Milk Monitor Rough ride ahead

The clock is ticking

By Gerald Piddock

Each month the Milk Monitor delves into the dairy industry and gives us the low-down on the good, the bad, the ugly and everything in between.

The so-called spring flush is appearing more like a trickle across some North Island farms as the wet spring weather continues to affect pasture growth.

It’s reflected in production numbers, with Fonterra’s NI milk collection down 6.3% for September and 5.9% for the season to date.

Anecdotally, some farms are definitely down in production in both single- and double-digit numbers.

It’s also starting to flow through in mating with submission rates back on last year because the tough autumn and winter have meant farmers have simply not been able to put on the right amount of condition on their herd.

The GDT has fared no better, lumbering on in October with three consecutive falls before surprising everybody by lifting 2.4% on November 15. NZX in its analyst opinion cautioned that is potentially a technical bounce before prices keep easing.

Buyers saw the auction as an opportunity to secure product at a bargain price, potentially allowing them to step away again for a few auctions, it said.

Aided by a softer exchange rate, it did give enough optimism for both ASB and Westpac at $9.40/kg milk solids and $8.75/kg MS respectively.

The tough spring and subsequent production decline look more and more likely as a possible industry trend. At an industry level, Fonterra’s acceptance that supply is declining has obviously had a major influence in the proposed amendments to the DIRA Act.

When a shareholder told Fonterra chair Peter McBride that the declining milk supply was concerning him at the co-operative’s recent annual meeting in Rotorua, McBride replied that he sympathised, and that the co-operative was losing 1% of dairy land to land-use change per year.

Looking further out, it’s not going to get any easier. In the South Island, according to a new Land and Water report, convergence of water-use consent renewals and dairy shed renewals could be a catalyst for land-use change in mid-Canterbury around the early 2040s.

It found that about 40% of all dairy milking sheds in the district were built between 2007 and 2015, according to resource consents.

Using the IRD calculation of a 33.3year economic life for a dairy shed, those 230 sheds will reach the end of their economic life between 2040 and 2048. This means nearly half of all dairy sheds are likely to need replacing during that period.

Replacing an aging dairy shed requires a significant amount of capital and any farmer making that decision is going to look at climate suitability, regulations and the prevailing economics of dairying compared to other land uses of the day – there’s no guarantees that dairying will still stack up like it did when those sheds were built.

The researchers also found that between 2030 and 2040, 78% of all wateruse consents in the district will expire.

The area of land involved in this process will, however, be even greater, as the water consents of all three irrigation companies in the district also fall due in this period.

You don’t need to be an Einstein to work out there are no guarantees that dairying will continue to dominate land usage in that part of New Zealand given what we know now about the environmental impact irrigated dairying has had on the region.

This will all mean a further shrinking milk collection pool for Fonterra and the other dairy companies in that region.

Whatever climate change legislation is decided on will also be well in place by then. It is to be hoped it will have provided a way forward for the industry to remain viable and profitable, but this could also affect the future of these consents.

The report noted that over the past 20 years, irrigation has transformed Ashburton District in the central South Island away from sheep and grain growing. Irrigated farming now covers 65% or 220,000ha of the Ashburton District Plains. Dairy farming now accounts for 63% of net farm income for the district.

So what, some might say: That’s 20 years away and by that stage – to paraphrase Matt Damon’s stranded astronaut character from the movie The Martian – we may well have scienced the sh*t out of the dairy industry to find solutions to these issues.

But in any case, the clock is definitely ticking. n

By 2040, 78% of water consents in Canterbury will expire and that, along with many farms requiring new dairy sheds, could be a catalyst for land use change away from dairy in that region.