The last dairy boom saw a rapid increase in the costs of production in dairying and it appears this is an issue again.While all of NZ will be very grateful that the record payout and increasing production of the dairy sector is playing a large part in insulating our little country from the worlds financial troubles, all farmers will realise that agricultural commodities are cyclical, and at some stage the worm will turn.
Reducing the exposure to debt is a no brainer for any high leveraged property and insulating enterprises to a future downturn will be a wise investment decision. Dairy farmers face a reduced payout next year, dairy commodities which are easing and international demand for products (other than Asia) is weak.
Grain prices are at yearly highs and volumes grown in NZ are dropping, some of it due ironically to dairy conversions of cropping farms. New Zealands competitive advantage is our ability to grow cheap high quality grass grown with reasonably reliable rainfall or irrigation, and that should not be forgotten when heavily supplemented options to increase production are looked at. Dairy farmers in the US that use a grain dominant feed diet, have struggled for profitability even under better prices.
Some talk is now emerging that banks are relaxing tough lending criteria amid heavy repayment of debt but new conversions will have to do their sums very diligently as they enter a market at a high and costs to convert and produce ever increasing.
Rising on-farm expenses will wipe some of the gloss off the record 2010-2011 dairy payout and new season forecast reports The Waikato Times. Specialist dairying accountant Pita Alexander said the "unrelenting" climb in feed, fertiliser, wages, power and fuel costs had taken expenses on many farms to $3.85/kg of milksolids. The 2010-2011 season payout was $7.90 and the $3.85 did not include interest, land rent or personal drawings, said the Canterbury-based principal of Alexanders Ltd. "There is no real answer – you can be as ruthless as you like, as efficient as you like, but these costs are from outside the farm gate."
Agriculture Ministry North Island regions manager Phil Journeaux said Statistics NZ figures supported the complaint. In the 16 years from 1994 to 2010, the Consumer Price Index rose 45 per cent but the Primary Producers Index climbed 99 per cent. "The leading cause is the non-tradeable sector of the domestic economy, central and local government charges and rates and our major duopolies such as Telecom and energy companies."
Meanwhile, Morrinsville specialist dairy farm accountant Nigel McWilliam said farmers had just received the last 20 per cent payment for milk supplied in 2010-2011, and a record $4.40/kg advance on the new season's forecast payout. Farmers were focusing on debt reduction and planning how to provide a buffer against tougher times, he said. Dairying is carrying $31 billion of debt, two-thirds of the total national agricultural debt. "They are taking full advantage of a potentially good production season this year and setting up their systems to bolster against drought.
"They won't get anything further until February," McWilliam said. "They're looking at consolidating their business, focusing on debt and investing in their systems to make the business robust. They are focusing on things that make money – feed systems in the shed, good stock, and just really good management systems, investing in labour and replacing equipment. But they are not buying new equipment for the sake of it."
Journeaux said the only way farmers could combat the "relentless treadmill" of working expenses was to improve productivity. This involved keeping an eye on research and development, technology transfer and taking "good ideas from science and other farmers". When it came to spending "it comes back to value for money – which is not the same as cheap", he said.
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Interesting. Grain prices are at 2011 lows
http://finviz.com/futures_charts.ashx?t=GRAINS&p=w1
But will a world slow down fundamentally translate into lower prices over the next 5 years or so given the determination shown to act against lower prices? Stagflation still seems as likely an outcome as any other.
Hi Andrew, here is longer term data.
World wheat supplies are to come lose to breaking back above 200m tonnes, after Canadian and European crops were assessed as having defied poor weather, and put on track for year-on-year gains.
The revisions, deemed "quite bearish", sent wheat futures lower.
US Department of Agriculture officials, in a benchmark monthly report, lifted by 5.7m tonnes to 194.6m tonnes their forecast for world wheat inventories at the close of 2011-12, a figure well above the average.
"At this level, global stocks would be up from 2010-11 and the second largest in the past decade," Kathleen Merrigan, the US acting secretary of agriculture, said.
http://www.agrimoney.com/news/wheat-prices-dip-after-canada-eu-crops-up…
Having a chart that begins at the 2008 high is not very representative though
http://www.indexmundi.com/commodities/?commodity=wheat&months=120
Yeh, i know its not always as straight forwrd as it looks. However you get what you pay for and the fact the Australia has more wheat than it can store says alot about where prices are going.
Bumper Aussie grains crop to strain silo capacity
http://www.agrimoney.com/news/bumper-aussie-grains-crop-to-strain-silo-…I suppose the direction of prices will depend on which group of people will go hungry in future?
http://www.indexmundi.com/commodities/?commodity=sorghum&months=120
Mexico India and Africa seem to be big consumers of Sorghum
Interesting read on farning in Canada -
"For all its prowess, Canada’s cheap food policy has produced an agribusiness sector that broadcasts the mixed signals of a system under severe stress. Nationwide cash receipts have climbed from $37 billion in 2006 to more than $44 billion last year, with a record take of $46 billion during a price spike in 2008. But over the same period, net farm income — the figure that matters most to the 300,000 Canadians who work the farms — has fluctuated wildly, climbing from $283.5 million in 2006 to above $6.8 billion in 2008 (a twenty-four-fold increase) before declining 62 percent, to just over $2.5 billion, in 2009 and 2010. Between these figures lies a gap pried steadily wider by the need for more land, bigger and smarter equipment, patented seed, and ever-precious supplies of fossil fuel inputs — from the gas in the combines to the petrochemical herbicides and nitrogen fertilizers that enable increasingly larger yields. Roger Epp, former dean of the University of Alberta’s Augustana campus, in the heart of eastern Alberta farm country, put it to me this way: “That growing middle piece of the graph between net farm income and gross farm income is the money that flows through farmers’ hands but doesn’t stick around long.”
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