Sunday, July 3, 2022

Taking care of business

Colin Armer lost money on the first dairy farm he owned and it proved a valuable lesson. Now he runs a business with wife, Dale, that has grown to 16 dairy farms, as well as a substantial stake in Dairy Holdings’ (DHL) 58 dairy farms.

"That very first farm I bought I sold for less than what I paid for it and that stuck with me,” he told the Marlborough Monitor Farm field day in November. “It's been a valuable lesson at the early stage of my career when I was bullet-proof.”

The former Fonterra director, who resigned from the board in August last year, described how profit rather than production drove farm management systems on every farm, and admitted he and his wife were "control freaks" in the bid to run self-sustaining units.

The Armers are a classic rags to riches tale, starting at the bottom of the pile when he mortgaged everything, including the Valiant V8, at the age of 19 to go sharemilking and climbing a ladder that reached beyond their wildest dreams. This year the Armers reached 49th on the National Business Review (NBR) Rich List with an estimated $200 million, while the combined assets of their personal business and DHL reaches $900m. Their 16 dairy farms around New Zealand encompass 4000ha and produce 3.7m kilograms milksolids (MS) and there' are a couple of large grazing properties in the portfolio as well. DHL produces 15.3m kg MS from its 58 dairy farms and has another 15 grazing blocks.
One of the main ingredients in their recipe for success has been the control of as many factors in the supply chain as possible, from heifer grazing and rearing their own service bulls to supplementary feed produced on their own farms. On the few occasions when land was leased, any profit realised from it was reinvested into freehold land and they bought land only when it made economic sense.

"We're very disciplined when the market is hot and when it's not we're very aggressive," Armer said.

He conceded not all bank managers had shared their vision as they expanded their dairy business, but 30 years following the same profit-driven formula had worked for them and they had formed strong relationships with their banks. Early in their climb up the dairy ladder they honed their skills on making profit from the industry and though Armer considered production a crucial part of the business, it was never their motivation.

"We spent a huge amount of time understanding what drove profit from farming systems in those formative years and we got a sound understanding of what drove profit from grass.

"We never skimp on fertility and pastures. We concentrate on growing as much grass as we can and then run a comparatively high stocking rate (SR) to use all that pasture.

“We also calve relatively early in the districts we farm and this delivers us higher production by the end of January."

In regions where summer is not perfect for dairy production the stocking rate drops later in the season but buying feed is a last resort.

"We have an aversion to buying in feed. We believe the profit from buying in a lot of feed is at best marginal, though at times of crisis inevitable," he said.

Quizzed about whether the regime was akin to controlled starvation for the dairy herds, Armer said there were key decision rules to ensure the cows were in good condition by June 1 and one of the ways of achieving that was beginning summer culling in January and early February, which dropped the feed demand. With close attention paid to pre- and post-grazing residuals, feed inputs could be minimised by adhering to grazing management and cow conditions targets.

The empty rate on average in the predominantly crossbred herds over the years was also low, with little unplanned wastage, he said.

In most cases the cows are wintered on the milking platforms in the bid to be self contained and reduce costs and Armer said they still achieved their pasture cover target of at least 2200kg dry matter (DM)/ha at the start of calving. Feed is only bought in if pasture cover is inadequate in late August and was necessary for only about 10% of the herds each year. When they do buy feed, it's palm kernel because it's convenient and available.

One of the changes in recent times has been dropping cow numbers from the ultra-big herds to between 900-1000 cows, which can be managed by one operator with three staff.

"The big farms in general have economy of scale, but in practice you lose some of the intensity of farm management and that shows up in the earnings before interest and tax (EBIT). We have extensive database numbers to compare with."

In response to questions from Marlborough District Council staff on the environmental impact of such large-scale dairying, Armer said they were in the process of lining all effluent ponds and 80% of the farms had moved from spray irrigation of effluent to K-line in a bid to avoid problems. For some years they had also been fencing and planting riparian areas.

In recent times the focus has changed from dairy effluent to farming intensity, with concern now focusing on the indirect build-up in nitrate levels in groundwater.

"None of us can hide from the fact that animals urinate on to pasture and nitrate goes in the soil," Armer said.

It would be a sad day for the industry if it was forced to build thousands of animal shelters around the country to mitigate nitrate loss into the soil, he said.

When it comes to management, the Armers employ farm managers, contract milkers, and 50:50 sharemilkers on their farms, while a general manager reports to two directors, according to the corporate philosophy.

"It's pretty important to separate out governance issues to management."

DHL goes a step further to become a true corporate entity with four directors, including two independent directors, plus a chief executive officer to produce a formal reporting structure. At farm management level six supervisors keep tabs on performance of each farm, which are managed by varying forms of contract milkers and 50:50 sharemilkers, who have agreements adjusted to suit the number of cows they keep adding to the herd.

"We're very effective at peer pressure,” Armer said. “LIC Minda feed program has been a great tool.  Every 10 days farms are expected to be walked and information is put in and information shared with all."

Between the two companies 21 sharemilkers are employed on farms and Armer said a third of those took the next step and bought their own farm each year.

"There are still opportunities out there for those wanting to take those opportunities, if you run a profitable farm system."

Looking to the future, he expects the American dollar to remain weak for a some time yet and so the NZ dollar will likely remain stronger than we have experienced historically. He expects to see the global financial crisis mark two and predicts that debt and equity will both be more difficult to obtain.

And, food for thought, Armer disputes the theory that world food shortages will benefit those producing it, because other cost comparative countries are gearing up to take advantage of global food demand.

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