Sound strategy needed to survive volatile times

Sound strategy needed to survive volatile times

DairyNZ's principal scientist Dr John Roche says that his time working with dairy farmers around the world has highlighted that the business environment for dairy farming is in a constant state of change.

The need for farmers to have a sound strategy to avoid flip-flopping from year to year is now more important than ever before. He says that the only constant in the future will be volatility and farmers must set their businesses to be able to absorb the uncertainties that come with that if they are going to survive volatile times.

Historically, the old adage was that the difference between a good farmer and a bad farmer was time. In other words, all farmers do the same thing eventually; the big difference is the timing of their actions. From an operational perspective, this is still true. However, increasingly I see the difference between successful businesses and those that struggle through challenging times is that one has a plan and the other manages day to day.

The key to resilience is a strategic plan that guides major decisions. It is not to say that your day to day tactical management is not important. However, to use a rugby adage, "forwards win matches; backs decide by how much" - your strategic plan is the forward pack of a dairy farming business, securing the business in the set piece and ensuring the team will not be caught unawares by a poor climate year or a low milk price, while the tactical management (the backs) determines by how much we win the game. The need for system resilience is more important than ever before because future milk production will be set against a backdrop of increased farm business uncertainty.

Fundamentally, resilient systems must:

• be profitable every year and not just when milk price is high
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• have a low production-cost base to insulate the dairy farm business from price shocks, and
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• allow farms to generate sufficient funds in better times to exploit opportunities in lean years, when other businesses can’t capitalise.
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Resilient farm businesses are those that are designed to utilise their competitive advantages. This requires a ‘fit for purpose’ system that will provide a consistent level of production at a consistent cost, within the general averages of climate, input price, and milk price uncertainty. A resilient farm system will, therefore have a plan on the appropriate stocking rate for the farm, an appropriate level of supplementary feed purchases to expose the business to, key decision rules about drying off and culling cows, and they will not change these rules come hell or high water. Resilient systems still have sufficient tactical flexibility to overcome unanticipated events that can lower short term profitability (e.g. cold wet spring, dry summer, low milk price), but the foundation principles of the resilient system remain the same. At the same time you need to enjoy what you do at a personal level and have fun farming. It’s a tall order – but most farmers I know love a challenge.

Markets love volatility as Christine Lagarde, managing director of the International Monetary Fund is fond of saying. Maybe that’s what we have to do too - learn to love the thing that challenges us the most. Because it’s here to stay.

Successful farming - putting science and management together

Historically, farmers have focussed their learning on plant and animal husbandry, rather than developing broad management skills. Don’t get me wrong – those skills are still vitally important. As a dairy industry scientist, that is part of what I do every day – help farmers to maximise value from understanding production systems. However, modern dairy farming has increased in complexity. My firm view is that dairy farmers need an increased level of understanding of business management principles if they are to prosper in a tumultuous ‘price-taker’ environment. It is now vital that farmers have a broader range of management skills to sit alongside these traditional farming skills. These include cashflow budgeting, human resources, contract negotiation and a knowledge of multiple facets of compliance. The resilient farmer has to have the science of management sitting alongside his animal and plant husbandry skills.

ENDS

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