John Mulvany On farm Consulting
Opening season price is always an interesting period for dairy farmers. It's supposedly a time to compare the payment plans of various processors. But how do you compare one payment plan with opening and closing prices against another, which then increases 10 -15 per cent after opening? No wonder there is confusion.
Most dairy farmers will appreciate that the only relevance of a quoted opening price is how it compares to last year. This year it looks as though milk price will be 20 - 25 per cent above last year; that's about $1.00 -$1.25 per kilogram milk solids above last year.
But there needs to be another stage of analysis done. Astute dairy farmers will seek information on their expected individual milk price which is determined by the volume of milk and the time of year it's produced. All processors can supply income estimations of the value of your milk.
It is worthwhile knowing the specific price considering that there can be a 25 per cent variation in the $/kilogram of milk solids across farms supplying the same processor. The range in individual milk prices has increased in recent years. This drives more questions about what on farm changes can be made to get closer to the higher range paid. In the same way that dairy farmers responded to market signals relating to cell counts years ago, they can now be 'tempted' by a pricing message, in some cases to produce milk March – July, which has been confusingly termed 'out of season' or 'flat milk' production and implies higher costs.
For those of you not aware of the history of milk pricing in Victoria, the table below summarises where the industry has been. There are similarities between now and the 1970's.
The challenge for dairy farmers is to choose a processor that pays adequately and compliments the profile, philosophy and supply pattern of their farm business. In addition, the choice of payment system must maximise profit, while not exposing the business to excessive risk - there's already enough of that in the dairy industry.
It may help with decision making to define two terms used in milk pricing.
Seasonal milk production
This does not necessarily mean a spring calving herd. It means producing milk to match the pasture/crop curve on your farm, which many farms can do out of spring. Cows directly harvesting feed is a well recognised key to profit. In Gippsland for example, at Yanakie, this can be achieved May to November, with high winter pasture growth rates; similarly with a north-facing red soil farm at Warragul. At Neerim South, it might be August to April, and in the Macalister Irrigation District it might be July to June, given plenty of water.
In other words all farms have a blend of natural attributes, enhanced by good farm management, which generates a low cost feed pattern for their farm. This can then be matched with the herd's requirements.
The result across Victoria is hundreds of low risk, seasonal calving farms with individual production patterns. In fact, some farms that have split calving, which is perceived to be 'higher cost', have lower feed costs due to the ability to manipulate feed demand periods.
Given this, it is no surprise that in a recent study commissioned by Dairy Australia and conducted by industry analysts, Jon Hauser and Neil Lane, using 416 sets of farm operational and financial data, the findings included "farm operating cost and return on investment is poorly correlated with off peak milk production and plant utilisation".
Therefore there are farms that can produce milk at low cost in the now clearly defined incentive months of some 'percentage formula based' payment systems. Many have 'tweaked' a few minor details to ensure a higher percentage and higher milk payment. Others have made major changes to chase incentives but have increased risk and complexity while possibly decreasing profit.
Flat milk supply
This does not have to be 'flat' to achieve a flat payment incentive. A single calving herd with a peak-to-trough ratio of seven-to-one can fulfil the 'flat payment' requirement. They can simply calve in January - March.
Table 1: Historical milk pricing systems
|1970s||Contract fixed volume and non-contract holders.|
1980s and 90s
|Victorian Dairy Industry Authority (VDIA) pooling; no contracts; each month independent; VDIA and processor payment.|
|2000 – 2007||Deregulation; no VDIA; independent months; limited between farm variation ($/kilogram milk solids).|
|2007 onwards||Seasonal ratio payment; domestic, flat; 'months linked'.|
The Dairy Australia report notes "increasing off-peak milk production does not guarantee a flat milk supply curve. Farmers can achieve high off peak milk percentage by shifting their calving pattern. This can deliver marginal benefit to processors as it can simply shift the low point of production to another point in the season..."
Consider, at a recent field day in the western district, the example of an former Gippsland farmer with a 550 cow January calving herd on a coastal non-pugging soil type farm south of Timboon. January is regarded as high risk and fresh cows are 90 - 100 days away from reliable green pasture. This is overcome by crops of brassica and millet and canola as a protein source, and high early lactation levels of grain. However the farm grows at 25 -30 kilograms dry matter/ hectare/day from April all through winter. The Total Cost of Production (not just 'farm working expenses') on the farm for 2012-13 was a very acceptable $4.48/kilogram milk solids, certainly not a high risk profile. On closer analysis, the 90-100 days of 'risk' appear to cost the system $0.47 per kilogram milk solids.
When the owners of the farm were asked "if they received the same milk price all year round, when they would calve?" They thought carefully and replied "probably just go a bit later into March - it's perfect for this farm". This is a great example of decision based mainly on matching the herd feed demands to the cheap feed profile on the farm.
The bottom line is be very careful about changing from what naturally suits your farm. You need to clearly see a 20-30 per cent return on the additional costs involved to make it worthwhile to chase incentives given increased risks and reduced resilience.
The report by Jon Hauser and Neil Lane is called Victorian Dairy Industry Milk Supply Trends Analysis of the Drivers of farm profit and is available from Dairy Australia in hard copy and electronically.
This article was commissioned by GippsDairy. For more information please contact GippsDairy, on (03) 5624 3900.