Dairy farmers concerned about where grain price will go

30-08-2010 | Annette Scott

New Zealand dairy farmers are moving to secure grain supply as they keep a close watch on global grain prices and production.

The uncertainty of the market given the significant movement in grain prices over the past few weeks has prompted farmers relying on grain for their cows to bunker in while they can, Federated Farmers national dairy vice chairman Willy Leferink said.

"There are two options - either put a buck each way or secure grain now. Personally I have signed up and secured my grain for the next two seasons. I advise farmers to at least secure their grain for this season."

Leferink said while the recent grain price rises presented a conundrum for NZ dairy farmers, the industry across the Tasman was more significantly affected with just 10% of NZ dairy farmers, compared to around 70% of their Australian counterparts, relying on grain to feed their cows.

While it was expected there would be sufficient grain in NZ to meet demand meantime, Leferink said it would be useful if the NZ arable industry "could get a handle" on just where stock levels were at.

With Russia down, Brazil remains the unknown and could well present a global problem while in Holland feed grain is being converted to milling grain, Leferink said.

The recent grain price rises have prompted concern for Dairy Australia.

The latest Australian Crop Forecasters report prepared for Dairy Australia suggests that a month ago the feed to milk price ratio would have been positive.

With hindsight, forward pricing feed requirements for 2010 would have protected a profit margin but according to the report the more difficult decision now lies in the risk of leaving grain requirements for the balance of 2010-11unpriced.

The dilemma is whether dairy farmers should take the risk of further feed grain price rises, or sit it out and hope for a downward correction.

Verbal and handshake deals are expected to be tested in markets with the big price swings.

If dairy farmers had forward contracts for feed supplies it was critical to confirm these details in writing with supplier, the Dairy Australia report recommended.

"One default by a farmer or supplier can trigger financial difficulty which impacts many in the chain, so check your supply arrangements with your supplier. Specify the quality of any grain and feed being supplied. Cutting corners on quality is one way of avoiding major price increases, but it will almost certainly mean lower energy and less milk in the vat."

Australia expects there is adequate grain supply for the next six to nine months. Once the initial shock of the impact of the Black Sea export bans is digested, and the world gets the chance to count up the global crops come late September or early October, then prices could settle down and ease back.

If there was a spring weather scare in Australia the market could flare up again.

Without further damage to world crops, prices would most likely ease down over 2010. Politics will play an important part with Russia trying to contain food price inflation, along with other regional deals around oil and gas.

Leferink said it was not so much a case of over-reacting, or looking to read too much into the daily moves, but rather keeping a close monitor on the situation as prices were likely to remain volatile for at least the next month or two.

Just up the price

The red meat Primary Growth Partnership (PGP) should be good value says Federated Farmers chief executive Conor English. He talks to New Zealand Farmers Weekly editor Tim Fulton, plugging one of Federated Farmers goals for sheep farming in the process.

"It's good to have an initiative that's heading towards our target of T150", Conor English quips, tossing in free marketing for Federated Farmers' $150 lamb target.

Later he warms into the theme, adding "All that matters is that farmers get $150 because that's what they need to keep their heads above water".

So, as a means to an end, how about a dairy-style meat industry to lift average lamb returns above, say, $6kg?

English isn't sure that the two sectors can be easily compared - let alone meat following Fonterra's example.

For starters, he says, meat is more complex than milk, making it harder for meat processors get 100% value out of their raw material.

Crudely put, drystock marketers have to disaggregate their product to add value "rather than just draining water out of it".

Dairy farmers also have the security of long-term contracts to a single processor, in part because milk's short shelf life necessitates it.

Again exaggerating for effect, English says Fonterra suppliers have a 10-year contract which they price three times a year whereas the meat industry essentially re-prices product every Sunday night.

English acknowledges meat industry offerings such as Silver Fern Farms' 12-month Backbone contracts but says dairy has other in-built advantages.

Fonterra shareholders, for example, own a "global protein logistics company".

English argues that whereas the meat supply chain tends to be one dimensional in terms of market destination and currency exposure, Fonterra shifts protein anywhere from South America to Europe - and itself is the biggest dairy exporter from the US.

If there's a major structural deficiency in NZ's red meat business it's the way that product is taken to market, English reckons.

Whereas Brazilian companies have been buying beef cutting facilities to service distant markets, NZ's model for exporting and processing red meat is much the same as 100 years ago.

"We still have this mentality of investing in NZ in bigger sheds to make it more economical to chop a head off," he says.

English accepts the PGP will go some way to connecting processors and their farmer suppliers to market requirements and sees sense in the PGP partners now talking about "plate to pasture" instead of previous catchphrases like "farm to fork".

It's now clear, if it wasn't already, that selling red meat is foremost about satisfying customers.

But equally he doesn't want to see meat sold at any old knock-down price.

"The other thing that farmers could do right now is charge more for what they sell.

"If you look at the supply side, particularly in lamb, we've lost 30% of our produce (in stock numbers).

"It's been a seller's market rather than a buyer's market.

"And so our guys just simply need to put their price up."

He mentioned that his organisation regularly talks to farmers from France, England and the United States who ask why NZ farmers aren't selling their product for more.

"And that's a really bloody good question."

For now though, English is happy to give the PGP tentative praise.

"It's great that these guys have got this over the line.

"I mean, they got $50m off the government and that's great.

"And $150m in total is not insignificant.

"These guys have got off their arse, they've got a plan, they've got some cash, let's hope they get to T150."

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