Low milk prices - podcast transcription
Low milk prices
Greg: Welcome to Dairy News. I’m Greg Mills and today I have with me Tony Dowman to talk about what we can do with these falling milk prices. So Tony, most people out there are experiencing or seeing around them milk prices starting to slide off once again, so what can they be doing in their businesses to deal with that situation?
Tony: Greg I wish there was a silver bullet that I could tell you that you could just do this one thing and all would be fixed, but the reality is there’s no silver bullet. If there was, I would just mail out the magic formula to everybody and we would live happily ever after. But, what we’re seeing now is falling milk prices as part of the fallout of the global economic crisis and depending which processor you supply, some falls are greater than others.
So what you need to do is work out - look at the true cost of milk production on your farm, know your figures and know what your break even point is. If your cost of production is below your milk price, you then have to make a decision how long can I run at a loss? There’s no point in milking cows forever at low milk prices, eroding your equity in your business ‘til you reach a point where technically you are bankrupt and going further and further into debt.
If your milk cheque can’t even cover the feed cost for your herd then there really is little hope of surviving over a long period of time with low milk prices.
Greg: So that cost to production now to produce a litre of milk, how would I calculate it? What sort of costs would I include in there and not include in there at this time?
Tony: Yeah it’s a good question because people quote their cost of milk production quite carelessly at times and you never know whether they’re talking about all cost of milk production which includes depreciation, imputed labour and all these sort of non-cash items, or are they just talking about the variable cost of milk production which is your feed, your feeding costs, the cost of running the herd, the cost of running the dairy.
If those are the only costs they’re talking about which is basically gross margin analysis, if they’re just talking about the gross margin, that is entirely different to the true cost of running a business which also includes your overhead costs and your financing of the business. You have to be very careful as to the figures that get quoted around as to what’s included and what’s excluded.
What you really need to do is get somebody to do a financial analysis of your business so that you really do know what it does cost to produce milk. A very, very simple way of doing it is have a look at your GST. If you’re paying GST on a quarterly basis, if you’re still paying the tax office GST then you must be making some form of profit because the amount of GST that you’re collecting on your milk cheque must be greater than the GST you’re paying on your costs.
So that is a very, very simple way to get an initial appraisal of the financial position. Unfortunately there are a number of GST exempt items on the farm and if you are going to use GST as a bit of a screening process, you need to take into consideration that as well. Debt servicing for argument’s sake is GST exempt. Rates is GST exempt. Wages is GST exempt. So we need to add those back into the equation to get a more accurate figure. But you can’t beat a good financial analysis of your business on at least an annual basis to see how you are travelling.
Greg: So Tony you would have seen these. Now is there some characteristics of business that survive during these times?
Tony: We haven’t seen these prices like this for very long at all. Pre 2000 in our regulated market in New South Wales the industry was absolutely protected from these sort of volatile price swings. It’s only since 2000 that we’re seeing them and it’s only nine years. We really do not know what the cycle is for the dairy industry in Australia and as far as pricing is concerned. It wasn’t long after 2000 that the prices were down to the 24, 26, 27 cents a litre. We’re heading back towards there now in some areas of the country.
So is this a seven year cycle? Don’t know. Is this a one off? No one can answer that. How long it’s going to last for? Again no one can answer it, but you’ve really got to say "Well, if my cost of production is higher than my milk prices, how long can I last before I basically run out of credit?" Someone has to make that call in the business and say "Well, we’re prepare to travel at these low prices for six months, 12 months, two years before we cut our losses and leave the industry and go and do something different, and wait ‘til the prices come back again."
Greg: Tony you mentioned feed a couple of times and that’s obviously a big cost for a lot of dairies. Is there something we should be doing in terms of looking at our feeding strategy to maximise the return on the dollars we’re spending there?
Tony: Yeah. This is the one area where we see the biggest variation when we look at our analysis of farm figures, whether we use through the Queensland Dairy Accounting Scheme or New South Wales Milk [5:15] Program or any other scheme, the big differences between farms financially is how much they spend on feeding cows and what sort of response they are getting.
Land ownership for farmers seem to be an essential part of the equation and the reason why you own land is to produce feed for cows. What we need to do is see what is the cost of home grown feed, what is the amount of feed that’s being generated on a per hectare basis and how much do we have to pay for it? That seems to be a fairly big difference between farms. Some farms produce eight tonnes of dry matter per hectare, some produce 12, some produce 16.
So obviously when you spread the cost of land ownership over more and more tonnes of feed, the feed becomes cheaper. Pasture utilisation is a major driver in the cost of production and the other area we need to look at is are we feeding the cows the right feed? You really need to do the sums to see how much energy and protein and fibre cows require, and make sure we are not oversupplying any of those three essential ingredients of the cow’s diet.
There’s not much use supplying the cows heaps and heaps of protein if they’re running energy deficient, because all we’re doing is wasting our money. There’s a real need to critically analyse the cow’s diet and work out which is the cheapest source of feed for the cows. If the cows are energy deficient, buy energy. If they’re protein deficient, buy protein. If they’re fibre deficient, buy fibre. We really need to do the maths, sit down and work out what the cows require and what’s the conversion between the money and the feed we put down the cow’s neck, and how much milk we get out of the cow.
Greg: So if I want to look more closely at my feeding strategy and want to look at some of these numbers and efficiencies you were talking about, how do I do that Tony?
Tony: You’ve got a number of options available, farm consultants. This is the sort of work that they do if you want to go down that track. If you feel as though it’s too difficult or you haven’t got the time to invest into this part of the business, New South Wales DPI has a number of livestock officers who can help do the equations and do the calculations for you. Or if you’re interested in doing it yourself, DPI has also available different computer programs or very simple programs that the farmers can be trained in so that they can check the rations that the cows are getting, or design rations to try and predict the format that you’ll get out of these cows.
So, there’s plenty of help available. The calculations and information has been around for a long period of time world wide. It’s just a case now of sitting down and doing the homework to work out what the cows really require to eat to get the desired performance.
Greg: You mentioned maximising pasture utilisation and that home grown feed, if you feel you need some skills in that area, is there any training courses that are readily available to help build up that skill base at this time?
Tony: Yeah. New South Wales DPI has been running a program called Managing Pastures for Profit which is based on the Victorian program and it’s looking at the fundamentals of pasture management and grazing management to try and maximise the use of pastures. As I said, it’s very easy to get four tonnes of dry matter per hectare, but some people get eight, 10, 12 even 16 tonnes of dry matter per hectare. You can get a four fold increase just by feeding cows properly and managing the pastures so that they are grazed at the optimum time so that the pastures can regenerate and get back, and be ready to be grazed again at an earlier period.
So there is a number of programs out like that, educational programs to help you improve your pasture utilisation and there is also a number of programs to either analyse your business to see how it’s performing financially and also analyse the cow’s diet to see whether they’re being fed the most appropriate feed.
Greg: Thanks Tony. Thanks for some of your insights today on what we can do to address these low milk prices.
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