Project

Cook, Dale

Search for the Sweet Spot in the New Zealand Dairy Industry


Executive Summary

The dairy industry is in a difficult period and faced with volatile global milk price, increased farm debt and an increasing level of compliance and regulatory costs. The industry is entering its second consecutive year of negative cash flows. The industry's biggest processor, Fonterra's current farm gate milk price of $3.90/kgMS, which is well below the break-even $5.25/kgMS needed according to researchers from DairyNZ. We are starting to see the combined impact of all of these factors reflected in a decline in farm sales and a fall in land values in parts of the country. The pressure has added urgency to the need for realignment in some farming systems and operating cost structures.

The qualitative study reported here explores the idea of a sweet spot in the dairy industry. This is the point where the operational cost of production (in this case farm working expenses per kilogram of milk solid produced) has the flexibility to mitigate downside risk and capture upside risk in a sustainable farming system. The study examines whether in fact the sweet spot exists, if so where is it and how can it be found? The sweet spot has a direct relationship with the concept of buffer capacity. This term, used to describe resilience in an ecological sense, is applied in a surrogate form to the New Zealand dairy as financial efficiency (Shadbolt, 2013).

Through interviewing Taranaki farmers, rural bankers, farm consultants and farm accountants, I was able to compare and contrast the different views surrounding the sweet spot in the region. I reviewed current literature on the industry's competitive advantage strategies, analysis of resilient farming systems and an analysis of the five dairy production systems. The data sets were then analyzed and results are discussed in this report.