Management Systems and Price Risk Management in multi-site Dairy Operations

A report for

Paul Niven 2014 Nuffield Scholar

January 2016 Nuffield Australia Project No 1420

Sponsored by:

© 2016 Nuffield Australia. All rights reserved. This publication has been prepared in good faith on the basis of information available at the date of publication without any independent verification. Nuffield Australia does not guarantee or warrant the accuracy, reliability, completeness of currency of the information in this publication nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the content of this publication. Nuffield Australia will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on the information in this publication. Products may be identified by proprietary or trade names to help readers identify particular types of products but this is not, and is not intended to be, an endorsement or recommendation of any product or manufacturer referred to. Other products may perform as well or better than those specifically referred to. This publication is copyright. However, Nuffield Australia encourages wide dissemination of its research, providing the organisation is clearly acknowledged. For any enquiries concerning reproduction or acknowledgement contact the Publications Manager on ph: (03) 54800755. Scholar Contact Details Paul Gerard Niven Hub Director Falcon Dairy Holdings Limited Unit 507 -509 Tower C2, Oriental Plaza Beijing 100738, China Phone: +86 138 1041 2282 Fax: +86 10 5952 0501 Email: pgniven@icloud.com

In submitting this report, the Scholar has agreed to Nuffield Australia publishing this material in its edited form. NUFFIELD AUSTRALIA Contact Details Nuffield Australia Telephone: (03) 54800755 Facsimile: (03) 54800233 Mobile: 0412696076 Email: enquiries@nuffield.com.au 586 Moama NSW 2731

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Executive Summary Largescaledairybusinessesthroughouttheworldmonitorandmanagethemarginbetween

theinputsandoutputsfromthebusiness.Inordertodothis,theyneedrealtimedatafor

both physical and financial parameters so that the people who are working at the

operational,tacticalandstrategiclevelscanmakeinformedandtimelydecisions.

ThisstudyfocusedonNewZealandandtheUnitedStatesofAmerica(USA).Thepurposeof

visiting these countries was to see large dairy businesses that cover the range of dairy

productionsystemsfromfullypasturefedtofullyconfined.NewZealandproducesabout20

billionlitresofmilkandexports95%oftotalproduction;themajorityoffarmsarepasture

based. TheUSAdairy industryproducesaround85billion litresofmilkandexportsabout

15%.Themajorityoffarmshavefreestalledcowsfedonatotalmixedration(TMR).

Within both countries, there are many large businesses that manage multi-site farming

operations.IntheUSA,onebusinesshad60,000milkingcowsoneightfarms(intwostates)

andhadhadyoungstock infourstates. InNewZealand,thegovernmentownedbusiness

Landcorphad59farmsfromthetopoftheNorthIslandtothebottomoftheSouthIsland

andhadpeakcownumbersof55,000. Thesebusinesses,andallbusinessesvisited,made

useofcommerciallyavailablesoftwareandhardwaresystemstomanagedifferentpartsof

the total business such as cows, feeding and financials. Many of the large New Zealand

businesseshaddevelopedtheirownwaysof linkingthesemanyprograms intoaportalso

people at all levels ofmanagement could access the informationneeded froma common

source. However,allthebusinessesthathaddonethishadinternaldedicatedhumanand

financialresourcestocollateandsupportthisinformation.Furthermore,externalsuppliers

(offarminputssuchasfertiliser,fertiliserspreading,semenandartificialinsemination(AI))

hadbuilttheirownsystems,whichwereusedextensivelybycorporatefarmers.

The context ofmilk pricing and price riskmanagement forNew Zealand and theUSA are

substantiallydifferent.Therearefederalgovernmentmarginprotectionmechanismsinthe

USA, whereas New Zealand has no price support to the farmer. The percentage of the

nationalmilkpoolthatisexportedfromeachcountryalsoaffectstheexposuretochangesin

worldpricesofdairycommodities,withNewZealandveryexposed.Duetothesediffering

contexts,approachtopriceriskandincreasingordecreasingproductionrelativetomilkand

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other commodity prices vary between the countries. The majority of New Zealand

businesses focus on being “a low cost producer”,with very fewbusinesses using forward

pricingorhedgingtools(andonlyafewtoolsareavailable).Incomparison,adairyfarmerin

the USA has many and varied tools available to manage price risk. Most large dairy

businesses had a dedicated person monitoring a variety of input (feed) prices and milk

prices,andselling,buyingortakingfuturepricepositionsonmilkandorfeed.

Therearemanymanagement systemsavailable formeasuringandmanaging thedifferent

partsof thedairybusiness,butas yet,nothing is commerciallyavailable thatbrings these

differentsystemstogether. Forall systems, Internetaccess inNewZealand,Australiaand

partsoftheUSAis impairingtherolloutandutilisationofthesesystemsfordatacollation

anduse.Asoftwarebusinesshastheopportunitytodevelopatoolthatlinksthekeytools

usedby farmers. Largeand corporatedairybusinesses arebuilding their own systemsas

theyhaveconcludedthatacentralportal,andthelinkingofsystemshavebenefitsfortheir

business. However,businessesthat implementanyanimal, feed,financialorothersystem

mustputsufficientresource(time,humanandfinancial)toimplementandthensupportthe

system.

Thedebatesandviewsoftherelativemeritsofeachfarmingsystem(from100%pastureto

100%TMR)inAustraliaandNewZealandhavebeenwellresearchedanddocumented.The

key finding is that the differences in median profits achieved between farms using low/

moderate or high concentrate feeding are small compared with the variability in profit

withineachconcentratefeedinglevel.Thissuggeststhatthefarmercanchooseanysystem

and gain similar returns, provided they have the required skills and the standard of

management is high. Therefore, the farmer, whether a small family business or a large

corporate business with multiple sites and tens of thousands of cows must know their

farmingsystemintimately. Theyneedtounderstand,measure,monitorandmanagetheir

keyphysicalandfinancialmetricsregularly,withafocusonleadindicators.Theymustalso

haveclearlydefineddecision-makingpointsforinputcosts(feed,fertiliser,energy)andmilk,

and documented action plans. They also need to evaluate and understand the price risk

managementtoolsavailabletothem,andestablishaframeworkorbusinessphilosophyon

theiruse.

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Table of Contents ExecutiveSummary........................................................................................................................iiiTableofContents............................................................................................................................vForeword......................................................................................................................................viiAcknowledgments..........................................................................................................................ixAbbreviations.................................................................................................................................xiObjectives.....................................................................................................................................13Chapter1:IntroductionandContext.............................................................................................14

1.1TheVanDiemen’s’LandCompany..............................................................................................141.2TheVDLdairyfarmingsystem.....................................................................................................141.3Makingchangeforvariationincommodityprices(milkandfeedcosts)....................................15

Chapter2AnimalandFarmManagementSystems........................................................................172.1Literaturereview.........................................................................................................................172.2 NewZealand............................................................................................................................17

2.2.1 Livestock Improvement Corporation ................................................................................ 182.3.2 Landcorp ............................................................................................................................... 212.3.3 Craigmore Sustainables ........................................................................................................ 242.3.4 Pye Group ............................................................................................................................. 252.3.5 Dairy Holdings ...................................................................................................................... 262.3.6 MyFarm ............................................................................................................................. 29

2.4 China........................................................................................................................................312.5USA..............................................................................................................................................32

2.5.1 Fernandes Brothers ............................................................................................................... 322.5.2 Observations from other dairy farms in the USA ................................................................. 34

2.6Limitationsofthestudy...............................................................................................................35Chapter3Managingriskandchanginginputandoutputprices.....................................................36

3.1Context:VDL................................................................................................................................363.2Literaturereview.........................................................................................................................36

3.2.1 TasMilk 60 Study ................................................................................................................. 363.2.2 New Zealand ......................................................................................................................... 373.2.3 Global warming .................................................................................................................... 38

3.3NewZealand................................................................................................................................393.3.1 Landcorp ............................................................................................................................... 393.3.2 Pye Group .......................................................................................................................... 413.3.3 Dairy Holdings .................................................................................................................. 423.3.4 MyFarm ............................................................................................................................. 44

3.4USAFarmBusinessVisits.............................................................................................................453.4.1 Federal margin protection tools for US Dairy Farmers ........................................................ 453.4.2 Bidart Dairies, California ...................................................................................................... 473.4.3 Fernandes Brothers, California ............................................................................................. 473.4.4 Redtop Dairy, California ...................................................................................................... 493.4.5 Noblehurst Farms, New York State ...................................................................................... 513.4.6 United Dairies, Minnesota .................................................................................................... 543.4.7 Riverview, Minnesota ........................................................................................................... 56

3.5USABrokersandMarkets............................................................................................................593.5.1 INTL FC Stone ..................................................................................................................... 593.5.2 Rice Dairy ............................................................................................................................. 60

3.6Limitationsofthestudy...............................................................................................................61Chapter4Conclusions...................................................................................................................62

4.1FarmManagementSystems........................................................................................................624.2PriceRiskManagement...............................................................................................................62

Chapter5Recommendations........................................................................................................65

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5.1RecommendationsforFarmManagementSystems...................................................................655.2RecommendationsforPriceRiskManagement..........................................................................66

References....................................................................................................................................68PlainEnglishCompendiumSummary.............................................................................................70

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Foreword WhenI lefthighschool,all Iwantedtodowasworkinthesheepindustry. Now,23years

later,allIwanttodoisstayinthedairyindustry.BeingawardedaNuffieldScholarshiphas

transformed my life. I have been able to meet and learn from numerous passionate,

intelligentandcommittedpeople.Iamverygratefulforthisopportunity.

Afterfouryearsoutsideagriculture,IjoinedtheVanDiemen’sLand(VDL)CompanyinMarch

2011asBusinessManager-Dairy.Atthattime,VDLhad23farms,milked17,000cowsand

produced5millionkilogramsofmilk solids. Itwasavery steep learningcurve,and Iwas

very lucky tohaveagood team, including thevery knowledgeableandhardworkingHugo

Avery. With theVDLDairyOperations team,we set aboutdeveloping, implementingand

refining the management systems for the people, cows, inputs and assets to measure,

monitorandmanagethebusiness.

As the business developed more systems, the management team developed a greater

understanding of the key profit drivers within the business. As with many farming

businesses,wewereexposedtovariationsinrainfallandcommodityprices.Ourchallenge

wastounderstandandadjusttheriskprofileofthebusiness.Ourobjectivewastomakethe

business flexible to react toboth increasinganddecreasingmilkprice, and increasingand

decreasinginputprices.

WhenAnthonyBrandsema(2006Scholar)suggestedtomeIapplyforaNuffieldScholarship

inJune2013,IwasunsuccessfulinconvincinghimthatIwastoobusy.Atthattime,wehad

just built our second new dairy conversion, were in a capital raising program and the

businesshadjustcomeoffaconsiderableloss.Sure,Ihadtime!

Inourdiscussion,Anthonyencouragedme to think aboutwhat I could learnby travelling

abroad. Very relevant to my situation was gaining an understanding of how other

businesses managed multiple site animal operations and adjusted their businesses to

changesincommodityprices.Thisreportoutlinesmyfindings.

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InDecember2014,theDirectorsofVDLmademyroleredundant,andIleftthebusinessin

March 2015. VDL are on track to produce over 7.4million kilograms ofmilk solids from

20,000cowson25farms,anddeliverthesecondconsecutiveyearofprofit.

Everycountryhasadifferentoperatingcontext.Thevariablesthatneedtobemanagedand

controlled are different in every country and often different in regions of countries.

However,theprinciplestoidentifyandaddressthesebusinesschallengesarethesame.Itis

withthisworldview,thatIwillmovetoChinainApril2015toleadthedevelopmentofnew

dairyfarms.Iamlookingforwardtothenextchapterofmylife.

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Acknowledgments

The generosity and support ofmanypeoplemademyNuffield experience a fantastic and

rewardingone.

IamverythankfultoAnthonyBrandsema,NuffieldScholarfromTurner’sBeachinTasmania

whoencouragedme(andtwistedmyarm)toapply.Withouthispersistence,thiswouldnot

havehappened.

To theothernineScholarsof the India2014GlobalFocusProgram- Ienjoyedour journey

andnowhavefriendsthroughouttheworld

WithintheUSA,thegenuineandfriendlyoffersofassistanceweregreat. Someofthekey

peoplewhohelpedarrangemytripsincludedRobertCheslerfromFCStone,TrevorSlegers

andBrianRicefromRiceDairyandMarkDoornickfromValleyAgSoftware.Aspecialthanks

toCharliePerottiandEddieOrmondeforhostingmeinCalifornia,MaryLedmanforopening

herhometoacompletestrangerandLarryvandeValk,andAnnandTomShepardfortheir

assistanceinNewYorkstate.

In New Zealand, Greg Hamill and Garth Stearn from LIC arranged a fantastic trip and

connectedmewithmanykeypeople.LouiseCook,MatthewJohnsonandMarkJulianfrom

Landcorpwere both generouswith their time and information sharing. Colin Glass from

DairyHoldingswasveryopenabouthowtheyoperateandmanagetheirbusiness. Itwas

greattocatchupwithformercolleaguesErinO’ConnerandLauraJohnstonwhoweregreat

hostsandhelpedmakeconnections.

Thepeople in theengineroomofNuffieldalsohelpedconsiderably throughout thewhole

Nuffieldexperience.Forme,thiswasJimGeltch,TerryHehirandJaneBennett.

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Oursponsors, inmycaseDairyAustralia, investheavilyintheNuffieldprogram. Aspecial

thanks to IanHalliday,ShaneHellwedgeandBernieBaxter for their support, contactsand

encouragement.

Lastly,andmostimportantly,thankyoutomyfantasticwifeAliceandchildrenLachie,Darcy,

AdelaideandTed. Thanksforallthesmiles,FaceTimecallsandhostingwhatwehopeisa

regularflowofvisitingNuffieldScholarsfromaroundtheworld.

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Abbreviations AI Artificialinsemination

APC Averagepasturecover

BST

BW

Bovinesomatotropin

Breedingworth(NewZealand)

CCTV

CEO

CFO

Closedcircuittelevision

ChiefExecutiveOfficer

ChiefFinancialOfficer

CME ChicagoMercantileExchange

DAL

DC305

DairyAutomationLimited(NewZealand)

DairyComp305

DFA

DM

DairyFarmersofAmerica

Drymatter(expressedasapercentageofthetotalweight)

DPR

EBIT

EBITDA

Dairyproductionreporting(Landcorp,NewZealand)

Earningsbeforeinterestandtax

Earningsbeforeinterestandtax,depreciationandamortisation

EID

FCE

FMS

FY

GIS

Electronicidentification

Feedconversionefficiency

Farmmanagementsystem(Landcorp,NewZealand)

Financialyear

Geographicinformationsystem

GPS Globalpositioningsystem

Ha Hectare

IRMP

Kg

KPI

lb

LIC

ML

IntegratedRiskManagementProgram

Kilogram

Keyperformanceindicator

Pound(weight)

LivestockImprovementCorporation(NewZealand)

Megalitre

xii

MOFC Marginoverfeedcosts

MPP Marginprotectionprogram(USA)

NAIT NationalAnimalIdentificationandTracing(NewZealand)

NLIS

NZD

NationalLivestockIdentificationScheme(Australia)

NewZealanddollar

P&L Profitandloss

PKE Palmkernelextract

PMR Partialmixedration

PW Productionworth(NewZealand)

RFID

ROA

ROE

Radiofrequencyidentificationdevice

Returnonassets

Returnonequity

SCC

SMP

TMR

Somaticcellcount

Skimmilkpowder

Totalmixedration

TOP

T4C

USA

USD

VAS

Traitsotherthanproduction(NewZealand)

TimeforCows(Lely)

UnitedStatesofAmerica

UnitedStatesofAmericadollar

ValleyAgSoftware

VDL TheVanDiemen’sLandCompany

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Objectives

Theobjectivesofthisstudywereto:

• Understandhowlargeagriculturalbusinesshavetheright information inthehands

oftherightpeopleattherighttimetomakechangetoabusiness

• Understandthemanagementsystemsusedtomanagemultiplesitedairybusinesses

• Understand how businesses measure, monitor and manage changes in input and

outputpricing

• Understandhowbusinessesare setup toadjustor changewhen inputandoutput

pricingchanges

Theaimofansweringthesequestionswastodevelopandimplementabusiness-widetool

for VDL to monitor the physical and financial performance of each farm, and adjust the

farming business depending on commodity prices. However, this piece of work is also

relevanttoothermultiplesitebusinesses. It isalsorelevanttoalldairybusinesses. Every

businessneedstoknowhowchangesininputandoutputpricingaffectprofitabilityandhow

thebusinesscanchangeinresponse.

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Chapter 1: Introduction and Context 1.1 The Van Diemen’s’ Land Company

TheVanDiemen’s LandCompanywas formed in London inMay1824by a groupofmen

closelyconnectedwiththewoolandtextiletrades(Pink,2003).Theyweregranted350,000

acres of Van Diemen’s Land (renamed Tasmania in 1856) under Royal Charter for the

“cultivationandimprovementofwastelandsinhisMajesty’sislandofVanDiemen’sLand”.

VDL is Australia’s second oldest company, and the only one to still own and operate

farmlandthatwaspartoftheoriginallandgrant(Pink,2003).

In2008,theinvestmentarmoftheNewPlymouthDistrictCouncil(inNewZealand)became

themajorityShareholder(74.33%)inVDL.Theybroughtnewcapital intothebusinessand

soughttoimprovethephysicalstateoftheassetandthefinancialreturnofthebusiness.In

2008,thebusinesscomprisedof23farms,14,200dairycows,excludingreplacements,with

anaggregatedproductionof3.4millionkilogramsofmilksolidsfortheyearending31stMay

2008.Thebusinessreportedearningsbeforeinterestandtax,depreciationandamortisation

(EBITDA)of$4.6mwiththefarmgatepriceof$6.46.

1.2 The VDL dairy farming system

Eachfarmhasasetamountof land. Thereforethekeyobjectiveofapasturebaseddairy

system is to grow and utilise as much feed as possible, per unit of land, as cheaply as

possible.Thenextstepistothenmatchascloselyaspossibletheavailability(growth)with

thedemand(calvingtimeandstageoflactation).Refiningandimplementingthisphilosophy

hasledtothecurrentsystems:autumncalvingsystemonmostofWoolnorth(summerdry)

andspringcalvingonmostoffWoolnorth farms(verywet inwinter-averaging120mmin

eachofJune,July,AugustandSeptember).

At the start of 2012, VDL had 13,500 autumn calving cows and 6,500 spring calving cows

across24 farms. All farms (exceptone)atWoolnorthwereautumncalving (plusone that

wassplit-autumnandspring).TheoffWoolnorthfarmswereallspringcalving(fromAugust

onwards)andonewassplit(autumnandspring).

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Over the preceding six years, there has been a comprehensive program to increase grass

productiononVDL farms. In termsof priorities, the approachhasbeen taken to address

drainage,soilpH,phosphorous(andpotassiumandsulphur) levels,andthengrassspecies.

Thishasbeen implementedasaprogramof re-grassingabout10%ofeach farmannually.

Novelentophyte,longseasonperennialryegrassesaresownintheautumn,andreachfull

productionintwelvemonths.

TheVDLphilosophyistogrowasmuchaspossiblewhentheconditionsarefavourable.This

means that in the spring, we aim to grow and harvest asmuch surplus as possible. This

conservedfodderisthenfedoutinthefeedgaps.Inthespringcalvingsystem,thesurplusis

harvestedandfedoutinthesummerandautumn.Intheautumncalvingsystem,thesilage

isfedintheautumnandwintertofillthefeedgap.

Withall thesemanagementpractices,wearenow ina repeatable, sustainableproduction

systemtogrowasmuchfodderaswecanforthe leastcost. There isnowopportunityto

furtherrefinethedifferentfeedoptionsbyanalysinghistoricalcostsovermultipleseasons.

1.3 Making change for variation in commodity prices (milk and feed costs)

Withthisbasemodelunderstoodandstable, thebusinessnowhastheflexibility toadjust

stocking rates and brought-in feed to capitalise on increased milk prices. Milk price

fluctuatesbetweenyears(asshowninTable1).Thisiswithinacontextthatmostcostson

the farm are relatively fixed - labour, shed costs, repairs andmaintenance, fertiliser, and

pasture renewal. Adjusting cow numbers and additional feed affects feed costs, animal

healthandbreeding,andwithlargechangesincownumbers,alsolabour.

Thisoverarchingsituationhasnowbeenwellunderstoodwithinthebusinessfor18months.

This knowledge was applied in November 2013 to January 2014, to plan for the autumn

herd.VDLhadthesituationwhereweknewwewereinahighmilkpriceperiodandhada

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relativelylowgrainprice.Thereforethedecisionwasmadetoincreasetheamountoffeed

(throughtheuseofbroughtinsupplements)fedtoautumncalvingcowsintheautumnand

wintertoincreasethepeakandmakemoremilk.Thefocusofthisanalysiswasthemargin

overfeedcosts.

Table1.Typicalfactorypaidpricesbystate(DairyAustralia,2013)

FarmBusinessRiskManagementisabroadtopic.Thisstudyfocusedonlyonunderstanding

andmanagingtheproductionsystem,andthepriceof inputsandoutputs. Central tothis

wastheacceptancethattherearepricecyclesincommoditiesandthatthebusinessesthat

managethesecyclestominimiselossandmaximiseincomewillbemoresuccessfuloverthe

long term. So, the scopeof thisNuffield topic is tounderstand the tools andapproaches

dairybusinessescanusetomaintainconsistentoperatingreturnsovermultipleyears,and

ideallyincreaseoveralloperatingreturns.

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Chapter 2 Animal and Farm Management Systems 2.1 Literature review

Theliteratureisrelativelysparsewithpapersthatgivebothasummaryandcomparisonof

farm management software available to dairy farmers. It is easy to find promotional

materialformanyandvariedprogramsfromaroundtheworld.However,AllenandWolfert

(2012) completed a comprehensive stocktake of farmmanagement tools used by farmers

andruralprofessionalsinNewZealand.Theyfoundthatthetoolsavailableandusedwere

mostlyforstock,feedandfinancial,andwereunderrepresentedintheareasofnutrientand

labourmanagement. They foundthat thegeneral feelingwas that theavailabilityof farm

managementtoolswasnotthelimitingfactortofarmproductivity.

Theirstudyfoundthattheinterconnectivityofdifferenttoolsandthespeedandavailability

ofInternetconnectionswerebothconsiderableissues.Thesetwoissuesleadtopoortime

efficiency due to data being entered into multiple tools and waiting for uploads and

downloads.Ofparticularinterest,AllenandWolfert(2012)identifiedthatgoodinformation

systemsshouldoperateattheoperational,tacticalandstrategiclevels.Theylinkedtheseto

planning horizon, and defined the periods as: strategic (planning/ monitoring between

years);tactical(planningandmonitoringwithinayear);andoperational(daily/weeklyuse).

This observation is particularly relevant for a multi-site business and a corporate model

where different layers in an organisation are accountable for different information and

decisions,butneedtobereviewingthesamedataset.

2.2 New Zealand

NewZealandwasvisited inFebruary2015,ata timewhenmilkpriceshadalmosthalved:

from$8.40forthe2013-14season(arecordhigh)to$4.70forthe2014-15season.Bythe

end of the season, it had dropped further to $4.40. This coupled with a “drought” (the

definition and criteria for a drought inNew Zealand is different toAustralia),meantNew

Zealanddairyfarmerswereseriouslyreviewinginputcostsandincome.

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NewZealandproduced20.7billion litresofmilk in2013/14,an increaseof10.1%overthe

previous year and was at a record production level (Dairy NZ, 2014). There were

approximately12,000dairy farms,withanationalherdof4.92millioncows. Seventyfour

percentofherdsand60%ofcowsareontheNorthIsland,with24%ofcowsintheWaikato

and13%inCanterbury.

NewZealandexportsaround90to95%ofproduction.Thecooperative,Fonterra,purchases

around75%ofallmilk.Thisapproachseemstobeworking,butdoesexposeNewZealand

farmers (and Fonterra) to massive swings in commodity prices (such as those being

experienced between 2013-14 and 2014-15). The one advantage of Fonterra is that the

farmersdohaveafactorytosendtheirmilk.Thismayseemasimplestatementbutisvery

importantwhenmilkpricedropsandglobalpurchaserscancelsupplyagreements.

2.2.1 LivestockImprovementCorporation

LivestockImprovementCorporation(LIC)isoneoftheoldestfarmingco-operativesinNew

Zealand.ThekeyobjectiveofLIChasbeen to improve theproductivityandprofitabilityof

the New Zealand Dairy herd. Today, they provide herd recording services (milk testing),

liquid (fresh) and frozen semen, DNA technology to genomically identify and select elite

sires,andashortgestationbullteambredtodeliveroffspringanaveragetendaysearly.To

manageandcollateallthisinformation,theyhaveacomprehensivecowdatabasethatthe

majority(85%ormore)ofNewZealanddairyfarmersuse.ThisprogramiscalledMinda.

MindacollatesallthecowinformationfromacrossNewZealandintoonecentraldatabase.

Each individual farmer has their own set ofMinda records,which they access tomanage

their herd. This is usually done with a desktop computer in the dairy or house. All

informationthensynchronisesbacktotheLICdatabase.Therearealsohandhelddevices,

whichrunMindaMobile.LICrunaherdtestingserviceandthisinformationisenteredinto

Minda.Together,thisinformationisusedtocreatebreedingworth(BW)foracow.There

are 46 core fields set by the herd testing standards,which includedmating dates, calving

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dates,milkquality,pedigreeandanadditional140fieldsforanimalevaluationoftraitsother

thanproduction (TOP). To implement this system inAustraliaoranyothercountry, there

wouldneedtobeanalignmentofthedefinitionsofthetraits. Farmerscanaddindividual

cow information (health treatments and events). Farmers then use this data for

managementoftheirherd,inparticularcullingdecisions.

The farmer is encouraged to keep all pedigree information for all calves. Minda also

connectstotheNewZealandAnimalEvaluationUnitDatabasewhereallBreedingWorthand

Production Worth figures are stored and where an animal’s profitability indexes are

calculated.MindaalsohasaninterfacewiththeNewZealandNationalAnimalIdentification

and Tracing (NAIT) database. This allows farmers to easily record sales and transfers in

Minda that then link directly to the New Zealand National database. Under the NAIT

program,cattlearetracedusingradiofrequencyidentificationdevice(RFID)eartags.Once

tagged,theseanimalsareregisteredinanationaldatabase,andthedetailsoftheanimal’s

location,itsmovementandthepersoninchargeoftheanimal.

All theLICAI techniciansusehandhelddeviceswhen inseminatingcows. Therearea few

typesofunitsused, includingPsion,DatamateandTrimble. Theyenter the cow’sear tag

number(mostofthetimemanually)priortoinseminatingwithaparticularbull.Theycheck

to ensure that the bull being used is not a (close) relative of the cow. This is done by

calculating the inbreeding coefficient. The technician, who synchronises their handheld

device, then uploads all the information daily. When pregnancy testing is done, the

informationiseithercollectedmanuallyorenteredintoMindaorcanbeenteredintoahand

helddevice.ThehandhelddevicecanbeconnectedtoaRFIDreader.

2.3.1.1 LIC Dairy Shed automation

LICalsosellanautomationsystem,Protrack,whichlinkstoMinda.Protrackdoesnothave

theabilitytohaveindividualmilkmetres,althoughitdoesallowforindividualcowfeeding.

However,basedontheaveragelowlevelofin-shedsupplementaryfeeding(ofgrainorpalm

kernelextract(PKE)),itwasasurprisethatitwasregularlypresentedasakeyfeature.The

20

keyfeaturesformanagementistheidentificationofcowsundertreatment,auto-draftingof

cowsandwalkoverscales.ProtrackisonlysoldinNewZealand.

LIChaverecentlypurchasedanothercompanyDairyAutomationLimited(DAL),whichhasin-

shed,in-linemilkmeters.TheacquisitionofDALmilkmetersandcellsensetalksdirectlyto

Protrackandthisdoesallowthefarmertofeedcowstodemand.TheDALmetersgivesfat,

proteinandyield,andalsothecellsensegivesanactualsomaticcellcount(SCC)score.They

costaround$400NZDperunit.

2.3.1.2 Heat detection camera

LIC havedeveloped their own technology for heat detectionusing devices on cows and a

camera.ItiscalledProtrackEZHeat-assisteddetection.TheEziheatcamerausedforheat

detectionhasnowbeenusedforaboutfouryears;itcommunicatesdatadirectlytoProtrack

anddraftsallactivatedormissingheatdetectors.

At an advertised price of $20,000NZD, this is very practical tool to reduce labour on the

farm. This systemworkswith an automatic drafting gate. The Protrack drafting systems

startat$25,000NZDandincreaseto$80,000NZDforfullautomation.

2.3.1.3 Minda Land and Feed

This isapasturemanagementandfeedbudgetingprogramprovidedbyLIC. It isgenerally

quitebasic,butuserfriendly.Italsohasafeedwedgeforecasterwhichisausefultool.Itis

verysimilartoPasturePlus,whichisusedbyVDL.

2.3.1.4 Agrimetrics

Agrimetrics is a database and dashboard that sits over Minda. It incorporates climate

information, stock numbers, production, benchmarking and reproduction. It has been

developedby LIC for key accounts (large and corporate customers). Thebenchmarking is

regionalandmaintains confidentiality. This system is veryusefulas it consolidates lotsof

keyfarminformationintoonewebportal.

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2.3.2Landcorp

Landcorp Farming is a New Zealand government-owned Enterprise, owning or leasing

376,942hectares(Ha)ofland.With137propertiesand1.6millionstockunits,theyareone

of New Zealand's largest farming organisations. They have sheep, beef, deer and dairy

operations.Theyhavetheirownfarms,plusmanagefarmsforothers.

Landcorp operates 59 dairy farms,with peakmilking cows of 55,000 from the top of the

NorthIslandtothebottomoftheSouthisland.Theyhave20,000Haallocatedtodairyand

300staff.Inthe2013-14year,theyproduced18.6millionkilogramsofmilksolids.Thedairy

businesscontributed$129millionNZDofthe$141millionNZDoperationalincomein2013-

14(LandcorpFarmingLimited,2014).TimewasspentonWairakeiEstate,nearTaupoonthe

NorthIslandwheretheyhave10farms,withabout12,500cows. Theirlong-termgoalfor

theareaistohave32,000cows.ThelandonWairakeiEstateiscomingoutofforestry.Itis

pumicesoils,hasanOlsenPof12withapHof5.3andrainfallis1000mmperannum.They

run a pasturebased system,with some farmshaving irrigation. Their stocking rate is 2.6

cowsperhectareonnon-irrigatedland.

2.3.2.1 Management reporting

Landcorphasadetailedwebportalthatallowsalllevelsofmanagementtolookatdifferent

sectionsofthebusiness.ItiscalledtheGatewayandisanInternetsite.Thisportalhasbeen

developed in-house, and incorporates data frommilk companies (Fonterra,Westland and

Synlait). Generally, the reporting is broken into complexes and type of farm. Each Farm

OperatorreportstoaFarmBusinessManagerwhooverseesabout7,000cows.

The Gateway incorporates the Dairy Production Reporting (DPR), the Farm Management

System(FMS),allhoursworkedbystaffandthebudgetingtool(TM1,fromIBM).Eachfarm

operator (Manager, Sharemilker, Sharefarmer) completes aweekly report, which includes

feeding,availablehectaresandcownumbers(inmilk,hospital,deaths).Thisinformationis

collatedwithmilkdatatoproducetheDPR.Thereisadashboardreportforeachfarmeach

week. The FMS is used for two key parts: the company stock reconciliation and all land

22

activities. FMS isaproduct fromFarm IQ,and isusedbyLandcorponall its farms (dairy,

beef,sheep,anddeer).Ithasaseriesofdropdownmapsthatcanbeusedtoplancropping,

fertiliser, effluent, chemical applications, pasture covers and recordpaddockhistory. This

informationiscollatedbytheLandcorpagronomyteaminWellingtontoorderfertiliserand

seed,anddevelopnutrientbudgets.

2.3.2.2 Farm IQ

FarmIQisabusinessestablishedasaPrimaryGrowthPartnershipbetweentheNewZealand

Government and industry. It is producing integrated solutions for the redmeat industry.

FarmIQisafarmsystemmanagementtooltocollateGeographic informationsystem(GIS)

datawith land and animalmanagement at its core. The systemwas launched in August

2014.Theprogrambringsindatafrommanysources.ItincorporatesdatafromTrackmap;

aglobalpositioningsystem(GPS)basedspreadingsystemforfertilizer.Italsocommunicates

withNAIT.TheaimistolinkFarmIQtoFarmax.

LandcorphaveembracedFarmIQasabusiness-widesolution.Overtime,theobjectivefor

the dairy farms is to introduce Farmax Dairy as a business planning tool, link it into the

company financemodels and then link thenutrientmanagement intoOverseer. Thiswill

meetbothonfarmneedsandregulatoryandreportingrequirements.

Minda is used on approximately half the farms. LIC prepare and send through weekly

breedingreports,whicharevisibleintheGateway.Ontheotherhalfofthefarms,MilkHub

isused. MilkHubisusedonmanyfarmsintheTaupoarea. MilkHubisusedforallanimal

health information, does individual milk production on a daily basis, can do individual

feeding,isusedforpregnancytestingresultsandislinkedtoauto-drafting.Onthesefarms,

herdtestingisnotconducted.MilkHubisnotlinkedtoMindacurrently.Theendgoalisto

link MilkHub into Minda and/or the national database so they build BW and production

worth(PW)foralltheircows.

23

Farmfinancialsarebrokendownbyfarmtocomparerunningcosts(excludingrent)withthe

budgetonamonthlybasis.Budgetsarereviewedquarterly.

2.3.2.3 On Farm

Landcorp doesmove cows between farms tomanage feed availability and demand. The

transfer in cow data ismanaged throughMinda. On farms that don’t haveMilkHub, the

farmoperatorisaccountableforkeepingallcowrecords. TheFarmBusinessManagercan

logontoMindaremotelyandlookatcowinformation.Thiswouldbemostlyfordeveloping

listsofcowstocull.

OnoneLandcorpFarm(withoutMilkHub),themanagerhaddevelopedasimplesystemfor

therecordingofallcowevents. Itwasveryuserfriendlysoallstaffonthefarmcouldsee

andrecordcowevents.ThisisshowninFigures1and2.

Figure1.LandcorpFarmBusinessManagersLouiseCookandMatthewJohnson intheofficeat thedairywiththewallchartofeverycowonan800-cowfarm(NivenCollection,2015)

24

Figure2.Individualcowinformationandrecordscompletedbystaffandavailableforallstaff(NivenCollection,2015). 2.3.3CraigmoreSustainables

Craigmore is a relatively new corporate dairy farming business established by Forbes

ElworthyandMarkCox.CraigmoreSustainablesisadiversifiedfarmingbusinesswithdairy,

beef,kiwi fruit,blackcurrants, sheepmeat, sheepmilkandsquash. Theystartedwith two

farms in north Canterbury, two in south Canterbury and one near Otago. They are

experiencingfastgrowthinthedairybusiness,andnowhave15,000cows.Theyaregrowing

through conversion, consolidation and acquisition. The business philosophy is to engage

“family farmers”, inject third party capital, and assist the manager develop their wealth

withinthebusiness.

ThenorthCanterburyPodaroundCulverdenhasthreefarmswith1080,1060and800cows

respectively. GeneralManager-Dairy,PeterMcLeod,PodManagerJosh,andhiswife,Bec

werefantastichostsandwereveryopenwithinformationabouttheirbusinessandwhereit

wasinthebiggercompanyjourney.

25

IntheCulverdenPod,thethreefarmmanagerscompleteadailyreport(onasmartphone).

Thesedailyfeeddetailsfromthephoneappgotoacentralplaceandarecollatedandsent

back to PodManager and senior staff. The information includes supplement consumed,

grassconsumed,areagrazedandcowsmilked.Thefarmmanagersandpodmanagermeet

togetherweekly. Minda’s Land and Feed is usedon all farms toprovide averagepasture

cover(APC),growthratesandapasturewedge.Thekeymetrictomonitorissupplementary

feed.Theobjectiveofthispodisthatfarmmanagersdon’thaveanyofficework.Theywant

thefarmmanagersworkingonthings“wheretheymovetheneedlethemost”.

Thefarmingsystemissetuptohave17%ofthelactatingcowdietasbroughtinfeed.Thisis

composedof200kgofgrain,150kgofsilageandtoppedupwithPKE.Basedonlastseason,

12.6Tofpasturewaseatenperhectare. Muchof the farmarea is irrigated,with4mmof

waterappliedperdayperhectarefrom1stNovemberto31stMarch(atotalof600mm).This

isinadditiontothe650mmrainfall.Ureaisappliedatarateof300kgperHaperyear.

Financial reporting is done throughmonthly accrual accounting for a profit and loss. The

business is developing new systems to prepare management reports. They have just

commencedcomparingfarmphysicalandfinancialperformanceonamonthlybasis.

2.3.4PyeGroup

ThePyeGroupisafamilycompanywithdairyfarms,largescalecropping(potatoes,carrots

andarable),atransportbusinessandacarrotwashingfacility.TheCompanyisownedand

run by husband and wife team of Michelle and Leighton Pye. Michelle had spent time

workingwithAlanHubbard,andLeighton’sfatherAlanPyewasinvolvedwithDairyHoldings.

Theystartedin2002withonedairyunitandstartedbuildinganother.Theyhavegrownthis

businesstoninedairyfarms,milkingover7,000cowsandproducing3millionkilogramsfrom

1,689Ha.

They run a simple business model where they have contract milkers and sharefarmers.

These FarmOperators provide their own utes, quad bikes, employ staff and pay all shed

26

costs. All farm operators report to Leighton, who is on farm regularly. Each farm is

responsibleforkeepingalltheircowrecordsinMindauptodate.Thereisnomovementof

cows between farms. All heifers are reared centrally, but each farm receives back the

heiferstheysent.MostcowsarewinteredonfodderbeetonaPyeGrouprun-offblockthat

iswalkingdistancefromthefarms.Eachfarmisallocatedpaddocksforthewinteringperiod.

Theyraiseinvoicesbetweenthedifferentpartsofthebusinesssothateverythingiscosted.

Reportingfromthefarmismonthly,andisfocusedonstocknumbers,sales,farmphysicals,

healthandsafety,environmentalconsents(irrigationandeffluent)andemployment.Thisis

asimpletwo-pagereportthatwouldtakeonly15minutestocomplete.Onamonthlybasis,

all FarmOperators come to the company office to review and approve invoices for their

farm.InformationfromFonterraforproductionandfarmfinancialsisthenfedbacktoeach

farm. Each farm only sees its own data. However, all information is collated for

managementreporting for thecomparisonbetweenfarms. Thekeymetric is thecostper

kilogramofmilksolidspermonth.

2.3.5DairyHoldings

Dairy Holdings was started in September 2000 by Alan Pye and Allan Hubbard who

purchasedsevenfarms,mostlyfromcorporatefarmersTasmanFarmsandDairyBrands.By

2001/2,theyhad30farmsandproduced7.95millionkilogramsofmilksolidsandreceived

$5.30 per kilogram. In 2002/3, the milk price dropped to $3.63, and the business

commenced a “return to basics” program. Their aimwas to have repeatable and simple

systems that lead toprofitability. In2014/15, theynowhave56dairy farmsplus support

land,with44,500cowson13,500Haproducing15.8mkilogramsofsolids.

Theyarebased in fourhubsandareself-containedforwinteringandheiferrearing. Their

governancestructure isaboardof five, includingtwo independentdirectors (includingthe

chair)andonerepresentative fromeachof the threeowners. Theboardmeet four times

peryear,andbyphonewhenrequired.TheChiefExecutiveissupportedbyaChiefFinancial

Officer (CFO),FinancialController,ContractsManagerandthreeOperationsManagersand

fiveFarmSupervisors.EachofthethreeOperationsManagershasabout13farmsreporting

27

to them,ofwhichhalfareherdowning. TheFarmSupervisors typicallyoperateone farm

themselves andoversee six toeight farmswhicharemostly lowerorder share farmersor

contractmilkers.Thebusinesshas50:50Sharefarmers,lowerordersharefarmerswithand

without cows, contractmilkers andmanagers. The trends between2009-10 and2014-15

includeareductioninmanagers(24to2),anincreaseinlowerordersharemilkerswithcows

(1 to15)andcontractmilkershave increased from8 to25. ThishascoincidedwithDairy

Holdings becoming an Investors in People company that has included a strong focus on

careerprogressionand theability tobuildequityandwealth. ChiefExecutive,ColinGlass

(2015)2,saysthatmovingtobecomingInvestorsinPeoplewasawatershedmoment.Within

DairyHoldingsnow,Glassexplains, “progression is constantanddynamic…and therewill

alwaysbeopportunitiesfortopperformers”,Glassfurtherstates,“onestructureisthereto

facilitatetheother,andamixedmodelworksthebest”.

The Dairy Holdings business uses many tools to measure the performance of each farm,

farmsinregions,farmsoiltypes,thefarmsofdifferentoperationsmanagerandthebusiness

asawhole.

2.3.5.1 Internal approach

Thekeymeasurethatisusedinthebusinessisearningsbeforeinterestandtax(EBIT).They

alsousesimplekeyperformanceindicators(KPIs)suchas-milksolidsproduction,cellcount,

nitrogenapplied,averagefarmcoverandpastureharvestedperhectare.Asabusiness,they

planinphysicalsandreportinfinancials.

Wherepossible,theyusesupplier’sdata. Theyhavefoundmonitoringthe10-dayaverage

bulksomaticcellcount;theyeartodateaverageandthevarianceisagoodleadindicatorif

thingsaren’tundercontrolonafarm.Theyusethemonitorandreviewapproachthatgives

focusandinsighttothepeoplewhoworkonthefarms.Theinformationispresentedineasy

tounderstandgraphs.

28

Theyalsopresentaweeklydashboardofpasturewalkswhichincludesinformationsuchas

whenlastcompleted,averagepasturecover,pre-grazingcover,greatestcover,postgrazing

target and lowest cover and growth rates. This is great way to create peer pressure for

thosewhohavenotcompletedtheirpasturewalks.

The business runs its own Internet site as a central portal to everything the managers,

sharefarmers and staff need. This includes a link to Fonterra, internal reports (mostly

financial)andtheLICsite. Italso includes irrigation information,suchaswater takes,and

soil information on time below refill points and time above saturation collected through

telemetry. There are three layers of access, Board and senior management, Operations

ManagersandFarmOperators.Theyalsohaveaportalfortheirbankers.

Dairy Holdings use LIC to generate customised reports at key times throughout the year.

ThisprovidesthemwithHerdTest,matingandreproduction,Mindaandotherinformation

inoneplace.Mindaisreconciledtothemonthlystockreconciliation.PriortousingLand&

Feed,theyusedPastureCoachformonitoringpasture.

AGISsystemforproofofplacementforfertiliserhasbeeninplaceforthepastthreeseasons

andhelpstoensurefertiliserplansareeffectivelycarriedout.Assessingmanagementisthe

nextpartof thebusinesswheretheyare lookingtouseasystemtomeasureandmonitor

businessperformance.

2.3.5.2 Externally

Dairy Holdings also benchmarks itselfwith external sources. New Zealand has a detailed

industry-benchmarking tool called DairyBase, which consolidates physical and financial

performance.DairyHoldingspridesitselfonbeingasgoodasowneroperatordairyfarms.

Analysis conducted by Baker and Associates for the 2009/10-year showed Dairy Holdings

farmswerearoundorbetterthanowneroperatorfarmsfortheoperatingprofitperhectare

for all the regions where they farmed (coastal Canterbury, inland Canterbury, Otago/

Southland, Waitaki and West Coast). For example, a 50:50 sharefarmer in coastal

29

Canterburyhad$2,400(NZD)profitperhectarecomparedwithanowneroperatorat$2,000

(NZD)(Glass,20152).

2.3.6 MyFarm

Myfarm Investments was established in 1990, and today has $550 million (NZD) of farm

assetsundermanagement.Theyhave300syndicatedinvestorsinamixofdairy,sheepand

beef farms in New Zealand’s key farming regions. They have 47 Dairy farms under

management.

For their dairy syndicates,Myfarm aims to attract experienced contractmilkers and farm

managers to manage the investment and achieve performance targets. Some MyFarm

syndicates alsooffer farmers theopportunity to invest in the farm syndicate as an equity

manager.ThesyndicatemanagersworkwiththeMyFarmAgribusinessManagertomanage

and operate the farm using the MyFarm processes and systems (MyFarm, 2014). Each

syndicatehasaboardwithaChairmanandisrunasanindividualentity.MyFarmprovides

managementservices,whichrangefromhourlyconsultingtoanannualmanagementfee.

FelixMcGirr is theAgribusinessManagerbased inChristchurch. Hemanages seven farms

thatrangefrom160to500Ha,carryingbetween700and1600cows.Allarepivotirrigated

and all have Protrack. Felix was very generous with his time and how the MyFarm

managementserviceworks.

The management service provided by MyFarm includes a formal monthly visit, and an

additionaloneortwovisitspermonth.Farmaxisusedonallfarmsandissynchronisedso

theAgribusinessManagercanseeallfarms. AllphysicalsarebudgetedandthentheFarm

Managerentersactualseverytendays.Theyfillintheirpasturewalkinformation,nitrogen

application,croppingdetailsonaten-daycycle. Milkreportsaregeneratedevery10days.

TheFarmManagercompletesamonthlyreportbythe5thofthemonthwhichincludesthe

stock reconciliation, cownumbersand class (dry,milking frequency) feeding, supplements

on hand plus a commentary. These reports are reviewed and edited by MyFarm

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Management and sent to all shareholders. MyFarm produce a monthly profit and loss

report(comparingactualwiththeapprovedbudget)andaquarterlycomprehensivereport

includingproduction, stock reconciliation,profit and loss (accrualbasis), cash flows, capex

andindustryupdate.

All accounts for the farm are received centrally, scanned and collated into a form for

approval by the Farm Operator, Agribusiness Manager and the Chairman. This happens

withintwodays.

Forthemanagementofphysicalsonthefarm,MyFarmhaveanumberofInternetenabled

tools.AllherdsareonMinda.AllshedshaveProtrackVantage,thepremiumofferingfrom

LIC.Thisallowsforindividualcowfeeding.Italsohasthefunctionalityforweightdrafting

cows basedonweight change. MyFarmhave theAgrimetrics tool from LIC and this is of

considerablebenefittoAgribusinessManagerswhocanseeadashboardofthereproductive

performanceoftheirfarms.

MyFarm also utilise an excellent web based tool called Aghub from fertiliser supplier

Ballance. It is linked to all aspects of land andwater use for all the farms. It shows the

monitoring of all irrigation pump sheds (litres per second), the outputs from on-farm

weatherstations(irradiance,evapotranspiration)andsoilconditions(re-fill,wiltingandsoil

temperature). It is also used for all fertiliser planning and application. The Agribusiness

ManagerloadsthefertiliserplanandtheFarmOperatorplacestheorder.Theprogramhas

different permissions as to who can adjust orders. The program then records proof of

placement,includingwhoapplieditandwhen.ItisallGPStrackedandyoucanseeonthe

screenexactlywherethetruckwent.

Itwasnotedthatwithsuchgoodreal-timesystems,thereisalsotheneedtohaveapointin

timeobservation.Forbusinessesfocusedonfinancialvalues,particularlyforbalancesheet

reporting,programsneedtobeabletonotonlyshowreal-timeinformation,butalsobeable

toholdahistoryatasetpoint intime. Thechallengeforsuchsystemsthatarebasedon-

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farm,wherepowersupplyandInternetconnectivityarenotalwaysavailable,istofillinthe

gaps, rather than report no data. This is particularly important for livestock and feed

monitoring.

OfallthebusinessesIvisitedinNewZealand,MyFarmhadthebestsystems,whichcollated

animals (throughProtrack,Mindawith theAgrimetricswebportal), businessplanningand

feedmanagement(inFarmax)andwaterandfertilizermanagement(inAgHub).Thismade

iteasyfortheAgribusinessManagertohavealltheinformationathisfingertipstomonitor

whatwasreallyhappeningonfarm.

2.4 China

Chinahasagrowingthirstfordairyproducts. Between2000and2011,averagepercapita

milkconsumptiontripledfrom9litreequivalentsperpersonperyearto30litreequivalents

of dairy products. By comparison, Australia’s average consumption is around 300 litre

equivalents per person per year (IFCN, 2012). In 2011, China produced around 32 billion

litresofmilk,andconsumed42billionlitreequivalentsofproduct.

The domestic Chinese dairy industry is growing. Based on visits, there seems to be two

growth engines. Firstly, large Chinese corporations are utilising foreign investment and

knowledgetobuildandoperatelarge(over1000cow)houseddairyfarms.Fonterraarean

exampleofabusinessthatisoperatinginthisspace.Secondly,therearenumeroussmaller

farms(between200and1000cows)thatarebeingsetupby localbusinesspeople. Iwas

veryfortunatetoseetenofthesetypesofbusinessesinShandongprovidence.

The Fonterra farms used DairyComp 305 (DC305) and Feedwatch tomanage their farms.

ValleyAgSoftware (VAS)have investedandputa supportoffice inChina to support their

offeringsthere.

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2.5 USA

TheUSAwasvisitedtwiceduring2014,visitingCalifornia,NewYorkState,Illinois,Wisconsin

andMinnesota. Thepeoplemetwithhad farms in these states plus operations in Texas,

New Mexico, Michigan, North Dakota and South Dakota. People trading in commodities

linkedtothedairyindustrywereinChicagoandNewYork.

The USA produces about 85 billion litres of milk (IFCN, 2012) and exports about 15% of

production. The three largest processors are co-operatives:Dairy Farmers ofAmerica (all

states)20%,CaliforniaDairies9%,andLandO’Lakes7%(NorthWeststates).

2.5.1FernandesBrothers

The five Fernandes brothers run two dairy farms (3600 and 3000 cows) and a cropping

businesswith3000acres (1214Ha) for forage for cows. Ameetingwith JaredFernandes

washeldatFernOakDairy.

DairyComp305isusedforallcows.JaredalsousesaprogramcalledPenBot,fromVAS.It

scanseverycow’selectronicidentification(EID)tagwhentheywalkontotheplatform.This

is very similar to the EasyDairy program or Protrack systems used in Australia and New

Zealand.Generally,intheUS,cowsontherotaryareonlymilked.Thisisbecausethecows

arehousedandarecheckedmostly for reproductionperformancewhilst instanchions. In

AustraliaandNewZealand,most reproductiveassessmentandmany treatmentsaredone

on the rotary. Also, cows are fed on the rotary in Australia and New Zealand, whereas

almostnocowsarefedintheparlourintheUSA.

PenBot (aVASproduct)was installedsocowscouldbe injectedwithBovinesomatotropin

(BST)whilstontheplatform.Thiswastosavetime.Itisalsousedtoidentifycowsthatare

inthewrongpen.

33

Thedairyoffice is thecontrolcentre for the farm. Thereareanumberofcomputersand

screenswhereCCTV footage is shown. There isalsocow informationdisplayed (shown in

Figure3).Jaredhasenhancedtheperformanceofsomedevicesforscanningcows.Hehas

permanently attached a longer RFID reader to a handheld device and added a speaker

(Figure4).Thisistostreamlinethecollectionofdatawhencowsareinstanchions.

Figure3.JerodFernandesintheofficewithreal-timedataoncowsbeingmilked(screenonleft)andCCTVscreen(NivenCollection,2014).

Figure4.JerodFernandeswithhishybridhandhelddevice,withextensionscanningwandandmicrophone(NivenCollection,2014).

34

2.5.2ObservationsfromotherdairyfarmsintheUSA

Ofthe30plusdairyfarmsvisitedintheUSA,allusedDC305.Allfarmerslikedtheprogram

andsaiditmettheirrequirements.Veryfewproducerswerechallengingthemanagement

system, and therefore challenging how DC 305 worked on a farm. Those that were

challenging the system were looking at options to use DC 305 in the milking shed, and

thereforeconductsomeactivities(suchasinjections)ontheplatform.DC305wasnotable

tomeetthisrequirement.

The200-cowfarm,Tayl-WindFarmwithLelyautomaticmilkingboxes,usedLelyT4C(Time

forCows)andDC305Scout.LelyT4Cwasanexcellentprogramandallowedtheownersto

spendmoretimeanalysingtheircowdata.ThedashboardisshowninFigure5.Thefarmers

alsousedCCTVtomonitormilking,calvingpensandfeeding.

Figure5.LelyTimeforCowsmanagementscreen(NivenCollection,2014)

Themajority of farms visited used FeedWatch (from VAS) for their feed formulation and

management of rations. TMR Tracker was also used, but the manager said he thought

FeedWatch was probably better but would cost them $25,000 USD for four dairy farms.

Thesetypesofprogramsarenotsuitable forpasture-baseddairyingbutare ideal forTMR

systems. The key metric in these programs is shrink- the reduction in dry matter (DM)

contentoffeedinasilagestackbetweenensilingandfeeding.Differentbusinessesaccount

forthisindifferentways.Itseemedtorunatabout10%,andseemedtobeaccountedfor

whenused,ratherthanensiled.

35

VAShadanumberofothertools,includingParlourwatch(formeasuringproductionfroma

penofcows)andanewandexcitingtoolcalledChemwatchformeasuringDMofsilage in

thestack.

2.6 Limitations of the study

ThisstudylookedatsystemsusedinChina,TheNetherlands,USAandNewZealand.Itdid

notlookatsystemsusedintheUK,IrelandorSouthAmerica.

Thefocuswasmostlyonthemanagementofthecowsandtheuseofnutrients(fertiliser).It

didnotfocusonthesystemsusedinbroadacrecropping.

Thisstudywasfocusedondairyfarms.Onemeetingwasheldwitheggproducerswhoran

multiplesiteoperationsindifferentpartsofNewYorkState. ThiswaswithBrettDKreher

and Vaughan Gingerich, from Kreher's Farm Fresh Eggs. This was an extremely valuable

discussion.However,theywerereallyrunningeachfacilityasastand-aloneoperation.They

didcentrallymanageprocurementandsalesofinputsandoutputs.

36

Chapter 3 Managing risk and changing input and output prices 3.1 Context: VDL

Since 2011, VDL has started using tools tomanage price variation in inputs. These take

contractsforkeyinputsforfixedvolumesfordefinedperiods.Thesetoolshavebeenused

forurea,fertilizer,grainandelectricity.Onthesalesside,VDLconsideredafixedsalesprice

forcertainamountsofmilkinthe2013-14and2014-15years.

Withintheworldcontext,VDLdidnothaveadetailedpriceriskmanagementstrategyand

wasonlyusingafewofthetoolsavailable.

3.2 Literature review

Within Australia and New Zealand, there is often debate on the relative efficiency and

therefore profitability of the farm system. For the purpose of this work, the dairy farm

systemisdefinedasthequantityandtypeoffeedthatisusedtofeedmilkingcows.Often,

the farm system is linked to the risk profile of the business. Changing or adjusting the

farmingsystemisseenasawaytochange,andideallyreducebusinessrisk.Recentstudies

fromAustraliaandNewZealandhaveexploredthispremise.

3.2.1TasMilk60Study

Themost relevantAustralianworkwas conductedaspart ofDairyAustralia’sGrains2Milk

Program(2011).Theprojectwastoanalysephysicalandfinancialdatafrom69Tasmanian

dairyfarmsforbetweenoneandthreeconsecutivefinancialyears2006/07to2008/09.Fifty-

six farmswerestudiedforall threeyears. Farmsweregrouped intothreesystemsonthe

amountofgrain/concentratesfedtocows:low(<1T),medium(1T–2T)andhigh(>2T)per

cowperyear.

The findings from the studywere analysed in relation to either performance (physical) or

profitability (financial). The study found no simple relationship between the amounts of

37

concentrate fed per cow and the pasture utilisation per hectare. Good andpoor pasture

managementoccurredatall levelsofconcentrate feeding. Total feed intakespercoware

notalwayshigheronfarmswheremoreconcentratewasfed.Therewasalsofoundtobea

significantvariationintheproteintofatratioinmilkfromfarmtofarm.

The profitability study found that there was no best concentrate feeding level for

production/feedingsystem.Anyconcentratefeedinglevelofaproduction/feedingsystem

canbeprofitableinanyyeargiventheappropriatemixofmanagement,milkpriceandinput

costs.Thedifferenceinaverageormedianprofitsbetweenfarmsusingthelow/moderate/

highconcentratefeedinglevelsaresmallcomparedwiththevariabilityinprofitwithineach

concentratefeedinglevel.

Thefindingsconcludedthatforallfeedingsystemsthereisamixofrisk,performance,and

management principles. The farmer can successfully balance risk and reward by

understandingandmanagingtheseprinciples. Pastureutilisation,pasturequalityandcore

costspercowarekeyprofitdrivers inallpasture-basedfeedingsystems,regardlessof the

levelofconcentratefed,andcanbeusedbyallfarmers.

3.2.2NewZealand

DairyBase is the New Zealand national database used by dairy farmers and professional

advisorsinNewZealandtoanalysefarmresultsandbenchmarkthemwiththeirpeers.Itis

runbyDairyNZ,andprovidesastandardisedmethodologytoanalyseandreviewKPIsforan

individualfarmbusiness.Thereisnolicencefeeforafarmer,butthefarmerhastousean

accredited DairyBase rural professional to enter data, which is done at commercial

consultingrates.

Shadbolt (2012)used theDairyBasedata from2006/07,2007/08and2008/09 toexamine

thefinancialperformanceofthefiveNewZealanddairyfarmingsystemstodetermineany

differencesinthedriversoffinancialsuccessbetweensystems.Thefivesystemsareshown

in Table 2. This test examined the premise that if a farm system had a comparative

38

advantage, itwouldexhibitaboveaverageperformance. TheDuPontmodelwasusedfor

theanalysistoevaluatethedriversofreturnonassets(ROA)andreturnonequity(ROE).

Table2NewZealandFeedingSystemsSource:Shadbolt,2012FeedingSystem Description1 Self-contained-noimportedfeed2 4to14%oftotalfeedimported-formilkingcowsofoff-farmgrazing

orbroughtinfeedfordrycows3 10 to 20% of total feed imported – for extending the lactation of

milkingcowsandoff-farmgrazingorbroughtinfeedfordrycows4 20to30%10to20%oftotalfeedimported–formilkingcowsatboth

endsoflactationandoff-farmgrazingorbroughtinfeedfordrycows5 Morethan30%oftotalfeedimported-allyearroundformilkingand

drycows

Thestudyfoundtherewerelow-inputfarmswhichachievelowcostproductionthroughcost

control (the numerator effect) and high-input farms, which achieve it through improved

outputs(thedenominatoreffect).Despitedifferencesinproductionandoperatingprofitper

hectare,thereisverylittledifferencebetweenROAandROEbetweenthesystems.Shadbolt

(2012) made particular mention of the consistency in operating profit margin between

different systems, indicatingno loss inoperatingefficiencyas the system intensifies (from

System1toSystem5).

3.2.3Globalwarming

Noreviewofriskmanagementwouldbecompletewithoutconsideringthechangingclimate.

Ofparticular relevance to this study,Phelanetal (2014)have reviewed the impactof the

changing climate on north-west Tasmania. The researchwas undertaken to quantify and

provide information forpasturebaseddairy systems innorth-west Tasmania. Their study

modelledpastureyields intheperiod2010to2050andthen2050to2085.Themodelling

showedadditionalgrowthfromlatewintertospring,reflectingwarmerwintersandspring

temperatureswithadequatesoilmoisture.However,duringsummeradecreaseisprojected

in pasture production due to the moisture deficit. They also modelled the physical and

financialoutcomesofdifferentstockingratestoconsumethisadditionalpasture.However,

thevariabilityingrossmarginsincreasedunderhigherstockingrates.

39

Thisstudysupportsalong-termviewthatTasmaniawillremainagoodplacetogrowgrass

forconsumptionbydairycows.Ultimately,thissupportsdairybusinessesintheareatoplan

forthefuture.

3.3 New Zealand 3.3.1Landcorp 3.3.1.1 On the ground- Farm Operator and Farm Business Manager

Thefarmoperator’sworkwiththeFarmBusinessManagerstosetannualbudgetsandthree-

year plans. Within season, and as part of reviews with milk and feed pricing, the Farm

BusinessManagersdolotsofscenarioplanning.MostofthisworkisdoneinanExcel-based

program,builtbyLandcorpcalledFeedplanner.Itwasdescribedasamodelthatwassimilar

toUdder,buteasierformultiplescenarioplanning.

At Farm BusinessManager level, therewas a very good understanding of supplementary

feeding costs andmilk income. The scenario tool, shown in Table 3,was developed in a

workingsessionwheretheauthorwasshowntheeconomicsoffeedingpalmkernel.Atthe

timeofthevisit,thereweredryingconditionsthroughmostofthedairyregions.Milkprice

wasat$4.70,comingoffarecordof$8.40forthepreviousyear. Businessesweremaking

thedecisiontodrycowsoffratherthantobringinfeed(suchasPKE)andcontinuemilking

them.

40

Table3.Theeconomicsoffeedingpalmkernel(CookandJohnson,2015)

PriceofPKElandedonFarm

$265

Drymatter

90%

Wastage

15%

Costpertonneconsumed

$346

Feedingcost(pertonne)

$50

TotalcostperkgDMconsumed

$0.40

Conversionof1kgofDMtomilksolids

82

Costtoproduce1kgmilksolid

$4.83

Milkprice($/kgmilksolid)

$5.00

Discount/premiumoffeedpriceonfat:protein* 87%

Realmilkprice

$4.35

Netbenefitoffeeding

-$0.48

*Differentfeedswillcausedifferentresponsesinthefatandproteincompositioninmilk.PKEleadstoahigherfatpercentage,andthereforealowervalueofeachkilogramofmilksolid. 3.3.3.2 Head Office and corporate approach

TheLandcorpapproachistodevelopfarmsystemsthataremostprofitableandresilientfor

the different regions. This is achieved through the business planning system. The

Feedplannerisseenasatoolthatisveryrigorousandhasservedthebusinesswell.Ascreen

shotofFeedplannerisshowninFigure6.Itisacceptedbyseniormanagementthatsystems

willbedifferentindifferentregions.

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Figure6. Landcorp’sFeedplannerbusiness support tool is seena cornerstoneof rigour in the farmmodellingprocess(NivenCollection,2015).

Forexample, inNorthland, the farmshavesplitcalving (60%springand40%autumn),use

maize at 10% of the ration to swing production and then use PKE as themarginal feed.

However,inthe2013-14year,itwasagreedthatacrossthebusinessmoremoneywouldbe

spenton feedtogivean increase in incomeoverandabovethecost (roughlya3:5ratio).

Landcorpisstillevolvinghowitcanturn-onproductionwhenthepricesignalsindicate.This

requiresthefacilitiestofeedeitherPKEormaizesilage.

3.3.2 PyeGroup

The aim of the Pye Group is to be a low cost dairy producer year-on-year. They do not

attempttochangetheirfarmingsystembetweenyears.

Theyhaveanumberofsignificantpriceriskmitigatingstrategies.Theygrowallgrainwithin

the Pye Group, and sell it to the dairies at market prices. All winter grazing and heifer

rearing isdonewithin thegroup. Theiraim is tobeself-sufficient. Theydoutilisegroup-

buying power for farm inputs. They also have a business policy of locking in a certain

percentageofmilkeachyear.Thisisarelativelynewapproach,asFonterrahasonlyhadthis

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optionforthelasttwoseasons.Acrosstheotherpartsofthebusiness,theyhavecontracted

pricesforallpotatoes,carrotsandgrain.

Thisisasimpleandrepeatablebusinessmodelthatprovidesfocusoncostmanagementon-

farm. The centrally managed procurement and risk mitigation approaches have made it

appearaverysustainableandresilientbusiness.

3.3.3 DairyHoldings

Thisbusinesshasa very soundand thoroughunderstandingof costsandprofit. Theyare

veryclear there isno linkbetween theamountof feedpurchasedandprofit in theirNew

Zealand setting. Wheremore feed is brought in, themargin is reducedby feedwastage.

ThereisalinearrelationshipbetweenpastureharvestedandprofitinNewZealand.Intheir

research,supplementaryfeedcostsinNewZealand,comparedtomilkpricearethehighest

in the world, whereas feed price, relative to milk price is the least in the USA. Their

approachistousePKEwhengrassisnotavailable,suchasduringdrought.

Theyfocusonleavingagrazingresidualof1500kgDM/Ha,andonlyputfeedintoholdthe

rotationlength.Ifresidualsfallbelow1300,grassgrowthiscompromised.Theyaimtocalve

downwithacoverof2200to2300kgDM/Ha,dropto1900onbreakevendayandmanage

thisperiodwitha spring rotationplanner. Thisway theycanmakeearlydecisions. Their

objectiveistominimiseanysilage,andwillonlycutagenuinesurplus.

CEO,ColinGlass(2015)1saysthebusinessisnotshyofdebt,andthishasledtothebusiness

being able to expand and seize opportunities. Glass states, “If a balance sheet gets too

strong,managementgetlazy”.

Afterthe2008globalfinancialcrisis,DairyHoldingsrevieweditsriskprofile. Thekeycosts

thatwerethemostvariablepartoffarmexpenditurewerefeed,grazingandfertiliser.Inthe

periodfinancialyear(FY)2008toFY2011,thebusinessstrategicallyreducedcownumbers

tomorecloselymatchpasturegrowthratesandthereforereducedthebroughtinfeedper

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cow.Thisleadtothebusinessreducingitsexternalgrazingandexposuretopurchasedfeed

risk.

The business is also not afraid to build internal capacity to give the total business cost

savings. Theyarenowself-sufficient forheifergrazing,afterpoorlygrownheifers, grazed

externally,werethenumberonecomplaintandexcuseforpoorperformance.Inadditionto

theyoungstockoperations, theynowhave11 farmsthatwintergraze27,000mixedaged

dairy cowsover thenon-lactatingmonths of June and July. This next year theywill have

1000 Ha of fodder beet for wintering of dry cows. Table 4, below, outlines the

disproportionateincreaseinheiferrearinganddrycowwinteringoverrecentyears.

Table 4. Relativemilk price andwintering costs in the South IslandofNewZealand. Source:Glass(2015)1 Milkprice($/kgMS) Winteringcostperweek2001 $5.00 $102014 $8.40 $30

Afterthe2013windevents,wherenumerouspivotirrigatorswereblownoverinthesouth

islandofNewZealand,DairyHoldingsinternalisedthisbusiness.Intheprocess,theyfound

thatsparepartsforthepivotswereapproximately2.5timesthevalueofnewirrigators.This

leadtochangeinthewaythebusinessoperated.

The business has also mitigated risk of availability of water for irrigation. They have

internalisedacontractingbusinessanddevelopedon-farmstorageofdairyshedeffluenton

approximately30farms.

Thereissomecentralisedpurchasing.However,theyonlytakecontractsifthereisaliftin

themarket.Thebusinessphilosophyistobuyonspotprices.Thisissothemoneystaysin

theirbusiness’sbankaccountandthefeedisn’ton-farm,whichwouldtemptpeopletofeed

it(andreducepastureutilisation).

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Thebusinesshasnothedgedmilk.Thephilosophyisthatthebusinessshouldbeagileand

respondtomarketsignals. Takingafixedpricewouldmeanthatthebusinessdoesn’tfeel

the pain and therefore slower to respond to market signals. The approach is to have a

strongbalancesheettobeatspotpricing.Theviewisthatifabusinesswastofixorcommit,

it should take a similar viewevery year, and take the sameproportionsof feed andmilk.

Glass(2015)2said“overtime,no-oneisgoodenoughtobeatthemarket”.

Theyhave focusedon furtherdeveloping their irrigated landand typesof irrigation. They

havefoundthatirrigationgivestheFarmOperator(andtheoverallbusiness)theconfidence

topushthefarmhard.Theydonotwanttouseirrigationconservatively.Changingthetype

of irrigation increases pasture growth, as shown in Table 5. Furthermore, as the ease of

applicationincreases,thelowertheskilloftheFarmOperatorneeded.

Table 5. Relative pasture growth rates from the same volume of water used through differentapplicationmethods.Source:Glass(2015)1 Pasturegrown IncrementalcostBorderDyke(flood) 10T Rotarainer 12T $2,000Pivot 16T $4,000

DairyHoldingsbenefitfromasimplebusinessmodelthathaslowlevelsofbrought-infeed.

Thismeansthebusiness isapermanent low-costproducer. Thisbusinessalsoshowshow

businesses evolve and grow, with a constant CEO and relatively consistent owners. The

business measures the key performance indicators of each farm and these are

communicatedtoeveryoneinthebusiness.Thisbusinesshasacriticalfocusoncosts,andis

happy tomanage spotpricing. They see their stable, variable-order sharefarmersachieve

improvedperformanceyear-after-year.Datadrivestheirdecisionsandgainscomeinsmall

steps.

3.3.4 MyFarm

MyFarmgoesthroughtheprocessofestablishingamanagementsystemandthensyndicates

theinvestment.TheFarmManagerandAgribusinessManagerthenoperatethefarmtothis

plan. Forexample, inthe InformationmemorandumfortheTePahauLimitedPartnership

45

(May,2014), there isadetailedpropertyoverviewandbusinessplanfortheasset. Inthis

memorandum, they also detail the “procurement power” of the MyFarm Management

group, and state that gains are between 3% and 15% and therefore cover the cost of

approximatelyonethirdoftheMyFarmmanagementfee.MyFarmalsostatethey“consider

feedpricetrendsandrecommendthetake-upoflongertermfeedcontracts”totheBoardof

managementofthesyndicate.

FelixMcGirr (2015) saysMyFarm generally feeds cows better thanmost dairy farmers in

New Zealand. This is partially to ensure cow condition and also tomaintain theMyFarm

brand. “OneMyFarm ContractMilker canmakeMyFarm look really good or really bad”

(McGirr,2015).Therefore,ContractMilkerselectioniscriticaltothesuccessofthesyndicate

and to MyFarm. The Agribusiness Manager is accountable for the appointment of the

ContractMilker.

Theygenerallybasetheirfarmingsystemonbringingin700kgofsupplementaryconcentrate

(grainand/orPKE)percow.However,McGirr(2015)saysthefarmmust“neverlosesightof

the pastures”. Interestingly, MyFarm have, in some parts of the business, responded to

changes inmilkprices. In2013, they increased supplementary feedingofbrought in feed

fromSeptemberon someSouthland farms. ThiswasdonewithBoard approval. Overall,

theybroughtinanadditional300kgDMpercowoffeed,whichleadtoanextra70kgofmilk.

Thiswas,inpart,duetoimprovementandapparentfullutilisationofpasture.Inthecurrent

year,withadropof$3perkilogramofmilksolids,theystrippedoutcostsforfeedandcows

at the first quarterly review in October. MyFarm are also aware of the impact that this

decisionwillhaveonaContractMilker

3.4 USA Farm Business Visits 3.4.1FederalmarginprotectiontoolsforUSDairyFarmers

Government support formilk pricingwas undergoing structural change in 2014. Allprice

supporthadbeenremovedwiththeintroductionofmarginprotectioninsurance.TheFarm

Bill 2014- Dairy, introduced aMargin Protection Program (MPP) (MPP (Dairy) Fact sheet,

46

June 2015). MPP is a voluntary riskmanagement program looking atmargin protection.

Producersneedtoenrolfortheprogram,whichwillbeinplaceuntil2018.Eachyear,milk

producers can take out insurance through the United States Department of Agriculture

(USDA) to protect a margin. Different premiums buy different levels of insurance. The

backgroundforthemodelwastheUSDA’scropinsuranceprogram.

FortheMPP,theUSDAcalculatesafeedcost(soy,corn,alfalfa)andtheAllMilkprice.Thisis

usedtocalculatethemargin.Thereisnolinktotheindividualfarm’scostsormilkprice,and

noadjustmentsforstates.Thereisfreecatastrophicprotectionforamarginoflessthan$4

(themaximum is $8). The aimof theprogram is topreventdairyproducers goingoutof

businesswhenmarginsdropbelow$4.Forthelast10years,theaveragemarginisaround

$8,withpeaksof$15in2007and2014,andlowsof$2.50in2009andlate2012.Producers

cancommitbetween25%and90%oftheirmilk(in5%increments)foramarginbetween$4

and $8 in 50c increments (MPP (Dairy) Fact Sheet, 2014). There is a break point for

premiums for more than 4 million pounds of milk. This would be the equivalent annual

productionfroma200-cowherd.Thisappearstobeanincentivetoprotectsmallfarmers.

Thisprogramhas thepotential tochangethe landscapeofhowdairy farmersusehedging

tools in their business. For an administration fee of $100 per year, any and every dairy

producer can effectively insure 95% of their milk for a margin of $4.

(http://www.futurefordairy.com/).Specifically,theMPPwasseentoreducethenumberof

peopleonforwardcontracts.

There was a general view from the businesses visited that these types of government

programswere not useful to the industry as awhole. This, in part,was reflective of the

farmsvisited;large,familyrunbusinesses,whichwereoftenintegratedwithprocessing.The

issuewiththeprogramswasthattheychangedbehavioursoffarmerstoacceptandplanfor

asafetynet.Theprogramwasalsocriticisedforkeepingsmallproducersintheindustry.

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3.4.2BidartDairies,California

BidartDairyFarmsisbasednearBakersfieldinCalifornia.Theymilk9900cowsthroughfour

35persidedoubleupparloursononesite.JohnBidart,athirdgenerationdairyfarmer,runs

thebusiness.

JohnBidartalsositsontheBoardofCaliforniaDairies.CaliforniaDairies,Inc.isthelargest

member-ownedmilkmarketingandprocessingcooperativeinCalifornia,processing47%of

California’smilk. Co-ownedbymore than410dairyproducerswho ship18billionpounds

(8.165billionkilograms)ofmilkannually,CaliforniaDairies,Inc.isamanufacturerofquality

butter, fluidmilk products andmilk powders. California Dairies process 10% of theUSA’s

milk, 45% of California’s milk and are responsible for 12% of all US exports.

(www.californiadairies.com)

Withinhisbusiness,Johnmanagestheprocurementoffeed.Theyhave7,000acres(2832.8

Ha)forgrowingtheirownforages.Theyprocurecorngluten,millrun,canola,drydistiller’s

grain (fromethanol plants) and almondhulls. His approach to procurement has changed

overthe last fiveyears. Theyusedtohavecontracts forat leastoneyearout. Theythen

movedtomorespotpricepurchases. Nowtheyhaveestablishedandbuy inprice (value)

ranges.Theywillbuymoreaspricesdrop,andmovefromonesourceoffeedtoanotheras

prices rise. Forexample,at thetimeofmyvisit inOctober2014, therewasnosoy in the

rationduetopriceandtheywereusingcanola.

BidartDairyFarmsdoesnottakepositionsonmilkprice;JohnBidart(2014)statedthatyou

“can’tbeattheguysinthesuits”.

3.4.3FernandesBrothers,California

JaredFernandesmanagestheriskprofileofthedairybusiness.Hedoesthebuyingoffeed,

andhedgesmilk. Forbuying feed, heuses abusiness calledCommodities Pluswhowork

with about 30 dairies. They change a retainer and provide their clients with market

informationandleveragetheircombinedsizeforbetterprocurementoptions.Basedonthe

48

pricing of different feed options, Jerrod then speaks with nutritionist and rations are

adjusted.

Formilkpricing,Fernandesknowshisrelativecostsofproduction,andgenerallyusestools

toallowhimtosellofftothetopofapricerangetoprotectthefloormilkpricing.Asforall

producersinCalifornia,thebasisisdifferent,whichdoescreatesomechallengesforrelative

pricing. Jerrod believes that very few other Californian dairy farmers are using similar

approachestomanagerisk.Hisphilosophyisthattheywon’tmakealotofmoney(fromthe

pricespikes)butwillstayinbusiness.

Fernandes alsouses aweb-based tool tomanageprice risk. The tool uses three years of

financialstodevelopoperatingcosts,includingfeedcosts,rationsandcosttofeed.Thetool

thenallowsfortheanalysisofwhathedgingwoulddoforthebusiness.Itusesalinktoasoy

and corn equivalent (which can be traded on the ChicagoMercantile Exchange (CME). It

takestheapproachthatallfeedisboughtontothefarm.Itdevelopsasensitivityanalysisof

margin and shows the effect of forward selling milk. Jared was keen to point out the

differencesbetweenprotectingamarginandlockingamargin.Ifamarginwaslocked,there

wasnoupsidepotential.

3.4.3.1 Other external impacts of price risk management

OneofthelargestriskstotheFernandes’businessisthelackofwater.Theyhadneverreally

thoughtaboutwater,butoverthe last fiveyears, it isnowaconsiderable issue. Theyare

nowmovingawayfromgrowingcorntogrowingsorghum,asitismorewaterefficient.

Fernandesreportedthathehasexperiencedinputfrombanksthatwillreduceinterestrates

for farmers who lockmilk price. This was the first report of banks financially rewarding

producersfortheactivemanagementofpricerisk.

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3.4.4RedtopDairy,California

RedtopDairy is runbyManagingPartner, ScottWickstrom,a fourthgenerationdairyman.

Theydescribethemselvesasalargefamilyfarm,milking4,000jerseycows.InOctober2014,

average production was 4.8% fat, 3.8% protein and 63 pounds (28.58kg) per day. It is

understoodtobethelast large-scaledairyfarmbuilt inCalifornia. Buildingcommencedin

1999,buttooksevenyearstocompleteconstruction.Thedelaywastopreventthethreatof

litigation as during the period, the bulk of changes to environmentalmanagement codes

took place. At the time, USD$350,000 (up to the beginning of the building process) was

spenttogetenvironmentalconsentsandlicences.Itisnowunderstoodthatnocountiesin

Californiaareissuingenvironmentallicencesfornewdairyfarms.

At Redtop they have twophilosophies: produce and buy feed as cheaply as possible, and

makethehighestproductionaspossibleofthehighestvaluemilk.Wickstrom(2014)says

“theyneverwanttosacrificeproduction”.

TheyseeCaliforniaasagreatlocationforpurchasingfeedstuffs,anduseupto15ingredients

intheir rations. These ingredients includecornsilage,wheatsilage, lucerne,wholecotton

seed, dried distillers grain, almond hulls, pomegranate, tomatoes, onion, grape pumice

(squishedgrapes),soyhulls,canola, rolledcornandcerealgrains. Theygrow95%oftheir

cornandwheatsilage,andbuy50%of lucernehayandsilage. TheyarepayingUSD$350/

metrictonneforlucernehayat22%protein.ThiscompareswithcornsilageatUSD$80per

metricwettonne(USD$240TDM)landedonfarm.

Theyuseafeedbrokertoprocurefeedingredients.Thebrokerwillengagedirectlywiththe

nutritionistiftheyseeanopportunitywithafeedtype.Thebrokeralsoorganisesdelivery.

They lock in some feed ingredients that are standard; they do this based on a monthly

forwardprojectionofvolumes.

50

Theydonotcurrentlyhedgemilk.Theyhaddonesimplecheesecontractsfor3monthsor

60days.Theydidthisover10yearsago,butnowlooktootheropportunitiestoprotecthe

bottomline.

Theyusedanumberofapproachestoprotectaftertaxdollars. Thisincludedoptionsfrom

the Co-Op to allow for the deferring of milk income. They also have the option with

suppliers to pre-pay some expenses. Their focus on protectingafter-tax dollars was very

impressive,andwastheonlybusinessvisitedthroughouttheworldthatarticulatedsucha

focus.

Their approach tomilk pricingwas to let it ride themarket. Wickstromused 2014 as an

example, stating “no-one saw the price increase coming” (2014). He also outlined that

havingastrongrelationshipwithyourbankiskey.Dependingondebtgearing,manybanks

requiredairybusinessestopre-payfeesandestablishanadditional lineofcredittotakea

position.

3.4.4.1Environmentalregulationandrisk

Wickstrom outlined that the biggest risk, and where he spent bulk of his time, was in

environmental management. In 15 years, it has gone from minimal time to a massive

management input. This has been as a result of changes to the Californian political

environment;underpinnedbyalargeurbanpopulation.Wickstromacknowledgestoomany

things were not environmentally stable, but considers it has now gone to excess. For

example,recordsneedtobekeptofhowmanyhoursageneratorruns,thenumberoftyres

coveringasilagestackisauditedandtheyhavejusthadtochangefromsixinchtofourinch

stickersonpressurisedvessels.Asabusiness,theyhavetohireexpertstobecompliantand

toobtainpermits.Scottisfrustratedthatitisnotdoneforthebenefitoftheenvironment,

“it'sdoneforCMA”(covermyarse).

Twentyyearsago,dairy farming inCaliforniawasperceivedtobethebestbusinessmodel

with inexpensive landandabundantwater. Producers couldeasily and cheaplybuy feed.

51

This has now changed, with demand from other industries such as nut trees and

horticulture,andiscompoundedbytheincreasingcostandreducedavailabilityofwater.

3.4.5NoblehurstFarms,NewYorkState

John Noble and his son, Christopher (eighth generation farmer) farm in upper New York

State. After their family arrived in the USA from Scotland and Ireland, they spent four

generations just feedingtheir families. Inthe1960’s,theyhad5sites,milking40cowson

eachsite,whichwaslargescaleforthetime.Theyhavenowexpandedtohave30peoplein

the business, including both family and non-family. Of these, 12 work every day on the

farms. In2009,theylostonethirdoftheirequity inthebusinesswithlowmilkpricesand

the global financial crisis; this lead to the business re-evaluating their objectives.

ChristopherreturnedtothebusinessinMay2009.

Theiraimistokeepaviablebusinessforthenextgeneration.Theirbusinessnowincludesa

farmmachinerybusiness,dairyfarmcontractmanagement,fivedairyfarmsmilkingatotal

of 5,000 cows anda commodity tradingbusiness. Their drivers are tobring clever young

people into agriculture, value-add to products and set the business up for subsequent

generations.Theirobjectivesaretobegoodstewardsofthe land,ofthefamilyandofthe

community.

They have internalised the monitoring, management and procurement of inputs. They

establishedLinwoodCommoditiesasabookkeepingandtradingcompany.Itisownedby9

businessesandtransactsover$20mperyear.Christopherhasanagribusinessdegreefrom

Cornellandhadworkedforasmallcommodityhedgefund,andforRabobankinNewYork,

foreightyears.HeworkswithDick,theinternalcommoditytradertomonitorandpurchase

inputs. They use trading ranges for different commodities and have buy-points. They

centralisethepurchasingoffeedthroughthecentraldesk,buteachfarmbuystheirownfuel

and consumables. They also look at alternative feed options, and Dick works with

nutritioniststoreviewoptions.Theyhavemovedfromusingonenutritionisttomultipleto

accessmoreinnovativethinking.

52

They understand there can be considerable variation in price for delivered product at

differenttimesoftheyear,soareveryactivetraders.Theyconsiderthatotherstates,such

asCaliforniaandIdaho,havemoreconsistentpricing,andthereforeneedlessmonitoring.

Withintheoffice,theyhaveadirectfeedofliveCMEandothercommodityinformation(as

shown in figure 7). This service is provided by The Progressive Farmer, who provides

agricultural information andmarket intelligence to enable their customers to actively and

effectivelymanagetheirbusiness.

Figure7.ChristopherNobleofNoblehurstFarmsinhisfarmofficewithascreendisplayingmarketinformation(NivenCollection,2014).

DickandChrismonitoronaweeklyandmonthlybasistherollingaveragefeedcosts.They

reviewwherepricesaretrendingandwheretheycanlockprices.Theyusehistoricalpricing

patternstoestablishtheparameterstheyusetomanagetheirbusiness(asshownforSoyin

Figure8).Theyaimtolockin25-50%ofmilledproduct.ForcommoditiesontheCME,they

hedgewithfuturesandoptions,anddonottakedeliveryofphysicalproduct.Theydotake

deliveryofotheritemssuchasbloodmeal.Theyaimtomatchthehedgingofmilksaleswith

feed purchases. Overall, they endeavour to have a layering of price risk coverage. Their

approachcanalsobeusedtomanagecashflow,ratherthangainorloseonahedge.

53

Figure8.NoblehurstFarmsmonitoringofseasonalityofSoybeanhighandlowpricesforIllinoisbyNoblehurstFarms(NivenCollection,2014).

TheyuseMPPasacheapwaytobuyoptionsandNoble(2014)estimatesthistooltakesout

15-40% of the risk. It provides them with a floor, and does not limit the upside. This

programwillstoptheirbusinesslosingasmuchequityaswaslostin2009.

Theyhavealsoexpandedthecentraldesktocoverotherfarminputs,suchassilagecovers,

tyresandtractors.Thisisdonemoreasacollationofordersthantakingpositions.

54

In October 2014, Noblehurst Farms were starting to commission a milk plant that made

crèmeandskimmilk;thenextphaseisartisancheese.Theirpointsofdifferentiationwere

thatallthemilkwasBSTfree,andtheplantusessustainableenergysources,suchassolar

panelsandenergyfromthebio-digesteronaneighbouringdairyfarm.Theplant isa joint

venture with dairy cooperative Dairy Farmers of America (DFA), with DFA the managing

partner.

3.4.6UnitedDairies,Minnesota

United Dairies (purchased 2003) operate three farms, eachwith 1500milking cows, near

Litchfield inMinnesota. Nick Ridgeway, a former banker, is the GeneralManager. They

calve all cowson theonedairy (UnionDairy) and thenmovemost first and some second

lactationcowstoWestlandDairy.SecondlactationcowsgotoCottonwooddairy.Cowson

their thirdormore lactation, or cows that transitionedpoorly, stay atUnion.UnionDairy

wasoriginallydesignedasaLandO’Lakes(dairycooperative)modelfarm.Theyalsobought

a20,000headbeeffeedlotinKansas(twostatesaway)wheretheyreartheirheifers.They

havechosenthismodel,asthecosttobuildaheiferfacilityinMinnesotawouldbetentimes

thepriceduetotherequirementsforallcowstobeinbarns.

Thebusiness isstructuredasfourfarmswithfourmanagers,andRidgewayastheGeneral

Manager.Anotherpartnermanagesoneofthefarms.EachfarmhasaP&Landreviewat

thebudgetandcostseverymonth.

Ridgeway’sroleincludesthemanagementofprocurementandhedging.Theyfocusonthe

purchasingofelectricityandusealocalcountycooperativetopurchasesomeoftheirpower

needs. Thecooperativetendersforthebestpricefromgeneratorsandusesthecollective

buyingpowertosecurelowercosts.

The business’ aim is tomaximise income, notmaximise production. Thiswas a different

philosophy tomostproducers inCalifornia. Ridgeway says thepartners (as investors) like

predictability. They aim tomakemoney every year, pay a dividend and increase equity.

55

Theyusehedgingandforwardpricingtogivethispredictability.Althoughtheyseetheserisk

management tools as useful, Ridgeway says the business must start with a low cost of

productionandthebestmanagementpractices.Thenthebusinesscanutilisethesetoolsto

supportthebusiness,notdrivethebusiness.

Theyhavedevelopeddetailedmodelstocalculatethepriceofcornsilage.Theyestablished

asystemwheretheybuytheseed(thatis,asthepurchaser,theychoosesthevarietytobe

grown)andthentheypayseventimestheethanolpricelessthebasispriceforcornsilage.

Thismodelhasworkedwell,buttheynowwanttoworktowardsalocalprice.Theyareinan

areawithanegativebasisprice,whichrangesfrom20cto$1.Theycontractgrow100%of

theircornsilage. Theymanagetheir lucernehaylageinasimilarway,andfixthepricefor

threeyears,whichisconsideredthelifespanofthestand(atfourcutsperyear).Ifsilageis

producedonafarm,theypaythesamepricesoastoensurethereisanaccurateandtrue

priceoffeed.

Asabusiness, they lock60%oftheir inputsand60%oftheiroutputs. Theaim is towards

65%, andpartnershave changed their viewon lockingprices. Theyunderstand theymay

loseoutonupsideprices,buttheyhaveprotectedtheirfloor.Ridgeway(2014)saysthekey

totheirbusinessistolockinaprofit,makeamargin,andacceptthatthey’llmissthetopof

themarket.

TheysellmilkusingafacilityfromcooperativeLandOLakes.Itcosts12cperhundredweight

(45.4kg)ofmilk.Theycoulddotheactivitythemselvesfor8cperhundredweight,butwould

needanadditionallineofcredittofundthetransaction.Theyaimtolockclass-threemilkat

thecostofproductionandthengetanextra$2to$3basedonpremiumsforcomponents,

SCCandquality. InMinnesota,dairyfarmersneedtobemembersofacooperativetosell

theirmilkasthereareonlyafewindependentbuyersofmilk.

NickplanstoenrolthebusinessintheMPP.However,whateverthebusinessdoes,theykey

is to ensure transparency of the decision-making. He recommends that all businesses

56

documentthecontext,documentthereasonsandkeepconsistentintheirapproachtorisk

managementandforwardpricing.

3.4.7Riverview,Minnesota

PaulFehrstartedRiverviewinthelate1930s(heisgrandfatherofBradandGaryFehr).Gary

thenstartedtogrowthebusinessinthe1980s.Theystartedwithtwofeedlotsof5000cows

with theplan tobuy500pound (lb) (227kg) feeder cattleand finish thembyMayof the

followingyear.However,bytheearly1990s,allthemeatpackershadclosedinMinnesota

andtheonlyoptionwas tosendthecattlesixhoursby truck toNebraska. Theyexplored

pigs,turkeysandsettledondairy.Theybuilttheirfirst(800cow)dairyin1995andbrought

inoutsideinvestment.

Asabusiness,theyhaveahighcomfortleveltobringinoutsidecapitalandadvice.In2000,

withanewgroupofpartners,theybuilta2000cowdairy,followedbya6000-cowdairyin

2004. Sincethen,theyhaverolledtheseintoa limitedliabilitypartnership. 85employees

ownSeventypercentof thepartnership, andneighbours and family own30%. Theynow

have five dairies in Minnesota and three in South Dakota, milking 60,000 cows. Whilst

visitingtheywereintheprocessofacquiringadairyfarminNewMexicoandconvertingitto

aheiferrearingfacility.TheyalsohavethreefeedlotsinNebraska,andfinish50,000cattle

per year. They farm 27,000 acres (almost 11,000ha). Animals consume 80% of what is

grown, and this accounts for 20% of total feed consumed. The business employees 800

people,ofwhich250areveterinarians(majorityfromMexico).

GaryFehristheCEO,andhisbrotherBradistheCFO.Theyhaveaseven-personboardthat

watch the balance sheet. Each site has a manager and reports through to the Chief

Operating Officer. They have well defined core values and operating model, which are

communicatedthroughoutthebusiness.TheseareshowninFigure9.

Theymanagepriceriskbydefiningthetypeofproducttheyareproducing. Theysegment

theirkeyproducts,meatandmilk intoanumberofproducts. Formilk, thesegmentsare

57

fromorganic tocommodity. Forbeef, theyseetensegments fromorganic tocommodity.

Within their beef business, they are all natural and hormone free. All except one of the

dairies are antibiotic free. They are BST free. They have changed the mindset from

treatmenttoprevention.Theyregularlyconductanimalwelfareauditsofthefarms.

They aremoving to all jersey genetics; they are about tomove to sexed semen and are

rearingaround40%replacementscurrently.Theircullrateiscurrently35%.

They use ten core ingredients in the cow’s diets. These included corn silage, lucerne,

distiller’s grain, canolameal, soyandamineralpack.Theyalsouse corn syrupby-product

and pressed beet pulp. They determine their own corn price, and silage produced by

neighboursispricedoffthisbase.TheysetapriceinMarchforLucernebaleage.Theysell

themanurebacktothefarmsasfertiliseranditisinjectedintotheground.Thisreducesthe

loss of nutrients and reduces odour. It alsomeans that there are fewermatters for the

people in the community to complain about. They use long term supply contracts with

neighbourstoprovidethefeedtheyneedfortheiroperation.

Thiswasthelargestdairybusinessvisited.OfallthedairyfarmsvisitedduringtheNuffield

scholarship,theRiverviewhomefarmwasthemostprofessional,hadthebestpresentation

(equalwithfarmsinCaliforniaandTheNetherlands)andhadworkhealthandsafetyatthe

centreofhowthebusinesswasrun.

58

Figure9.Mission,corevaluesandbusinessmodelofRiverviewFarms(NivenCollection,2014).

59

3.5 USA Brokers and Markets 3.5.1INTLFCStone

INTL FC Stone is a Fortune 500 company that provides clients, across the globe, with a

comprehensiverangeofcustomisedfinancialservicesandtools tohelpthemprotect their

marginsandmanagevolatility.INTLFCStone'scustomersincludetheproducers,processors

and end users of virtually every major traded commodity; commercial counter-parties;

governmental, non-governmental and charitable organizations; as well as institutional

investors,brokers,professionaltraders,commercialandmajorinvestmentbanks.

Theyofferthesecustomersacomprehensiverangeofproductsandservices.Amongthese

services is their proprietary Integrated Risk Management Program (IRMP), as well as

exchange,andexecutionandclearingservicesdesigned to limit riskandenhancemargins,

and bottom-line results. They also support the physical trading in precious metals and

grains,aglobalforeignexchangeandcurrencypaymentservice,assetmanagement,equities

market-making,securitiesexecutionandtrading,andinvestmentbankingadvisoryservices.

ItwasapleasuretomeetwithRobertChesler,VicePresidentoftheFoodsDivision.Chesler

outlinedhowtheirbusinessprovidesservicestodairyproducers,andprovidedatourofthe

CME.Chesler’steamhavetoolsthatareusedbydairyfarmerstounderstandtheircostsand

managetheirrisk.Itbringsindetailsoftheration,andaddscostpercommodity,andcost

forkeycomponentssuchasprotein.Theyalsohavetheabilitytoaddinfixedcosts.With

this,theythenfocusthefarmertolookattheirmarginoverfeedcosts(MOFC).Withthese

parameters set, it allows the FC Stone advisor to show the producer their exposure to

different changes in feedandmilk costs. From there, the farmer,dependingon their risk

profile,maychoosetohedgefeedinputsormilk.

Likemanyclevertoolsdesignedbyindustryspecialists,thechallengeforFCStoneistohave

accesstoproducersandengagethemintheconversationaboutriskmanagement.FCStone

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werelookingatnewanddifferentwaystoengageproducersintheconversationaboutprice

riskmanagement.

3.5.2RiceDairy

RiceDairy isaboutiquebrokeragefirm,offeringguidance,analysis,andexecutionservices

onfutures,options,spot,andforwardmarkets,specializing indairyandmarketsatdairy’s

periphery.Theyhelpproducersmakedecisions.Theyarebrokersratherthanapartnerin

thetransactiontakingamarginonly.Morerecently,theyareworkingwithsomeAustralian

basedcompanies.

InmeetingswithJonSpainhourandTrevorSlegers,andthenSlegersandfounderBrianRice

(inJulyandOctoberof2014,respectively)theysharedadeepunderstandingofthemilkand

inputmarketsintheUS.Since2007,whentheUSdairymarketbecamemoreexportaware,

they have expanded to lookmore at globalmilkmarkets and pricing. This resulted from

trading companies entering the butter market in the US to make money out of spreads

betweentheUSmarketandoverseasmarkets.

Priorto2007andthesubsequentintroductionoftheGlobalDairyTrade(GDT),theUSwas

notabletoeasilyaccessexportmarkets.SincetheGDT,ithasledtheUStofocusmoreinto

skimmilkpowerandcheese. Itwastheviewof thepeopleatRicethatNewZealandhad

considerable exposure to China, considering 50% of their dairy product is whole milk

powder,and100%ofitisexportedtoChina.NewZealandhadleftskimmilkpowder(SMP)

andcheese,andtheUShadenteredthismarket.However,withchangesinNewZealand’s

productionprofile(backtoSMPandcheese),thiswill leadtoapricedrop intheUS. The

real issuefortheUSdairyindustryisthespeedwithwhichprocessorscanswitchbetween

products. It’s not just aboutmaking product, it’s about having the customers ready, and

thenthehedgepositionsthattheproducer,processorandendusermake.

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3.6 Limitations of the study

From aUS perspective, this study focused onmilk as one of the fourwhite commodities

(rice, sugar and cotton being the other three). This study did not investigate how

commodities in theUSA,notassociatedwithdairycows,were traded. Therewasgeneral

discussionthatdairyriskmanagementtoolswerenotasadvancedasforcorn,butthiswas

notinvestigated.ItwasalsomentionedthatthenewFarmBillwithmarginprotectionwas

modelledonthemechanisminplaceforcornfarmers.

ThisstudydidnotexplorethetoolsavailabletoEuropeanfarmers.Throughthemechanism

of the European CommonAgricultural Policy, theremay be tools that could be useful for

dairyfarmersoutsideEurope.

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Chapter 4 Conclusions 4.1 Farm Management Systems

“Thechallengeforallbusinessesistheexpertiseofpeopleonthegroundtoimplementand

seniormanagement’sabilitytomonitorandmanage”RobertPoole(2015).

NewZealandandtheUSAeachhaveadominantprogramusedtomanagecowdata(Minda

and DC 305 respectively). Each of these programs also has associated and compatible

programsformanagingfeeding.Neitherofthesesystems,however,isdirectlytransferable

to an Australian pasture based dairy farm. In the case ofMinda, it is linked to the New

ZealandnationalcowdatabaseandthisexcludestheassimilationofAustraliandata.DC305

isdesignedforcows insheds,whereallanimalactivities,suchasbreedingandtreatments

aredoneinthepen.ThisisnotcurrentlyfullycompatiblewithanAustralianorNewZealand

systemwhereallanimalactivitiesaredoneinthedairyshed,andusuallywhilstmilking.

In both the USA and New Zealand,more work is required to have better portability and

functionalityofthedatabaseonsmallhandhelddevices.InsomeareasoftheUSAandmany

areasofNewZealand,Internetaccessisnotsufficienttooperatethesesystemsinrealtime.

Therearemanysolutionsinplace(Wi-Fianddailysyncing),butthesearenotyetideal.

4.2 Price Risk Management

Throughout the US and New Zealand, price fluctuations for inputs and outputs are

considered a usual part of the external operating environment for a dairy business.

However, there are very different ways that farmers in each country can manage the

businessriskcreatedbythepricefluctuations.

InAustraliaandNewZealand,dairyfarmersoftenusethefarmsystemasasurrogateforrisk

management.Farmersoftenchangetheirfarmsystemtomanagethepricerisksassociated

with brought in feed. InNewZealand, therewere views that a businesswithminimal or

63

evennobrought in feedwere less risky (andalsomoreprofitable) thanabusinesswhere

somefeedhadtocomeineveryyear. WithinanAustralianandNewZealandcontext,this

viewwasbasedontheissueofdrought.Duringanextendeddrought,feedpricesincrease

dramatically and in some regions, no feed would be available for purchase at any price.

Alternatively,somedairybusinesseschangetheirsystemtoincludeasetamountofbrought

in feed (usuallycerealgrainorPKE inNewZealand) to increasestockingrateand increase

production.

Analysisofdairybusinesses inNewZealandandAustralia,however, showthatall farming

systems,fromnosupplementthroughtohighsupplementcanbeasprofitableastheothers.

Therefore,itistimethatthedebatemovesfromwhichsystemisthemostprofitabletohow

doImakemysystemmostprofitable.

Throughout theUS andNew Zealand, the businesses thatwere themost profitable knew

their system, knew their costs and how to manage their costs. They had a clear

understandingof their feed costs, their feed requirement and themilk income from their

farm at different milk prices. The best businesses focused on having the best people

managingthekeybusinessdrivers.

Whenitcametotoolsavailabletodairyfarmerstomanagetheriskassociatedwithchanging

inputandoutputprices,therewerevastdifferencesbetweenthecountries.IntheUS,the

toolswerewelldeveloped,andcommonlyavailable;mostdairyproducershadusedsomeof

the tools at least for some inputs, for some time. ManyUSdairy businesses employed a

specific person to monitor input and output prices, and then buy physical product for

immediateordelayeddelivery,orusefuturesoroptionstotakealongtermposition.Most

businesseshada riskmanagementphilosophyas to thepercentageof feedandmilk they

wantedhedged.

Bycontrast,toolsavailablefortheNewZealanddairyfarmertomanagingriskarevirtually

non-existent.Mostproducersacceptedtheywerepricetakersformilkinaglobalmarket.

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Everyone explained that they committed their business to produce milk without even

knowingtheprice theywouldreceive. Against thisbackdrop, theoverwhelmingapproach

wastobealowinputandthereforelowcostproducer.Inthelasttwoyears,FonterraNew

Zealandhadbeenoffering fixedmilkpricing foraproportionofa farmorbusiness’smilk.

Theuptakeofthistoolwasgreatestamongstcorporatebusinesses.

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Chapter 5 Recommendations 5.1 Recommendations for Farm Management Systems

Thefollowingrecommendationsaremadetothemanufacturersofsoftwareprograms:

- Those companies operating in the USA, and other placeswhere cows are housed,

should consider the improvements to their offerings by looking at pasture-based

dairy farming where all activities are done in the dairy shed. This should lead to

improvedlabourefficiencyandfastercollectionofdata.(p15)

- The hand held devices available forMinda and DC 305 are robust, but are not as

user-friendly as they could be. Improving the hand held devices will improve

usability.ThisappliestotheUSmarketasmuchastheAustralianmarket.(pp23,24)

- Itisessentialforlargeherdswithmultiplestaffthatthehandhelddeviceshavethe

ability to electronically scan EID tags into the device to bring up cow information,

ratherthanrelyonmanualdataentry.(p23)

- There is opportunity for a software provider to develop and sell the overarching

architecture to link and consolidate animal, feed, and financial information to all

farmers, irrespectiveof size. Sucha systemwill improve thealignmentofphysical

and financial information toassistdairy farmersmanage theirbusiness. (pp20,21,

22)

Recommendationsfordairyfarmmanagementsystems

- For both software developers and dairy businesses looking to install a new farm

management system, separate the requirement of the software with the

functionalityofthehardware.(p14)

- Forbusinessesconsidering installingand implementing farmmanagementsoftware

(and hardware) consider both the initial set-up cost and the on-going resource

(peopleandmoney)tosupportandmaintainthesystem.(pp16,22)

- Internet coverage remains a considerable limitation to implementing a real-time

system inAustralia,New Zealand and parts of theUSA. Governments and service

providersneedtocontinueworkingonprovidingphoneandInternetaccesstorural

andregionalareas.

66

- All businesses that are embarking on implementing a farm management system

should looktohavethe leastnumberofdataentrypointsaspossible forthesame

informationtomaximiseefficiencies.(p18)

- The best system is one that is used throughout the organisation: from the person

puttingthecupsoncowsthroughtotheCEO(pp13,16,20,31)

- Businesses need to know the levers they can pull on business costs and milk

production-howfast,howmuch,andtheimpactofchangesovermanyyears.

- Ensure there is transparency in how records of physical parameters are converted

intofinancialdata.Thisallowsalllevelsofmanagementtolinkactionontheground

withimprovedfinancialperformanceofthebusiness.

5.2 Recommendations for Price Risk Management

Thefollowingapproachhasbeendesignedforanydairybusinessintheworld-irrespective

ofsize,ownershiporsystem,tomanagepricerisk.

1. Chooseanddefineyourfarmingsystem; it isnecessarytounderstand it inorderto

manageit.

2. Understand cost structures; understand the ranges for fixed and variable costs

betweenyearsandseasons.

3. Use benchmarks for your farming system and cost structure to look for

improvementsinthebusiness.

4. Understandthepricecyclesoffinancecosts,inputsandyouroutputs(milk).Itmay

benecessarytoseekadvicefromanadviserorexpert.

5. Setpricetriggerpoints for inputsandoutputs,andunderstandthefinancial impact

onthetotalprofitabilityofchanges

6. Decideonapriceriskmanagementstrategy.Thiscanvaryfromnoriskmanagement

throughto100%ofinputsandoutputsboughtatpre-determinedprices.

7. Getadviceonthetoolsavailabletoimplementapriceriskmanagementstrategy.

8. Commencemeasuring,monitoringandmanagingpricerisk.

9. Re-assessthepriceriskmanagementstrategyeverysixmonths,andpriortomaking

anyfarmsystemchanges.

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Generalrecommendations

- Everydairybusinessmustunderstand,measure,monitorandmanagetheirtopthree

physicalandfinancialKPIs(pp20,21,31,32,35,36)

- Consider the lead indicators for the future success of the business. Retrospective

KPIsarenotusefulformanagingfuturebusinessrisk.(p.37)

- WithinAustraliaandNewZealand,itistimetomovethedebatefromwhichsystemis

themostprofitabletohowdoImakemychosensystemmostprofitable.(p.29)

- Withrareexception,dairyfarmersmustacceptthattheyareinacommoditymarket

andpriceswill fluctuatefor inputsandoutputs. It is thereforenecessarytohavea

systemtoaccessandmonitorcommodityprices.(p.12,35,38)

- Dairy businesses need to access professional advice and information. This can be

throughexternalsupportor,fora largebusiness,bringingthisservice in-house.(pp

38,40,42)

- Whenmakingbusinessdecisions tomitigateprice risk, thecontext for thedecision

should be documented. This is importantwhen others in the organisation review

thesedecisionsatalatertime.

- The development of DairyBase Australia, the Australian national database of dairy

farmperformance,needstobeapriority.Thiswillassistfarmerstobenchmarktheir

businessesandoptimiseperformance.

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References Allan, J andWolfert S (2012). Farming for the Future- towards better information-baseddecision-makingandcommunication.Phase1:Australasianstocktakeoffarmmanagementtools used by farmers and rural professionals. Centre of Excellence in Farm BusinessManagement.Bidart,J(October2014).Personalcommunication.BidartDairy.Bakersfield,California.USA.Chestler,R(July2014).Personalcommunication.INTLFCStone.Chicago,Illinois,USA.Cook,LandJohnson,M(February,2015).Personalcommunication.WairakeiEstate,Taupo.Landcorp,NewZealand.DairyAustralia(2013).AustralianDairyIndustryinFocus2013.FarmingforNZ(2014).LandcorpFarmingLimited,AnnualReport2014.Fehr,B(October,2015).Personalcommunication.CFO,Riverview.Minnesota,USA.Fernandes,J(October2014).Personalcommunication.FernandesDairy.Hanford,California.USA.Glass,C(February2015)1.FromapresentationtoLICShareholdersCouncil,Ashburton.NewZealand.Glass,C(February2015)2.Personalcommunication.CEO,DairyHoldings.NewZealand.International Farm Comparison Network (IFCN) (2012) Dairy Report 2012 – For a betterunderstandingofmilkproductionworldwide.McGirr, F (February, 2015). Personal communication. Agribusiness Manager, MyFarm,Canterbury.NewZealand.McLeod, P (February, 2015). Personal communication.GeneralManager-Dairy, CraigmoreSustainables.Canterbury.NewZealand. Margin Protection Program for Dairy (MPP-Dairy) (June 2014) 2014 Farm Bill Fact Sheet,FarmServicesAgency.UnitedStatesDepartmentofAgriculture.MyFarm(2014).YourGuidetoworkingwithMyFarm.MyFarmLimited(May2014)TePahauLimitedParnershipInformationMemorandum.NewZealandDairy Statistics (2014) Livestock ImprovementCorporation Limited andDairyNZLimited.

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Noble,C (October2014).Personalcommunication. NoblehurstFarms.Linwood,NewYorkState.USA.Pink,K(2003).WindsofChange-ahistoryofWoolnorth.Phelan, D.C, Kemmerer, E and Parsons, D (2014). Planning for climate change: spatialinterpolationofpastureyieldsinnorth-westTasmania.Performance,ProfitandRiskinPasture-basedDairyFeedingSystems(2011).FindingsfromtheTasMilk60study.ProducedbyDairyAustralia’sGrainstoMilkProgram.DairyAustralia.Poole, R (February, 2015). Personal communication. VDLBoardDirector. Taranaki,NewZealand.Pye, M (February, 2015) Personal communication. Director, Pye Group. Temuka, NewZealand.Rice,BandSlegers,T(October,2015).Personalcommunication.RiceDairy.Chicago,Illinois,USA.Ridgeway,N (October, 2015). Personal communication. GeneralManager,UnitedDairies.Minnesota,USA.Shadbolt, N (2012) Comparative strategy analysis of NZ pastoral dairy farming systems.InternationalJournalofAgriculturalManagement1:3pp19-27.Spainhour,JandSlegers,T(July,2015).Personalcommunication.RiceDairy.Chicago,Illinois,USA.Wickstrom,S(October2014).Personalcommunication. RedTopDairy.Merced,California.USA.

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Plain English Compendium Summary Project Title:

Management systems and price risk management for multi-site dairy operations

Nuffield Australia Project No.: 1420 Scholar: PaulNiven Organisation: FalconDairyHoldingsLimitedUnit507-509TowerC2OrientalPlaza,Beijing

100738,China Phone: +8613810412282 Email: pgniven@icloud.comObjectives To understand how farming businesses manage multiple site animal

operations. Tounderstandhowbusinessesmanage inputandoutputpricevolatility,andthetoolsandapproachestooptimise income inthemediumtolongterm.Tofurtherinvestigatehowbusinessesadapttheiroperationstocapitaliseoncertainpricepointopportunitiesincommoditypricecycles.

Background The author undertook aNuffield Scholarshipwhilst in the role of BusinessManager- Dairy for the Van Diemen’s Land Company, Australia’s largestdairy farming business. As the business matured and stabilised, it soughtways to use its purchasing power of commodities and proven farmingsystemtocapitaliseoncommoditycyclesandmakemoremoney fromthebusiness whilst reducing risk. This study was aimed at determining whatsystemsexistaroundtheworldtoaidthisprocess.

Research The research consisted of visits to farms, financial markets, brokers,manufacturersand suppliers in continental Europe,USA,NewZealandandChina. The scope of the studywas limited almost exclusively to the dairyindustry.

Outcomes There aremany and varied software tools tomanagemultiple site animalbusinesses.However,intheUSA,Dairycomp305hasveryhighmarketshare(90%+). The complexityadded ingrazingdairy systems (ie cowsand land)has not yet been adequately consolidated into a system for multiple siteoperations, but Landcorp in New Zealand, currently, have the mostdevelopedframeworktoconsolidatemultiplesystems.Around the world, businesses display the full spectrum of price riskmanagement- from pure price takers through to hedging all farm inputs.Therearefundamentaldifferencesinthetoolsandopportunitiesindifferentcountries available to dairy business. The key, however, for all dairyenterprises,whatevertheirsystem, is tocomprehensivelyunderstandtheircostofproduction,andunderstandwherealltheirinputsandoutputsareonthecommoditypricecycle.

Implications Dairybusinessesmustunderstandtheflexibilityofcoststotheirsystemandmonitorthekeyexternalcommoditypricetriggers.Manybusinessesaroundtheworldhaveunrealisedopportunitiestoturnonand turnoffpartsof theirproduction system inorder to increaseprofit atcertaintimes.There is a void (and therefore an opportunity) for software that canconsolidate both the animal and farmdata formultiple-site pasture-basedanimal operations so all levels of management can monitor and managetheir businesses, andbe able to quickly respond to changes in commodityprices.