Category Archives: Supply Management

The New Zealand Dairy System, One Canadians View #NuffieldAg

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Farming systems around the globe are steeped in historical context, bound by geographical characteristics, demographic demands, political influences and climates which dictate farm types, size and location. Be it supply managed, vertically integrated, contract based or direct market; all farms have exactly that, a market!  It is just a matter of determining how that market is filled.

If I hear one more New Zealand farmer tell me ‘they punch above their weight’, it will only further confirm the cultural challenge it has in positioning itself on the global stage.  It is true, New Zealand, with a population of about 4.6 million people, was essentially bankrupt 30 years ago when they did away with all agricultural support to all commodities, hardest hit being dairy, beef and sheep at the time.  However what happened over the next three decades is a focus on land use change determined by the best rate of return for rural business.  Today, approximately 95% of agricultural output is exported with a population feeding capacity of around 40 million people, quite remarkable for a country of its size!

Today, New Zealand boasts one of the highest output countries per capita of milk production, with average farm size of about 420 cows.  Dairy conversions have a new meaning seeing the country first hand. Pervious sheep, beef and timber land changed to centralized grazing zones for dairy cattle.  New Zealand is in the free market, but having the world renown dairy cooperative Fonterra, who distributes about 85% of the milk in New Zealand, and essentially sets the national price, farmers have organized well to be a part of the market.  Fonterra shares equate to around $2400 per cow based on $6/milk solid at 400MS/year.


Having identified global opportunities nearly two decades ago, the mass conversion of land has now created mistrust with urban counterparts who view dairy as negative.  As such, I would have never thought of New Zealand’s broader populations not supporting farming, but like every other developed nation, the ‘social license to farm’ is by no means present.  As such, government policy will essentially limit the number of livestock units to current values and we can expect output to stabilize.  It is shocking at times, to witness certain terrain having livestock grazing and more so thinking back to the natural treed landscapes of a few generations ago.  However when economic rule drives change, other factors such as social or environmental concerns become secondary as markets typically put little value on externalities.

Unfortunately New Zealand dairy farmers faced a significant financial crisis with the down turn of the global dairy markets in 2015 and 2016, with long term outlook improving, farmers have not recouped lost revenues as of yet.  In the face of perceived financial ruin, farmers maintained positive working relationships with their banks, as such loans were converted to interest only, Fonterra provided $0.50 per milk solid of loans to be paid back upon milk exceeding $6.00 and additional working capital beyond these being injected into farm units, many of which were below their cost of production.  As one farmer pointed out, the high milk prices of a few years ago at $8.00 created a false economy in the sector by which cattle were fed high amounts of purchased feed and failing to fully leverage actual returns by hectare of land whereby grass is and in most case should be the only feed source.  Ironically, farmers reflect that the concern over access to bank support was far worse with the global financial crisis in 2008 compared to their working relationships with the downturn in the milk price last year.

However, one significant number is rarely communicated overseas in regards to the other major factor which has propped up the New Zealand dairy sector: land values!  Despite poor milk prices, historic land values had risen so dramatically over the past decade, farmers and lenders remained secured, perhaps not cash flow positive, but equity in the business remained.  Land values range significantly, like they do here in Ontario, but land with good fertility, flatness, good rainfall with a decent milking platform are selling for $30,000 up to $60,000 per hectare.  Based on a stocking density of about 3 cows/ha, that average 420 cow farm will need 140 ha plus room for young stock, thus costing upwards of between $7 and $8 million dollars (with the NZ dollar and Canadian loonie at par), that is a lot of money!  As such when doing the reverse math of cash flow, nearly 40% of equity is required with returns not more than 3%.  That seems an awful lot like our ridiculed system of supply management with quotas!  It is expected that as milk price returns over the coming year, additional farms under financial distress will come onto the market, but at a rate to not negatively affect overall land values.

Given New Zealand is essentially a captive market, its limited by space, its an island, compounded by looming environmental regulations, price is effectively set by one governing body, in this case a farmer owned, market oriented cooperative looking to be the single largest export driver in the country.

Having spent several weeks traveled and interacting with New Zealand Nuffield Scholars, I was quick to respect and credit their export natured disposition, at the same time as credit their business ability to competing in a global market place.  Every New Zealander I met, stresses that they produce without subsidy! However, I am not sure such credit is warranted based on the long term existing farmers inherent asset values in land.  But, the credit I do give to Kiwi dairy farmers is their ‘go getter mentality’ of the younger generation.  Like other land sensitive countries, the next generation of farmers are milking cows, or at least managing the dairies, and very often leasing or share milking on second and third sites to generate cash flow with long term goals of acquiring ‘the home farm’.  But with farm sizes reaching into the thousands, they truly look at return per hectare and the cattle become ‘sticks in the field’, in other words maximizing the cows as harvesters and converters of grass.

One area of credit worthy of noting is the investment in processing! With billions of dollars being invested in milk processing facilities, the entire value chain is realizing the need for efficient facilities to develop globally competitive products.  However, much of this investment, for the solely owned Kiwi cooperative, is in other countries as part of enhancing their global foot print, given that domestic production will remain flat.  Overall, with dividend payments of about $0.10 per milk sold in the high milk priced times a few years ago to $0.40 recently, the global corporation, remains profitable.

My take away message from New Zealand:

  • Kiwi’s do a great job at producing price competitive milk, exclusively based on its climactic advantage of year round grazing and market organization through a single desk market, Fonterra.
  • Return on investment is modest to low, given the high cost of land.
  • Grocery store prices at $2/litre, domestic consumers are not realizing any value in a large sector.  As one farmer put it, if the Chinese will pay that price, why shouldn’t our local consumers?
  • A wide range of management abilities and fully knowing cost of production remains a challenge, like other farming nations, remains a concern among advisors
  • In the face of economic driven decisions, with governments paying zero dollars for environmental preservation, the natural landscape will reflect the economy, not social value.  For example, too much livestock with its effluent affects the environment, and now the urbanites are insisting on regulation, but in a free market, regulation tends to be relaxed.
  • New Zealand must find a home for 95% of its milk, the higher value market, the better.
  • The push for global markets is coming from New Zealand farmers, those who own shares in Fonterra, who have plants in Australia, Asia and South America; so it may not be about NZ butter in Canada, but rather Fonterra owned milk from Chile reaching the US; which in the long term benefits NZ dairy farmers
  • Exported minded farmers is the only way to survive, as such the second generation of ‘free market’ farmers are coming into the business, therefore this cultural change that is happening around the globe is sure to further influence free market trade.
  • A glimmer of hope did arise, a couple of farmer said, ‘perhaps enough is enough’, meaning free market is fine, but particularly in developing countries, perhaps they have a right to develop local economies too.
  • Every industry person I met, reinforced their message of producing without subsidy, almost to the point it’s implied every other farmer in the world receives wheel barrows full of cash annually and it’s simply ‘not fair’.
  • Lastly, in a meeting with Mike Petersen, Special Agricultural Trade Envoy, who travels the globe promoting free trade of New Zealand dairy, sheep, beef and horticultural crops; the government is very aware of Canada’s new class of milk and the likes of New Zealand and Australia will follow to investigate trade breaches under WTO; its on their radar!

To conclude, the farmers and industry professionals I visited were open, honest and as inquisitive about our system and I was about theirs.  We each have misconceptions about each others market and overall we mutually struggle with consumer relationships, succession planning, labour relations, financial management to name a few; our main difference was simply around feeding the world versus feeding Canada.

 

 

Who owns your market? #NuffieldAg #AustralianHumour

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It has been a long day, I’ve spent several hours driving to Toronto and back, productive meetings, turkey barns checked and time well spent with the family, but after too many social media feeds about Mr. Trump or Mr. Bernier, I needed some humour… and asked myself a recurring question, Who owns my market?

Check out Meat and Livestock Australia’s version of owing their market, lamb!  This award winning commercial is clever and touches on food as a uniting factor across cultures, with a twist of Aussie humour… take a look as they seek to ‘own Australia Day’.

In following with my quest of meeting consumer driven needs in the market place, a question around the use of dollars that are invested in marketing and communication, particularly in our supply managed boards is an important factor, what value do we have in promoting our products and how should the dollars be spent? Particularly with generic marketing where it is about informing, educating and ensuring product awareness is prevalent.

As a turkey farmer, I am envious to my dairy peers in the dollars allocated to budgets at a national level, but at the same time, what is the message, the purpose and does it make a difference?  With a niche (and preferably not so niche) protein like Turkey, perhaps we don’t have a vision, or we have lost sight of the goal.  Are we simply a festive protein with duality year round? Or have we even given up this festive space to other meats?  Do we even have an identity?

In meeting with the marketing representative at Woolworth Grocery Retailer in Sydney last month, he recommended I look at the humorous pork advertisements that helped stabilize consumption in the country.  I know most certainly that marketing is much more about product, price, positioning etc., but the funny side of cultural advertisements, at least makes you think about ‘putting pork on your fork’.  I realize its the lighter of side of marketing, and to be fair, I am not sure all Canadians would see the same humour, but seeing how our food is marketed elsewhere is at least worth a watch.

So again, Who owns your market?  I sure hope the answer is that we do, the socially organized, market responsive industry that ultimately meets consumer needs with availability, fair pricing and a knowledge that local farmers are a part of responsibly and competitively growing this food for you!

 

Sights, sounds & observations of a Nuffield Scholar on tour in Australia #NuffieldAg #NotEnoughTime

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I was fortunate to spend a short week and a half in Australia on the final leg of my Nuffield Canada Scholarship.  Filled with gracious hosts, familiar faces and new industry contacts, my time did not disappoint.  For those that would rather watch versus read my adventures, than this short video is for you!

 

Where Turkey Is On Everyone’s Plate & Mind @MinnesotaTurkey #NuffieldAg #EatMoreTurkey

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NTF – getting turkey in front of The President
New Product Development at McDonalds

Fargo? Yes that is correct, Fargo, North Dakota was my destination for a two day conference where the weather was a balmy -20 degrees with wind chill more frigid than I would prefer, however the warmth of the turkey sector from the mid-west regions of North Dakota and Minnesota more than offset the outdoor climate as they celebrated the 70th anniversary of the poultry meeting.

The conference theme ‘Where Every Connection Matters’ was a fitting focus as my goal of learning, networking and connecting with farmers, industry partners and understanding the dynamics of US turkey markets; stemming from the fact that American’s consume twice the amount of turkey that Canadians eat.

Through the power of Twitter, I connected with Lara Durben (@MNGobbleGal), Communications Director with the Minnesota Turkey Growers Association suggested I attend this regional event with the purpose of connecting with growers, at the same time as having the opportunity to share my experience as Canadian turkey farmer for their association members as part of their leadership training and retreat. It was great to have an association with independent farmers, contract growers, integrated corporations and processors, in addition to industry partners such as lenders, all around one table talking about the future of the Minnesota turkey industry. Given that Minnesota is the largest turkey producing state in the US, boasting 450 farmer producing over 46 million turkeys per year; far greater than that entire Canadian production.

Acting as an industry ambassador can be a daunting task, but my presentation was very well received and created a lot of conversation around the relative size of the Canadian markets with head scratching questions about the low, but stable returns with quota. The farmers marveled at the concept of smaller, independent operations, yet with their capitalistic focus on growth, challenged me on how long our supply managed system could last. As I clearly pointed out, it is not about one system being better than another, but rather how the Canadian sector evolved 50 years ago.

There were shared challenges and opportunities in the room; for one, this industry has lived, learned and for the most part, recovered from Avian Influenza outbreak of 2015. When asked about other concerns; a remarkable answer was ‘less government involvement in our farms’ which I principally support, however our Canadian system is 100% dependent on continued support and lobbying. We both shared concerns over consumer preferences and lack of connectivity to farms, supported by the rapid acceleration of raising turkeys without antibiotics, which has far greater uptake compared to Canada. I did challenge the group on the raised without antibiotics as a true dichotomy; how can the same consumer want cheap food, be looking for convenient, often processed food such as ‘turkey ham’ (which I still don’t totally understand) at the same time as wanting ‘raised without antibiotics’? To me, it does not make sense, however I do believe based on my travels, that the US consumer is perhaps the most disconnected buyers of their food with the most focus on ‘convenience food’. However, in my assessment, vertical integration accelerates the ability to react, influence and meet changing consumer needs and continually bring product to market at a more rapid pace than home, that and the fact the US population is 10 times that of Canada.

The formal portion of the industry conference proceeded to be very engaging, having presented to 15 Minnesota partners, it amplified the “Where Every Connection Matters’ theme by bolstering my network within the room. Admittedly, I tend to shy away for strange settings where I literally know nobody, but a speaker on day two, Mark Deterding spoke on ‘servant leadership’ which I related back to my presentation of giving others value through sharing and supporting their sector, before asking something in return. As such, my conversations with local growers and partners has created perhaps more questions than answers during my conference visit.

However to summarize some of my findings, I reflect on the following:

The idea behind independent growers and contract farmers, having assumed that nearly all US growers worked for a large processor is in fact false, in the Minnesota market, this represents about 50% of the farms. With half the farmers owning their turkeys through to processing and the balance, which represent far more volume of birds being contract farms with the likes of Jennie-O.

I met a farmer, John, who I connected with on a common issue, that we both can suffer from ‘small farm syndrome’, despite John’s farm being about 10 times my size, it can be a challenge interacting with the large integrators, yet we both shared the understanding the consumers want and need to relate to average growers whom are able to share and instill the values of family farms to consumers and government officials alike. A farmer named Max, who is likely a few years younger than I, shared the challenges of succession planning and working with multiple generations on farm. Rob, he shared his experience of losing his flock to hens to Avian Influenza and the government measures imposed to deal with the crisis, all fascinating conversations with ‘everyday farmers’.

Still unsure if it is my naivety or lack of experience in the industry, I was surprised with not being the only Canadian in the room as a significant amount of live Canadian turkey crosses the boarder on contract with North Dakota processing plants. I question, is this an opportunity for me? Well, not entirely sure, but spending time with US turkey partners creates the atmosphere that anything is possible when focused on short term cash flow and return on capital. It is vital to understand that the US sector has come off one if it’s best years for growers, unfortunately on the back of those that suffered loss in the bird flu outbreak last year.

Again, it was the overall scale which continues to conceptually challenge me on the size of operations, in addition with Toms being raised over 20kg and hens that are routinely used for further processing compared to our Canadian expectations of being used exclusively for whole bird markets. I valued the messages of systematic efficiency from farm to plant, looking to squeeze pennies on the margin, my only hesitation on this idea is that the farmers themselves are continually squeezed.

Is there expansion in the US market? Generally I did not get the sense of new growth, however many farmers were looking at updating their sheds with new equipment, shuttering old facilities, adding new barns with concrete floors and walls to allow for the antibiotic free movement where additional space is necessary.

I appreciated the presentation and warm welcome that Carl Wittenberg provided to myself and the entire audience. Carl is the President of Protein Alliance, a turkey and protein marketing firm based in Minnesota, he spoke at length about the work which his current role of Vice President of the National Turkey Federation does in lobbying the government for support for their industry, but more so as the alliance in which nearly all turkey farm associations and processors pool resources with a national objective to promote and develop the growth of turkey consumption in the US. Now known as the Turkey Demand Project, it was earlier coined by Gary Cooper of Ohio as the 20/20 plan; increasing per capita consumption from 17lbs to 20lbs by the year 2020. It seems so simple to promote a common goal, however given the Canadian system which should seem easier to accomplish, I give the US credit for this organizing movement. I expect Turkey Farmers of Canada is well aware of such initiative, however we spend a great deal of time keeping out of province birds from moving between provincial boarders, that I think we lose sight of the long term need for collaboration and cooperation; hats of the NTF and I look forward to tracking this project as it evolves.

So as I wrap up my thoughts on my venture to Fargo and meeting with North Dakota and Minnesota industry professionals, I leave with the sense farmers are feeling very good about their 2016 year. Market growth continues to be top of mind, yet farmers are dealing with the changing landscapes of raising birds without antibiotics and fighting the consumer perception challenge, like we all face. The sheer size and total focus of processors to drive innovation is done based on market size, but also the corporate approach of Hormel Food that owns Jennie-O and their intimate knowledge of the protein sector. As well, ground turkey is where it at (or at least that’s what I’ve been told), if you can use beef, why are we using turkey?

Finally, the industry has faced profitable and unprofitable years, consolidation has occurred and farmers have adapted to working with ongoing relationships, as such we can accuse the big bad integrators of eroding on farm profits, but in this part of the country, many of these farmers operate in diversified family farming businesses where many have grown turkeys for generations and are looking to do so for years to come, why? Because they are good at what they do, have made some profits, and a full service industry of several processors, feed, equipment and support services exist here.

Finally, the quote of the day goes to Dr. Megan from Jennie-O as she compared my small farm of about 5000 birds compared to the farms with 10’s and 100’s of thousands: “Think about what you can do for biosecurity and management on a farm your size?”

Maybe that’s it… I may be small, but I have every opportunity to be a producer of the highest quality birds! Now on to connecting with the market….this is to be continued!!

Turke Bacon… with the real stuff!
Checking out turkey products in the store