A lunchtime punt on the farm

What a wonderful day to go boating!

Unconventional boat launching, granted.

Unconventional boat launching, granted.

 

“Nice? It’s the only thing,” said the Water Rat solemnly, as he leaned forward for his stroke. “Believe me, my young friend, there is nothing — absolutely nothing — half so much worth doing as simply messing about in boats.”

“Simply messing…about in boats — or with boats… In or out of ‘em it doesn’t matter. Nothing seems to matter, that’s the charm of it. Whether you get away, or whether you don’t; whether you arrive at your destination or whether you reach somewhere else, or whether you never get anywhere at all, you’re always busy, and you never do anything in particular; and when you’ve done it there’s always something else to do, and you can do it if you like, but you’d much better not.”

“Look here! If you’ve really nothing else on hand this morning, supposing we drop down the river together and have a long day of it?”
– Wind in the Willows by Kenneth Grahame

Although my invitation for Wayne to unblock the effluent pond pipe was not quite so romantic as Ratty’s, it was a little more pressing.

All the manure that collects on the dairy yard while the cows are waiting to be milked is hosed away into ponds. This way, it can be reapplied to the paddocks where valuable nutrients are recycled rather than leaking into waterways.

Realizing we would run out of storage over winter, we had an extra pond excavated back in autumn. The system is now getting rather full but, still, the pipe from pond 2 to the new pond refuses to flow.

Damnation

Damnation: this should be a waterfall

We suspected the pipe was too long, buoyant and flexible, so the idea was to simply row in and saw some off. After a false start and some safety modifications (getting some hay band to stabilise the boat with an anchormaid) to the Good Ship Shi%, Wayne did just that.

Wayne wrestles with the Loch Macdonald monster

Wayne wrestles with the Loch Macdonald monster

The rotten thing still popped up defiantly above the surface. Another metre lopped off and it sank. Triumphantly, we waited for the water to flow. Nothing.

The next weapon in our armoury was a long piece of poly. Wayne thrust the two-inch down the throat of the pipe with all the courage of his Viking ancestors, daring a blockage to reveal itself. Four or five metres in – about where the two sections of pipe must join in the centre of the pond wall – it did.

Ah well, not every boating story has a happy ending, as Toad would attest. The next exciting episode will have to feature some serious yellow horsepower. Life on farm is never boring!

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The blueprint for NSW dairy

A week or two ago on Twitter, CEO of NSW dairy body Dairy Connect Mike Logan made an intriguing reference to a “blueprint for NSW dairy”. There’s only a limited amount you can learn from the 140 characters of a tweet, so I invited Mike to elaborate on Milk Maid Marian and here’s what he had to say:

Mike Logan, Dairy Connect CEO

Mike Logan, Dairy Connect CEO

In the NSW dairy industry the issue is that the value chain is not adding value at the farm gate. Since deregulation the farmers have descended from being strategic partners in the value chain, to an input that must be minimised.

Perhaps this is similar around the rest of Australia – I am not qualified to say. However, it is easy to assume that the dairy model in NSW is flawed as we watch our cousins across the ditch (dutch) grow their businesses, convert sheepmeat farms to dairy and build new kitchens. (The ‘New Kitchen Meter’ is a reasonable measure of success in agriculture.)

It is also easy for the NSW dairy industry to look at the New Zealand dairy industry and suggest we should emulate their model of ‘one big co-operative’. Without doubt that is the best model in the world at the moment. I call it the United Soviet Socialist Republic of Dairy (USSRD) and Barnaby Joyce says that Fonterra is a Maori word meaning ‘single desk’.

As much as we would like to, we shouldn’t emulate their model.

Firstly, because we can’t. The legislation required would make the current budget look easy. Between Clive Palmer and David Leyonhjelm it would be a nightmare.

Secondly, it is because we need to think about the next model after New Zealand. What is better than the USSRD?

Our current model of the value chain in NSW dairy seems to look a bit like this:
CurrentNSWdairymodel
Sort of messy eh?

The real problem with that value chain is that the farmer is held a long way from the representative of the consumer – otherwise known as the retailer. There are lots of ticket clippers, gatekeepers and a few value adders in the chain. There is not sufficient transparency and doubtful equity. The last person to make any money is the farmer.

So who is making the money?

Well, certainly the retailer. Here in Australia we have two of the three most profitable supermarkets in the world (Woolworths then Walmart then Coles/Wesfarmers).

Also the banks. The four most profitable banks in the Western world are right here. I needn’t name them. There are more profitable banks in China and Russia.

The distribution and transport sector is quite profitable. Linfox is not going out backwards.

Oddly, the processing sector in dairy is not making that much money. They are making more than the farm sector, but not an inordinate amount more. They only have about 25% of the capital invested when compared to the farm sector but they are mostly in control of the milk, its destiny and its value. They are the gatekeepers. The profit of the processors precedes the profit of the farmers.

So, what would a better model look like in NSW?

We suggest a value chain that is circular. We could call it a ‘value cycle’;

ValueCycle
The most important part of the value cycle is that the farmers and the retailers are side by side. The needs and values of the farmers and the supermarkets align. They align because the farmers have a secure supply of a high quality product and the supermarkets need a secure supply of a high quality product. Both want transparency and equity.

The first time I saw the value cycle work in NSW dairy was with the Woolworths Farmers’ Own brand and the group of seven dairy farmers in the Manning. The farmers were told by their processor that they couldn’t get any more money from the supermarkets for their fresh milk. They were told how tough it is dealing with the supermarkets. To their credit, the farmers took the challenge and decided to find out how tough it is to deal with the supermarkets.

The processor was half right. It is tough to deal with the supermarkets, but there was more money available. Both the supermarket and the farmers got what they needed because their values aligned. The system is transparent and equitable.

If that is right here in Australia, is it right in the export market?

Yes it is. Along with Norco and the logistics company Peloris Global Sourcing, the NSW dairy industry facilitated by Dairy Connect has developed contacts in the retail sector in China for the sale of fresh milk. Again, the milk is worth more with a direct deal with the consumers. The model does work.

It is easy to scoff at the volumes for fresh milk to China, I will tell you that they are small but they are invaluable.

If we can deliver albeit small volumes of fresh milk into the fastest growing dairy consumer market in the world at a profit by developing direct relationships with the supermarket sector in China, then what is next?

Can we develop those relationships to deliver other NSW dairy products without having to enter the export commodity circus that is mostly controlled by the USSRD?

Of course we can. The NSW dairy industry is actively seeking investment and partnerships with the Chinese retail sector to access the infant formula market. Again, the processors are right, it is tough. The farmers in the Manning too are right; it will bring value back to the farm gate.

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Charged by a cow

It all happened in slow motion. I was walking across the paddock to offer our vet, Sarah, a light steel pigtail post for protection when the cow we were so desperately trying to save squared up to me, lowered her head and charged.

I managed to strafe her face once with the spring steel rod but it did nothing to deter her.  Collecting me under the chin with her neck, she effortlessly threw her pathetic matador into the air. Luckily, I was not trampled; as my head hit the ground I saw her white belly soar through the sky as she cantered off towards the distant corner of the paddock.

I stood up, sobbing, laughing and shaking. My jaw sat unnervingly askew and my head was already sore but I was still alive and walking.

After three x-rays and a CAT scan, I’m home again, neck in a brace and feeling chastened for the anxiety I caused my ashen-faced children, who witnessed the whole thing. So, what went wrong?

The cow was a terrified first-time calver (“heifer”) in big trouble. She’d been down for a couple of hours with a rotten calf inside and sprang up miraculously the moment Sarah arrived.

1. My instincts were right that she was cranky but I didn’t know her and should have been triply careful.

2. I got off the Bobcat and walked to the vet. Why oh why didn’t I drive to the vet?

3. The vet was on the ground instead of in the Bobcat. I’d already called for extra help on wheels and if we’d waited another five minutes, this would never have happened. A vet’s time is valuable but not more valuable than life itself.

In other words, I was in a rush and took unnecessary risks in the name of getting the job done even though I pride myself on being very safety-conscious. The latest WorkSafe statistics prove dairy farming is agriculture’s most dangerous job: please learn from my mistakes and take care out there.

 

 

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But we don’t get tornadoes in Gippsland

“Toto, I’ve a feeling we’re not in Kansas anymore.”
- Wizard of Oz

Hayshed gets a makeover

Hayshed gets a makeover

Our dairy farm now boasts a hay shed roof that spans 20 acres. Bits of it, anyway.

We knew yesterday’s winds were coming, so had shifted the cows, heifers and calves to shelter.

The calves big enough to be weaned in the next couple of weeks were bunkered down in the hay shed when Mother Nature began her renovation work. Thankfully, none of them or the Maremmas who live with them were injured.

Nor were any of the yearlings who could have escaped through crushed fences Alex and I discovered during “border patrol” this morning. We count ourselves very lucky.

Alex aboard the lazy milk maid's chainsaw

Alex aboard the lazy milk maid’s chainsaw

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The beauty of trouble

Every now and then you have a day like Friday, a day marred by a flat tyre, stripped wheel nut, machinery breakdowns and a string of bad luck.

I was scrabbling through my paperwork with Alex tucked in for his midday nap when one of our Holstein bulls ambled across the lawn past the cubby house.

As I watched in dismay, the one-tonne giant turned nonchalantly to scrub his massive head against the base of a tree. Until that moment, I’d decided to sit tight and hope he would settle in for a quiet graze until Little Man awoke. But head scrubbing is the first step in an avalanche of bullish destruction that, set in my treasured garden, is too awful to contemplate.

I rushed outside with flailing arms and a bark bigger than its bite. It was enough to distract Bos Perditor and buy me time to rustle up the Little Man.

The Little Man is always up for an adventure and woke with bright eyes when I explained that we were going bull hunting. “Bull hunting, Mama? Like the bear hunt, it’s a beautiful day?”

Bouncing into the Bobcat, we pursued Bos into the wilds of the windbreak, where he turned and faced me. In the ensuing standoff, I broke a flimsy stick over his broad head. Bos didn’t flinch. Simply stood, staring, and then in his own time, wandered out to the road back towards the gate he’d broken and his buddy. So far, so good, but then his mood changed and off he went down the road.

By now I was on foot again with another stick and managed to get in front of him as a 4WD rounded the curve and slowed. The bull sized me up, lowered his head and simply stood there.

I wasn’t scared,
For I have never been afraid.
Of anything. Not very.

This stick, too, broke across his poll without any effect as the 4WD glided by. Now I was getting desperate and ran back to Alex and the Bobcat – at 730kg, the machine weighs almost as much as the beast and makes a more formidable opponent than a flimsy middle-aged farmer.

But by then, the man in the 4WD had done something wonderful. He reversed, pushed the nose of his vehicle towards the bull and tooted the horn like he meant business. My heart leapt. Together, we could win this. Armed a little more meaningfully with a star picket, I marched up to Bos, who turned and swaggered through the gate to join his buddy.

I didn’t get to thank the 4WD driver wearing his Chubb uniform – apart from a smile and a wave – but by taking three minutes out of his day, he made mine. Sometimes, it feels like we’re living in a dog-eat-dog world but a scratch of trouble reveals beauty that lies just below the surface.

 

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From soggy paddock to paradise

Can you spot two black swans and a flock of wood ducks and moorhens?

Can you spot two black swans and a flock of wood ducks and moorhens?

Stretching a temporary fence across an adjacent paddock in the warm winter sun, I was captivated by the scene through the tussocks. Two black swans were gliding across the water, a mob of moorhens were stretching their long orange legs, while a dozen or so wood ducks gathered a little way off.

It wasn’t always this way. This is, or was, paddock 17.  One of the lowest parts of the farm, paddock 17 was often under water and when we investigated the soil, we found it was a potential acid sulphate soil (PASS) with high levels of salinity. The safest thing to do was leave it alone, so we fenced it off and, one November, planted 800 moisture-loving plants with the help of a Landcare grant and the hard work of the Victorian Mobile Landcare Group volunteers.

The next two seasons were the wettest on record and I thought we’d lost the lot. We moved the fence out further and the Wellington Shire offered some extra money to replant the margins. Well, it’s all taken off – even some of the first plantings I’d given up on – and we now can boast a magical on-farm ephemeral wetland habitat.

Put yourself in the paddock with me for a few seconds and listen to this:

 

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How processors decide the opening price for our milk

Piggy Bank

With the anticipation of shoppers pressed against the doors of a Boxing Day sale, farmers look forward to the “opening price” for our milk every season. This year, the hype was bigger than ever.

Last season’s prices were high enough that many farmers have recovered from the year before, commentators continue to gush about the future of dairy and processors are on the hustings looking to poach supply. On the other hand, global dairy commodity prices are tumbling and the Australian dollar remains stubbornly high. Uncertain times.

The first of the major processors to announce its (edit: this post applies to the south eastern Australian states only) opening price was Fonterra, the giant NZ co-operative, at $5.80 per kilogram of milk solids, only to be trumped hours later by Australian co-op Murray Goulburn at $6.00. The two forecast closing prices were in the range of $6.10 or $6.15 to $6.30, making this year’s buffer between the start of season price and the forecast close one of the narrowest ever, suggesting an increased risk of a historically rare and confidence-busting mid-season price “step down”.

Opening prices are a little contentious, with United Dairyfarmers of Victoria president Tyran Jones, labelling them “misleading“. I invited the two big processors to answer some questions about how the opening prices are set. Thank you to Matthew Watt of Fonterra and Robert Poole of Murray Goulburn for their explanations.

 

Q1. How do you arrive at an opening price?

A: Matthew Watt, Fonterra:

We look at multiple information sources. The most important one of these is the market intelligence we get from the Fonterra Global insights team. I expect that others in the market take a lead from our and Fonterra NZ pricing to leverage this information as well. Other information sources include GDT futures, Fonterra Treasury (FX), Rabo Bank.

  • We extrapolate these information sources into a number of different commodity and currency scenarios (this season we ran in excess of 15 pricing futures through our model)
  • Model looks at weighted returns based on forecast milk flows.
  • Sensitivities are completed at different commodity prices and currency
  • Following this, we establish the most likely estimate of closing price – this becomes the forecast close range.
  • We then compare the forecast close to our lower price scenarios & calculate an opening price that is paying what we can to farmers but also ensure there is a level of protection from any market/forecast downside.

A: Robert Poole, MG:
At a high level:

Milk Price = Total Revenue less Total Non-milk Costs less Profit. As stated below the 2014/14 milk pool grew to $1.7 billion up from approximately $1.2billion in 2012/13.

An extensive budgeting process occurs across the business. We estimate milk intake volumes and composition, determine product mix, budget sales revenue (sales and other), budget company-wide costs, determine profit requirements (to manage balance sheet and funding needs, and dividends) which provides for a milk price. Throughout this process we make certain assumptions such as pricing, volumes, product mix, foreign exchange and sales channels for revenues and savings initiatives, efficiencies, wages and working capital for company costs.

Improvements in the budget position as the year progresses are usually passed through as step-ups.

 

Q2. How have the margins between opening price and forecast close changed since 2008?

A: Matthew Watt, Fonterra:
The traditional rule of thumb was that opening price was 85% of forecast closing although published forecast closing prices are a relatively recent addition. This year our forecast opening is 94% of midpoint of forecast close range. To actually track this is difficult because published forecast closing prices are a relatively recent introduction.

A: Robert Poole, MG:
Yes, these are slightly different each year. In determining the amount of buffer required, allowance is made for those areas where the co-operative is exposed to volatility; upwards, downward  and other adverse conditions or potential risks.  Generally MG has an opening price between 90 and 95% of its initial forecast.

 

Q3. Given the uncertainty of the exchange rate and falling commodity prices, is there an increased risk of a step down this year?

A: Matthew Watt, Fonterra:
As the variance between opening and forecast close narrows, there are an increased number of potential scenarios that provide a number that is on or lower than opening price.

  • Our current forecasts suggest that commodities will improve which is factored into our forecast close price. However, these are subject to global economic conditions and global production – both can move quickly and can impact commodity prices either way
  • The exchange rate has been anticipated to fall for some time but it remains high and a number of forecasts suggest that this could increase. As a rule of thumb, every 1 cent move in the exchange rate (across a full year) will have a 5 c/kg MS impact on milk price
  • At this stage of the season, we have limited volumed that is priced and sold. This means that, any moves in the commodities or exchange rate have a large impact on the actual, final milk price. As we move through the season, we get more priced and sold, meaning that movements that happen later in the season have a lower impact on the farmgate milk price.

A: Robert Poole, MG:
The difference between the opening milk price and the budgeted milk price allows for adverse variances to budget and a step down in price is historically very unlikely.

 

 Q4. What percentage of your Australian suppliers receive a price that is equal to or above the published opening price?
A: Matthew Watt, Fonterra:
All of our published pricing is based on best quality milk. The greater the level of penalty/incentive built into the pricing construct and the relative achievability of the premium quality standard will impact the difference between average quality and premium quality.

On our new, simpler pricing construct, between 25 & 50% of our farms will be at or above average quoted price, (assuming premium quality). Given we also have a transition payment in place from old pricing system to new, the number that will actually receive more than the published number will be over 50%.

60% of our suppliers are within +/- 0.15 cents per kg MS of average price, based on premium quality. Naturally, the poorer the individual farms actual quality that is delivered, the further they get from average price due to penalties incurred.

A: Robert Poole, MG:
Approximately 50% of milk supply is above the average and 50% below – hence the weighted average.  The majority of suppliers are within 2 cents per litre of the average.

[NOTE from MMM: I did follow up with Robert to clarify his answer in terms of the percentage of farms but the information was not available for the blog.]

 

Q5. Aside from the opening price, what do you think are the top three reasons farmers are attracted to supply your business?

A: Matthew Watt, Fonterra:

  • As a broader comment on price, I would like to think that farmers look past opening price as a reason for choosing a processer, particularly on opening average quoted numbers. On the price aspect, whilst opening is an important indicative number, what is really important is how that pricing construct suits an individual farm and, what the actual as opposed to projected or opening price performance is.
  • However, the three key reasons that we think farmers value are
    1. Leveraging our Global Leadership for Local Benefit – this means giving the best market information to our farmers to help better decision making on farm and, as a key extension to this, introducing fixed base milk price to enable farmers to better manage price risk. The other aspect of this is the multiple product streams, brands, domestic and global markets that we are active in. This provides access to the best and emerging opportunities in the market as well as a balanced group of customers and products which serves to reduce risk.
    2. Supporting Profitable Farmers – Profitability in farming is fundamental to industry success and our success if we are going to have long term, secure milk supply. We clearly don’t control all of the profitability factors. However, there are some that we do and some we can influence. These include simplifying our pricing structure. A critical aspect of this was ensuring we were aligning the value that we could extract from the value chain into  a clear construct, enabling suppliers to farm profitably to their set of circumstances and available resources. We be believe it is now better understood, reduces risk to farm business profitability and enables better decisions around optimising margin to be made by our farmers. It also includes our support crew work, where we assist where we can with specific opportunities within business to increase bottom lines – this year we have identified well over $1M of profit that has been generated by specific farmers through this program.
    3. Partners in Asset creation – this means getting to a stage of sustainable profitability and then leveraging that for future growth. Again, our fixed base milk price program plays an important role in helping to provide the certainty and confidence required for a farmer to make an investment decision to growth. We are also leveraging our support crew team to identify opportunities to support the growth of our farmers, where it makes sense for them. The support can come in many ways – technical, helping prepare information for banks, direct finance assistance and the like.

A: Robert Poole, MG:

Our suppliers are attracted to MG for a number of reasons. If I had to limit these to the top three they would be:

  • The strong understanding that whilst opening price is very important that having a Co-op that has the objective of growing the pool of money available to farmers. For example in 2013/14 we have grown the pool paid to farmers from $1.2 billion to approximately $1.7 billion.
  • A desire to supply the last Australian farm owned dairy Co-op, controlling the milk supply process from end to end and passing benefits to farmers.
  • Stability – MG has a proven performance, reliability and track record of successfully running a large and complex dairy company for 64 years and we have a clear strategy to improve business performance
  • Service and support

 

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