How (and why) do farmers respond to volatility the way they do. Basil Doonan

Transcription

1 How (and why) do farmers respond to volatility the way they do. Basil Doonan

2

3 Introduction For this discussion we re talking about two groups The Best The Average Robustness/Resiliance comes from profit Profit is a function of skill/capability We have modest levels of skill/capability That's why farmers react the way they do to risk (volatility)

4 Profitable farming Is much more than managing the feed base Business management Human psychology/emotion I'm presenting a combination of: Hard data (DBOY) Personal observation generally new clients Taking Stock Using the last 3-4 years as a case study (Tas) High, medium and low prices

5 Profitable farming is based on 1. A desire to farm for profit rather than how they want to farm 2. An understanding of the resource base and it suitability to the production system 3. An understanding of the business including profit and risk but especially MC vs MR 4. An understanding of the production system how that drives profit or exposes them to risk 5. A high level of skill associated with the key profit drivers

6 Awareness

7 1. A desire to farm for profit It is obvious that: Most farmers do not actively look for profit They have an overwhelming desire to farm the way they want Generally compromises profit (hobby) So they actively hope for profit As price increases they gravitate towards this (rapidly) Compromises short-term profit Introduces sticky costs Are great at working backwards from this and justifying it with bush economics

8 Milk price and costs, $/kg MS Example: As price increases... Milk prices and cost of production ($/kg milksolids) $7 $6 $5 $4 $3 $2 $ Lags $

9 We spend it on... Unpaid labour Depreciation Paid labour Repairs Fertiliser Fuel Hay & silage Agistment Purchased feed Irrigation Pasture & forage Dairy power Dairy requisites Animal health Costs, $/kg milksolids, & $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20

10 Reaction to price Average* Top 10% Average* Top 10% Milk price Increase in farm value 15% 35% ROC 5% 12% 8% (9%) 16% (22%) MS 151, , ,000 (10%) 204,000 (24%) N/ha (47%) 232 (21%) Grain (44%) 1200 (9%) Pasture harvested 9,210 11,290 9,320 (1%) 12,350 (10%)

11 No reaction to price Average* Average* Milk price ROC 5% 10.5%

12 In actual fact 70% of the average would have been better off not reacting to the increase in price They farmed the way they wanted to and essentially most of the extra production was at a loss

13 Pasture Growth/Herd Requirments (kg DM/ha/day) 2. An understanding of the resource base Herd requirements Elliott Growth Rate 10 0 Brittons Swamp Growth Rate Month

14 Trends of the best Comparison of the Top 10% and the Average participants DBOY ( ) Top 10% Average Herd size Production/cow (kg MS) Production/ha (Kg MS) 1,449 1,073 Purchased feed (t/cow) Nitrogen (kg/ha) Pasture utilisation (t/ha) Stocking rate (DCE/ha) Irrigated area (%) Cows/labour unit Return on capital (%) 16 8

15 To try to be the best... We ve done what the best do more cows more grain more purchased fodder more nitrogen bigger farms more irrigation milking platforms And we've had the cash to pursue these

16 Unfortunately... These are associative not causal That is: These are traits of the better farmers They are not the cause of their success

17 Done a good job in this area Trends in Tasmanian dairy farming systems * Herd size Production/cow (kg MS) Production/ha (Kg MS) 630 1,073 Purchased feed (t/cow) Nitrogen (kg/ha) Pasture utilisation (t/ha) Stocking rate (Cows/ha) Irrigated area (%) Cows/labour unit Return on capital (%) *Standardised for price and input costs

18 The new plane Higher costs Higher prices FOREVER Many farmers made structural change to their business that means that these businesses are now unviable

19 3. An understanding of the business P2 Q2

20 Milk price and costs, $/kg MS Milk prices and cost of production ($/kg milksolids) $7 $6 $5 $4 $3 $ $1 $

21 Profitable decisions There is obviously a difference between profitable and unprofitable decisions Less obvious is the difference between a profitable decision and the most profitable decision A less profitable decision will often preclude a more profitable one The Rest make lots of these MC:MR analysis can be complex Oversimplifying it usually gives the wrong answer But often the one they want The Rest

22 4. An understanding of the production system Profit Feedbase 70% Business 40% People 30% Operational 15% Hoekema 2002

23 ROC Pasture utilisation vs profit 20% ROC v Pasture Consumption (all) 15% 10% R² = % 0% % -10% Pasture Consumption (kg DM/ha)

24 ROC Pasture utilisation vs SR 20% ROC v Stocking Rate (all) 15% 10% R² = % 0% % -10% Stocking Rate (dce's per ha)

25 What about increasing stocking rate (cow numbers)? No increase in capability Sticky costs (insurance) Feedpads Mixer wagons Feeding levels Wrong cow Run-offs Labour They still pay for these when the price drops Increased overheads (e)

26 Stocking rate At the start of the season its fixed So how do we conclude: At a higher price we ll Feed more grain Use more nitrogen Buy more fodder If The Rest say they ll do it they will (especially if you want to)

27 Just how desperate?! If pasture is the cheapest feed then its the cheapest feed to waste (Anon But obviously one of The Rest)

28 5. A high level of skill associated with the key profit drivers Its no use knowing what to do if you cant do it! (The Rest) Implementing good decisions is critical to business profit

29 Skill is the missing variable

30 Percentage of total possible score Audit results - Average 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EQUATES TO 2.5% RETURN ON CAPITAL Business management Herd management Nutrition Pasture management

31 Percentage of total possible score Audit results - Best 100% EQUATES TO A 9.5% RETURN ON CAPITAL 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Business management Herd management Nutrition Pasture management

32 We re not alone? Each year Australian golfers spend $300m to upgrade their equipment Over the last 10 years average handicap has increased They re now hitting the ball further in the wrong direction We always tend to believe that our skill are higher than they actually are!

33 So what for you As a general concept Things that help The Rest could penalise The Best Things designed to help could ultimately make things worse Do you really want to manage dairy farms? Can all support not ultimately be reflected in milk price?

34 Volatility The Best The Best react/prepare for volatility by Strong dependence on skill and capability Having systems that can respond (resilient) Limited sticky costs Last cost in first cost out Know which costs to pull and to what extent Know how hard to push the system Liquid assets (cattle/cash) Planning and scenario analysis Trade the cash position with the economic imperative (survival vs profit and growth)

35 Are helped by: Knowing the rules of the game (information) The earliest possible announcement of opening price (minimum opening price/maximum opening price) Long term predictions for milk price or derived commodities Variations (trends) in key input prices Early step ups (even if smaller)

36 Are helped by: Income estimations or cash-flow support Capital budgeting support Milk quality support Supplier advances Growth incentives Volume incentives Higher prices Step downs are a nightmare! for everyone

37 Volatility The Rest The Rest react to volatility by Continuing tolerance of an unprofitable system cant do anything different A victim based mentality Severe personal hardship A random approach to planning (silver bullets) A random approach to cost reduction not linked to production/profit You know what it is when you cant pay it spend and hope house of cards effect

38 Volatility The Rest Additional borrowing High IR sources Erosion of equity

39 Are helped by: The facts of life (stated) Skills auditing Industry based skill development approach See DA national projects Supported learning where appropriate Handing over scarce resources (land/dairy/cows) Leasing/SF/selling

40 Are helped by: Forced savings Capital repayments Fertiliser Savings FMD s Equity growth Limited growth No point franchising an unprofitable business Bulk buying Price averaging Income estimation/cashflow?

41 Are helped by: Higher prices Sort of (gain equity, catch up spending) But the price will be what the price will be

42 Summary The solution lies in finding this store There's two stores for the two groups The best will buy knowledge and information They can canoe The rest will buy insurance All the paddles in the world wont help if you cant canoe Learn to canoe classes?