Breakeven Milk Price Surprise (New Zealand)

With milk prices down, and likely to stay that way for the immediate future, many dairy farmers are closely examining their business structure, and considering options for cutting costs. It’s worth doing the sums, as the results can be surprising as Te Mawhai dairy farmers, David and Sue Forsythe, discovered.

Over the past three years, David and Sue have steadily moved into a high input, high productivity system, with a 520 cow split calving herd, and raising 110 replacement stock each year. Over the past few years, their stocking rate has reached 5.5 cows/ha and production 3120 milksolids/ha.

“My initial feeling was that we’d fare better with the current prices by lowering our inputs,” said David, who has always taken a keen interest in the financial aspects of his farm. More recently he has focussed on the dairy as a business, considering both production and finances together. So before cutting back on inputs, David carefully analysed the business implications.

“I was a little bit surprised to discover that it is still more profitable for us to run a high input system, even while prices are low,” said David.

This is partly because the Forsythes have improved the efficiency of their system in recent years, especially in the area of minimising feed wastage. However, David is carefully examining costs, and looking for options for savings. “We all know that feed is a major cost for high input systems, but our financial analyses show that the bottom line is very sensitive to changes in feed prices. So I re-do the sums if there’s a significant move in grain or maize silage prices,” he said.

One change this season will be a move towards more home grown supplements, and less purchased maize silage. The stocking rate on the milking area will be slightly increased, freeing up land to be cropped with maize. The maize crop also has a role in a pasture improvement program.

Increasing stocking rate enables better pasture utilisation. However the Forsythes have a very high genetic merit herd, and are finding they can milk fewer cows without dropping total production.

Although he isn’t happy about current milk prices, David isn’t panicking. That’s because he’s had a close eye on the business for several years, and his plans are based on conservative returns.

David said there are two reasons why he has been able to examine his business regularly in the past few years. Firstly he joined a financial discussion group, and that gave him access to Red Sky, software designed specifically for farm business analysis.

“We’d always paid close attention to the farm finances but Red Sky is unique in that it allows us to consider the physical and financial aspects together, and that’s what our business is all about,” he said.

The discussion group worked with consultant, David Beca, to assess the performance of their farms individually and then to compare why some systems were more profitable than others.

“It really was a great forum for challenging our own thinking. For example, David Beca was insistent that our budgets be based on conservative milk prices – about $4 at a time when we were being paid $5-5.30. We challenged this approach but he maintained that we needed to make our plans on realistic prices. Now we are all grateful because our systems are sustainable, even with today’s lower returns,” said David.

These days the Forsythes do their business analysis independently, and as often as needed.
“The discussion group also highlighted that every farm has very different cost structures, so it is dangerous to assume that what is profitable for one farm will be profitable on ours. It always pays to do the sums.”

And this year’s experience has certainly confirmed that. “If we’d gone with my initial feeling that we needed to reduce inputs this season, we’d be worse off. And now that we have Red Sky, doing the sums is pretty straightforward. I’ll probably use it a couple of times each year,” said David.

Dave & Sue Forsythe were initially surprised that their highly stocked, high input, high productivity system
remained the best option for them at $3.50/kgMS.
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