Volatility in dairy sector here to stay

24 March 2011

Volatility in dairy sector here to stay

The dairy industry has withstood one of the most volatile periods in history following the global financial crisis but farmers cannot afford to be complacent if they are to make the most of the opportunities as well as reduce the risks of volatility.

Speaking at the Dairy Women's Network conference in Invercargill today, Westland chief executive Rod Quin says volatility is here to stay and if farmers are capture the benefits and importantly, weather the storms, they need to adapt to more frequent changes and plan well ahead.

"Farmers often get caught up in what is happening on a daily basis on-farm, but increasingly farmers need to be aware of what is happening in the wider global business environment and what impact it has on their business," Quin says.

Milk prices plummeted following the global financial crisis with Governments in the EU and USA electing to stockpile milk powder and reintroduce export subsidies. The price of milk has recovered quickly and most export subsidies have been removed. Stockpiles in countries such as the US and Europe have gradually fallen.

But the industry still faces on going uncertainty and volatility with an increase in extreme shifts in climatic events, exchange rate movements and oil price fluctuations.

"As we have expanded our dairy footprint in global sales terms, New Zealand has become increasingly exposed to global events and farmers need to start factoring these changes into their on-farm strategic planning."

Farmers can prepare for future price shocks by assessing their business plans on a regular basis and seeking independent advice from experts in the dairy industry, banking, veterinary and farm advisory sector on the likely challenges they could face as a result of volatile events.

The key is not how to fight it, but how to adapt to benefit, Quin says. He suggests improved governance to challenge current on-farm thinking.

"Farmers are running multi-million dollar businesses and they need to be managed as such. Adding a director to a farming business is a proven way of introducing the necessary business disciplines required to look further ahead and adjust business plans as the world changes.

"The key to remaining competitive in today's environment is to focus on profitability and productivity, not simply payout," Quin says. "By planning ahead and seeking advice on a regular basis from professionals in the industry, the negative impact of major global shocks can be significantly reduced."

Types of risk assessment tools include putting in place future contracts for major farm inputs such as fertiliser and supplementary feed and regularly assessing these contracts.

Quin says Westland is not immune to volatility and must use similar techniques when conducting its own strategic planning. "We meet frequently to ensure our tactical decisions are in line with our strategic goals and, in recognising the world has changed, how to adapt accordingly.

"The world has changed quickly and we have seen prices fall from high to extreme lows and back again. The old boundaries around global prices have gone. Adapting our sales program has been critical," Quin says.

"Westland is part of the global food and beverage industry and our future success depends on having policies, techniques and strategies in place that allow sufficient discretion to manage the extremely volatile environment we operate in. For example our approach to foreign exchange has changed in recent seasons to provide for the more extreme highs and lows the New Zealand dollar experiences."

Quin says its challenge is to differentiate itself and decide which part of the consumer life cycle it wants to focus on and to make to those investment decisions now. "We are not the lowest cost producer in the world anymore so we need to create products for which people are prepared to pay a premium for the value we have developed."

ENDS

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