b4breeding

No, I am not promoting a milk-based formula for horses, although I do know that milk proteins are a key part of some popular supplement feeds.

This blog is looking at our industry as a whole and trying to find where breeders sit in terms of the industry’s returns.

To get some comparison, I have looked to the giant in NZ that is the benchmark of how to make things rural turn into things that deliver global success, and also how it handles bad times and its relationship with its suppliers, the dairy farmers.

Fonterra, one of the world’s biggest dairy product companies.

Now, I don’t agree with everything that Fonterra does. This is not about acting like them – but there might be some things that our own small and vulnerable (but resiliant) industry can learn from. I am very aware that analogies fall flat on their faces when taken to extremes, so this is more a look at “how does their industry manage this issue?” rather than a detailed comparison.

Recently I heard that Fonterra had made a record breaking profit. At the same time its Milk Price for farmers (i.e. the price it will pay for the milk that dairy farmers produce) has dropped to a level which is simply not profitable for most farmers, and is forecast to stay there for a couple of years more. Ironically, the two things are interlinked – stay with me, it does relate to horse racing – because the overall profit for Fonterra was driven by lower raw milk prices, which in turn allowed much better profit margins on items that use milk but are not “just milk” – e.g. cheese and yogurt – and which have a high “value added” factor and a growing market.

So that is how Fonterra can be having a record profit year while many dairy farmers in New Zealand have their backs to the wall.

The basic product – milk

The driver for this situation is not Fonterra’s greed as a monopoly, but worldwide trends. In a nutshell, there is an over supply of milk globally based on previous encouraging good signs (“get into dairy, it is white gold”) and a slower demand in large key markets like China and Russian based on their own economic situations. However while the global demand for basic milk products has gone down, there is still good demand for cheeses and yogurts and other dairy-based products.

It is also important to know that Fonterra is a farmers’ cooperative, so some of the profit made can be distributed back to farmers via a less direct route than the basic “farm gate” milk price. And that is the situation at the moment where Fonterra is releasing a good dividend at a time that will bring some help to cash flows over the difficult winter period when many cows basically go off production.

The longer term implications for most NZ dairy farmers depends on how resilient they are. And that is a mix of factors like debt burden, size, flexibility (ability to move partially to dry stock farming in the short term,  for example), and market niche. The farmers most likely to suffer are those that have highly capitalised their production to intensify outputs and reap the rewards of the very high “farm gate” milk prices we have had for a number of years. So newly set up farmers in Southland, for example, are probably mortgaged to their eyeballs and also reliant on expensive irrigation to maintain the intensive farming methods they have set up. Many of these farms may well go broke if bank support flags. Whereas in the Waikato, which is a more traditional dairy farming area, experienced farmers with larger farms, lower debt ratio and less pressure to farm intensively or with some dry stock alternatives, are likely to get through the hard times.

Now I am no dairy farming expert, only a listener of analysis thanks to our excellent national and rural farming media coverage which I catch online or listening on my radio on the way to and from work – tip o’ the hat to Radio NZ National.

This is a “helicopter view” actually more like a Boeing 747 view as the Auckland to Christchurch plan flies over the Waikato where I live in New Zealand.

But it puts a different perspective on our industry which sometimes we lack when we are literally at the grass roots level.

What can we learn from this?

First thing that strikes me is that the producers – those producing milking cows/milk – are recognised absolutely as key stakeholders (financially and structurally) in the industry. Their role in producing and managing a dairy herd (from which basic and value-added products come) is recognised in a range of ways, not just the “farm gate” price for milk. As shareholders of Fonterra, they get dividends and that is what is helping them now. They are not just stakeholders, they are shareholders.

In the harness racing industry, breeders are not recognised as key stakeholders in the same way. When profits from the racing industry are ploughed back to stakeholders it is usually in the form of payouts to clubs and into stakes. While this is a welcome move for the industry overall, it is not shared by breeders unless they are also successful owners or trainers. Many are, many are not. There is nothing going back directly as a “dividend” to breeders.

Value-added products

If mares and foals are the equivalent of dairy cows and milk, then the equivalent of cheese and yogurt is our own “value added products” – race horses. So many would say it is only fair that those who add the value (owners, trainers and drivers) get the rewards of higher stakes. However this doesn’t recognise that what breeders produce takes a while to mature – or as our Mainland cheese advert says, “Good things take time.” In one sense a foal is raw material, but what has been put into it and the mare, plus the experience of pedigree matching, and then the added resource of the weaning, handling, good feeding while growing and sometimes preparation for the sales is not just cosmetic. These things, if done well, optimise a foal’s potential to be the best it can be.

When we raise the concept of “breeders bonuses” or a performance-based percentage of stakes paid to breeders, the response is usually about the cost – “Where will the money come from?”

The Fonterra factory at Hautapu, just down a road or two from where I live. specialises in high-value products including cheese, casein, whey protein concentrate, hydrolysate, lactoferrin, milk protein concentrate and lactose – bound for the domestic market, as well as international markets in Asia, Europe and the USA.

The Fonterra example shows that when you look at an industry in a more integrated way (particularly vertically integrated), the producers of your basic product will be better looked after and/or given better signals that help them predict the future and make choices which align with the industry’s direction and their own “business”. Fonterra gives clear signals via its forecast Milk Price – and estimate that is regularly adjusted of where the Milk Price is heading. The Milk Price is a price calculated on all the product as if sold as the basic product to the world commodity market i.e. basic market value. The sale of value-added products then make up the rest of the income. Profit is used for capital investment, maintenance, R&D and other costs  – but also allows a dividend to be paid back to shareholders (farmers). In some cases, including now, an early or additional dividend can be paid to help farmers through difficult cash flows. This is not a subsidy or a guaranteed safety net. They are still vulnerable to global ebbs and flows, changing interest rates and the consequences of their own decisions. Or indeed a stuff up by Fonterra.

So for our harness racing industry, there is a strong case to be made for a model that at the very least returns a dividend (as bonuses, credits or percentage of stakes) to breeders. And at the far extreme, a model that totally restructures and integrates our industry to provide contracted (but forecastable and adjustable) prices for foals, plus additional returns as a dividend potentially based on performance of a foal as a racehorse (i.e. when value is added to the product).

The devil would be in the detail, but it is a scenario I will have a look at in more detail in a future blog.

I believe there is a lot of confusion about the harness racing industry’s consumers versus the industry’s stakeholders. For the dairy industry, it’s those who drink milk or eat cheese, versus farmers with dairy cattle. In our case it’s punters versus breeders /owners /trainers. We need to structure our services to meet consumers’ needs because our success depends on their interest in our product. But we also need to structure our industry to meet stakeholder needs because our success depends on their ability to produce a good product. It’s a balance companies big and small struggle with, but I think there is a lot we can learn from those who do it well.

In future I will do a similar comparison with the wine industry, which we can also learn from.