Unfortunately the breakeven point may be very difficult or painful to unwind. Through a hard fought media and political campaign this group of National Foods suppliers have been able to extract a larger premium from the market place. What they need to remember is that everything (and I mean everything) has a replacement price. Latest media reports suggest that National Foods has done all that it will do to appease these suppliers (http://www.themercury.com.au/article/2009/11/21/111065_tasmania-news.html)
It would be naive to think that National Foods are totally blameless in this argument, however my advice would be for them not to overstate their negotiating position, or risk having their milk replaced with Tasmanian, Victorian, or dare I say it, New Zealand milk. As a farm consultant I have often advised clients in their negotiations with their milk processor and the most important skill in any negotiation is to know when you've maximized your position - that goes for the milk processor as well. What the producers need to keep in mind is that processors operate in a competitive environment as well and if they are forced to pay too much for their milk then eventually the relationship will end, probably in tears.
In a broader context, the key message for any farm business around the world is to focus on their Cost of Production (CoP). In strict farm business comparison terms CoP should not include debt servicing but should include a realistic operator allowance. For the purposes of being able to calculate the cash flow of individual farm businesses it definitely should include all these factors so that if everything goes according to a reasonable plan, you can:
- Pay all farm running costs (including depreciation and without eroding the farm asset base)
- Meet your commitments to the bank and/or landlords
- Draw a fair and reasonable wage
- Pay tax as required
Why focus on CoP? In terms of what the farmer has control over, CoP on their farm usually has a much larger influence on profitability than the premium they can extract from the market place for their milk. With a few notable and usually short lived examples, most farmers in the same region are paid a similar price for their milk. Any premiums are usually attached to flatter supply curve or some other differential connected to a higher cost of production.
For pasture based dairying, of all the variables that are thrown into the mix the one that consistently correlates with a lower CoP and greater profit is pasture consumption per hectare - regardless of the level of production per cow. Mind you, most of the more profitable dairy systems seem to sit somewhere between 5,000-8,000 litre/cow or 400-580 kg MS/cow. An excellent series of articles on the drivers of pasture based dairy farming have been written by David Beca of Red Sky Agricultural. They can found at: http://www.redskyagri.com/page/149-Articles
The key message is that, as with any agricultural commodity, despite our best endeavours we only have limited control over the milk price we receive due to the vagaries of supply and demand. What we do have much more control over is our CoP and those farms with a healthy obsession for maximizing pasture harvest with grazing cows will be best placed.
Oh and the other thing - don't pay too much for your land and/or carry too much debt - but we'll leave that for another day.