. Fonterra can make the product in about 24 hours. They've got some unique science – and you can ask to go and have a look at the plant, but you won't get inside."
However he says the main sales are going to be mozzarella toppings for the fast-developing China pizza business. Just like the slice cheese is aimed at the Asian burger market. So it is a bulk business really – a step above commodity milk powder – not selling New Zealand as a brand.
Woodford says the real push into high-profit "consumer ready" products may come from new small players that can raise their own investment funds, like Oceania and Synlait.
For instance, Synlait, based at Dunsandel in Mid-Canterbury, has evolved quickly with the help of Chinese partners. Woodford says it began with a milk powder dryer, then got into infant formula, and is now building its own-brand canning facilities.
So the production shifts away from WMP are starting to happen. And Woodford says the new plants are beginning to give farmers the right price signals to encourage them towards year-round milking. Premiums are being offered on winter deliveries to keep the plants supplied.
But he says it still feels like baby steps. The commodity WMP model remains entrenched. And for dairy farmers – in the thick of it with environmental limits looming and uncertain milk prices – moving to barns and year-round production looks another financial gamble on top of all the others.
Ealing's Jeff Gould says he did find the switch hard. Changing from a strict seasonal schedule meant a lot of farm jobs – like calving, mating and drying off – were often happening at the same time.
"Yeah, it was complicated at the beginning. But it's amazing how once you get used to something, then you think it's just damn simple."
Gould says New Zealand also has the advantage with barns that it can in fact take a hybrid approach. Where the US or European mega-barns buy in their feed and keep the cows completely inside, he runs a free stall system where the cows can go back and forth to the fields still.
So two-thirds of his farm is pasture. On the other third, he grows winter foliage like kale and beet. That mix takes advantage of the New Zealand economics of home-grown feed, while getting cows off the ground when the weather is unsuitable.
Barns are not cheap, Gould says. With concrete floors, the stalls need mattresses. The stalls are designed so that when a resting cow stands to dump her waste, it hits a lowered alleyway equipped with scrapers. The all-up cost is about $5000 a cow.
But he says he gets the pay-back of winter milk prices, less wet-weather pugging of the fields so stronger grass growth, and not as much food wastage as the barn keeps it dry.
"A lot of people ask me how I can afford to run such a high cost system but actually it's not. Our costs this year, including costs of management, are going to be $4 a kilo of milk solids. So it's not expensive."
Cows in barns then. Gould says it has been a touchy subject. But personally he finds cows outside in extreme weather an animal welfare issue. "I was never 100 per cent comfortable with cows in a winter kale paddock, with the mud and that. It was a bad look."
And even the greenies will probably support barns if that is the best way to make a dent in the nitrate problem.
Then as Woodford argues, there is the general economic argument – the need to get out of that dangerously narrow rut of being a milk powder producer pretty much now dominated by a single rapidly-changing customer.
So quite likely? "Aw, there's no doubt its got to happen," Gould says.