Smoothing out the milking seasons in NZ

16/11/2015

New Zealand has to supply milk consistently throughout the year if it wants to be in the value-add game, writes Keith Woodford.

My last article in NZ Farmer focused on what we need to do in New Zealand to climb the value chain. I emphasised the importance of China – there really is no alternative – and the associated need for an integrated NZ Inc approach to online selling direct to consumers. 

The products we need to be selling through this dedicated and integrated NZ Inc portal (but also linked into the major Chinese online portals) include dairy, meat, wine, fruit, jams, biscuits, chocolate, and bottled water.  Indeed almost anything else we make for ourselves that has a shelf life of more than a few days, we can also be making for China. 

This integrated NZ Inc approach to the China market is something that I am passionate about, and last week I was at the China Business Summit in Auckland talking about these same issues.

However, in this article I want to get closer to the farm and look at what we will need to do there if we are to capture the potential benefits of value-add.

Specifically I am going to focus on dairy. First, it is our most important rural industry. Second, it is the industry where we will have to make the biggest changes down on the farm.

The New Zealand dairy industry has been built on seasonal production.  We have focused on spring calving and then following the seasonal pasture production curve.

Until recently, it has been predominantly about low-input systems and production of long-life commodities. Wholemilk powder has been the perfect product for that system.

There are only two major producers of wholemilk powder in the world. They are China as No 1 and New Zealand as No 2.  In terms of consuming countries, then China is far ahead of everyone else. And in terms of import countries, it is also China that is by far the No 1.  In terms of exports, New Zealand is totally dominant.

There is little doubt that over the coming years China will consume more dairy. But will it consume more wholemilk powder?  I think the jury is very much out on that one.  As long as we are so dependent on wholemilk powder, then we are relying on China taking a different consumption path than every other country.

If we decide that we need to further diversity to products other than wholemilk powder, then our seasonal system becomes an increasingly important constraint. 

These other products require higher investment in processing plant.   And whereas low plant utilisation might be acceptable for simple products like wholemilk powder, this becomes increasingly problematic with higher-cost processing.

Under seasonal dairying, the peak weekly flow of milk in spring is about 4 per cent of annual production. This means that overall plant utilisation only runs at about 50 per cent.  In contrast, our major competitors run their processing plants at around 90 per cent.  

Last week I heard Prime Minister John Key refer to his recent opening of the Yashili infant formula plant at Pokeno, south of Auckland. He turned to Fonterra's Theo Spiering and said he now knew where lots of Fonterra's and also some of Westland's milk powder was going. Apparently Yashili has a warehouse, described by the Prime Minister as 50 times the size of the Great Hall at the Langham Hotel where we were sitting, which is full of milk powder.

Now most people might assume that all of this milk powder was simply going to be mixed with other ingredients to make infant formula. But that is not quite the way it happens.  

Some quick inquires with industry folk confirmed to me that the first step is actually to put all the water straight back into the milk powder to do a wet mix.

So what does it actually cost to take the water out and put it back in again?

The answer – at least for the first part - is available from Fonterra. In this last year, the corporate arm of Fonterra charged its farmers $1.76 per kg milksolids to process the milk into powder.

This processing figure is seldom talked about, but it is the key difference between what Fonterra gets paid for milk powder, and the amount which flows through to farmers.

So why don't companies like Yashili just purchase the raw milk and get on with the process of making the infant formula without drying and then rehydrating the product?

The answer is that they need a steady supply for 12 months of the year. In almost every other country of the world this is possible, but with our seasonal production systems it is not.

There is also another issue with seasonal production, and that is the changing composition. 

I have been told of an international company that is investing in Australia – rather than New Zealand - because of access to a 12-month supply of milk with consistent composition.

By now you will be getting the gist of where I am heading.

The simple message is that companies can afford to pay considerably more for a steady and consistent supply of milk 12 months of the year. And New Zealand dairy has to go down that route if it is to be in the value-add game.

Fonterra already pays a modest premium for all milk outside the peak production months of September to December. In 2014-15, the premium was 52c per kg milksolids. This year it is 51c.

Some farmers also get additional premiums for 12-month supply to specialist factories, such as the mozzarella factory near Timaru.  One farmer tells me his overall payout will be 85c per kg milksolids more than the standard Fonterra payout because of seasonal premiums.

So the non-seasonal journey in New Zealand dairying has indeed begun, but there is a lot further to travel.

Already I can hear the groans from farmers. Under New Zealand's pasture-based conditions, winter milking can be a real pain.

Accordingly, in most parts of the country, off-paddock wintering systems need to be part of the 12-month-a-year milking story. And if we are going to get it right, both for the environment and animal welfare, it means free-stall cow-houses, where cows have their own mattress beds.

By now the groans will be rising to a crescendo. And many farmers will have turned off. This is madness, they will say.    Or in more polite terms, and having cooled down a little, then the message will be that "this is one path I am not going to travel; it is going to cost lots of money and it is going to increase costs". 

Well, that attitude is OK as long as farmers are happy to be producers of commodities in a world that is largely going value-add, and as long as their on-paddock wintering will satisfy increasingly stringent nitrogen leaching conditions that now hang like a sword across much of the dairy industry.

Personally, I am not too concerned about the capital cost, even with figures of up to $5000 per cow for the total housing plus effluent system.

Most of the 50 to 60 farmers who have already gone the free-stall way would say that in any case the costs I am using here are far too high.

But I have become a strong believer that paying more and getting the system right is actually the best way to go.  So those are the figures I am now using as a genuine all-up cost  - much higher than I would have used 12 months ago.

Farmers who go the free-stall way typically raise their per cow production by between 150kg of milksolids per cow.  This is typically through a combination of higher peak production, a more sustained peak, and longer lactations. 

Whereas pasture-based farmers struggle to get a lactation length of more than about 260 days, with cows being dry for the remaining 105 days, in a free-stall system the dry period can be reduced to about 45 days.  

My calculations are showing that under these systems, the overall capital investment per kg of milksolids is actually less than for traditional farming systems in New Zealand.

As for the operation costs, I agree that this will be the crucial issue. But once again I am confident there are solutions.

In the last week I was emailed by a rural professional who said that he has two farmer clients who are making the system work brilliantly – my words, not his – with a free-stall system. Their farm working costs this year will be a maximum of $3.50 per kg milksolids, and they are sailing along very nicely even with the low payouts.  

Those two particular farmers are still working within a seasonal system. However, my experience is that most famers with free-stall barns do end up eventually shifting to non-seasonal production. 

Clearly, we still have lots to learn about non-seasonal dairy production under New Zealand conditions.

To me, it is very evident that free-stall barns are part of the solution. But we still have work to do to optimise the feeding for these cows under New Zealand conditions. 

The way forward will involve a range of feed mixes that include a combination of pasture, other forage crops, and harvested fodder. Compared to our American competitors, we will make less use of grain.

As with all journeys, there is scope for false steps. Even with traditional pasture-based systems we have some farmers who do it brilliantly and some who stumble.

And it is in a year like this one, when prices are low, that the stumbles typically occur. It will be the same with non-seasonal farming. Not everyone is going to get it right.

Keith Woodford is an independent consultant and Honorary Professor of Agri-Food Systems at Lincoln University. His archived writings are available at http;//keithwoodford.wordpress.co.nz

 - NZFarmer.co.nz