Soon after landing back in Australia last week, I had the opportunity to attend a local farmer seminar. The Department of Primary Industries hosted presentations and discussion on the past year, the outlook for the year ahead, and the results of their latest research on feed conversion. This was a great chance to gauge the mood of farmers and their support groups - to get something of an idea of how well the dairy industry had come out of the 'annus horribilis' of 2009 and, from a local perspective at least, what was in store for the coming year.
Michael Harvey from Dairy Australia led the batting with a snapshot of the findings in DA's excellent 'Situation and Outlook' report.
DA has a difficult job in communication to the industry and the media at large. On the one hand their job is to promote a positive image and outlook for the dairy industry in Australia. On the other they have a duty to their farmer members to warn of problems ahead and advise how to deal with the situation. In contrast our task is much easier - if the outlook is crap then we tell it like it is, or at least how we see it. Industry public relations is definitely not our job - we are more like that irritating accountant / financial adviser that keeps reminding you that this is more like a game of snakes and ladders. If it looks like you are about to step on a snake it's our job to tell you. If a ladder appears we'll try and guess if there is a snake waiting for you at the top. Using another analogy, we do like to think that the glass is half full, but keep coming back to the view that it is only half full.
Where was I? ... Oh yes, Michael Harvey.
Michael did a good job of stepping through the minefield of the dairy industry outlook. The news is generally positive:
- The international supply / demand balance back on track
- Commodity prices are at very good levels
- Industry reform is on the agenda in the EU and there is waning commitment to export subsidy
- Strong growth and demand continues in Asia,
- We have seen an improvement in Australian seasonal conditions and increases in supply
The clouds on the horizon include:
- The economic outlook for the major Western economies is weak and uncertain
- China demand may falter, tied to weakening export opportunity and an overheated internal economy
- EU SMP stocks are still overhanging the market
- US (and EU) supply could ramp up at any time
- Dairy prices have gone ahead of competitive protein / fat sources such as soy
- The currency outlook is uncertain
I am on record as saying that the Oceania dairy market is currently overcooked. I will stick by that view but don't disagree with DA's prognosis. The outlook for 10/11 is much better than the past 12 months and it looks like there will be a return to positive cashflow. A little bit more time is needed to determine where the milk price will sit in DA's range of $AU 4.50 - 5.50 / kg MS but anything north of $4.50 should be relatively good news for most Australian dairy farmers.
We then had a panel discussion with four of the leading farmers of Gippsland up front. Matt Harms facilitated the discussion and did a good job of drawing out the similarities and differences between four very different farm systems and commercial situations. Looking back to the dark days of the 09/10 opening milk price the strategies that were adopted were:
- Lower stocking rate - cull low production / high SCC cows
- Reduce purchased inputs (feed and fertiliser)
- Source cheaper inputs
- No capital investment
- Reduce expenses (maintenance, pasture renovation, labour, and others)
- No principal on loans
With the first two items a common theme it is no wonder we saw such a dramatic drop in milk production over the course of 2009.
The question was asked whether the management decisions were good ones with the benefit of 20:20 hindsight. The skies started to lighten towards the end of 2009 and some of the more drastic culling and cutting decisions may have resulted in lost opportunity in the second half of the season. As the season progressed we saw very good feed prices, an improving milk price, and an autumn break was rated from good to the best ever. The consensus was yes, profitability could have been improved with more confidence in the financial and seasonal outlook. Only one out of the four panellists was prepared to "bet the farm" with conservatism being the order of the day.
Looking ahead to the new year there was cautious optimism across the board. Immediate investment on growth was going to be limited by the need to catch up on maintenance expenses and the recommencement of principal repayments. The experience of the past 18 months has also introduced a new level of conservatism to the industry. Our perspective is that conservatism in commodity markets (ie. most farming enterprises) is not a bad thing.
The third presentation in the seminar was from Steve Little, Grains2Milk program leader for Dairy Australia. Steve spoke on the latest research into dairy herd feed conversion efficiency. It is all good stuff, and particularly because the research is looking at the full range of dairy farm systems in Australia - from predominately pasture based to full TMR systems.
The most heartwarming comment (for me) was something like: "Pasture utilisation is the foundation stone of profitability". One of these days I'll write up an analysis that shows the relative risk profiles of Australian dairy systems based on pasture versus brought in feed. In the meantime it is nice to know that our local researchers are not fixated on the idea that the future lies in more and more grain down the cows throat.
All in all it was good to come back to a much lighter mood. As I look out over our fat pregnant sheep, and paddocks with winter grass, the sentiment feels exactly like the current weather - "mostly clear with occasional showers".