Thursday, July 7, 2022

The battle to make a profit

Landcorp’s soon-to-retire chief executive Chris Kelly sees the profitability of dairy farming as an ongoing challenge, because inexorably the costs of dairying have gone up. He cited costs like fuel and other items farmers have no control over, such as local body rates. He was also worried by a swing to high-input dairying. “I’m not saying it’s not profitable,” he said. “It is profitable at times. But farmers tend to see something as a variable cost and then they see it as a fixed cost and then the payout drops and they get caught. “And so farmers have to be on their toes to try to make sure they can control those variable costs and that’s a problem. I think there will be ongoing cost pressures. “We will be hoping the payout will keep pace with that and will increase, but at the end of the day the international market is what it is and that’s a bit of a worry.” Compliance costs, such as fencing off streams and so on to meet environmental obligations, are another worry.

Kelly was appointed Landcorp’s chief executive in March 2001 after holding various positions with the Dairy Board, including strategic planning manager, general manager for corporate planning and global head of strategic industry relations.

He had represented farmer interests to the LIC, the Dairying Research Corporation (DRC) and the Animal Health Board (AHB) members’ committee.

Earlier in his career he had practised as a veterinary surgeon, lecturer and advisor and held jobs in the animal health area for Glaxo Animal Health and Pitman Moore (previously Coopers Animal Health).

When he joined Landcorp he had been helping with the establishment team on Fonterra’s creation.

But continuing to work for the new company would require him to shift to Auckland.

“I loved the Dairy Board. It was a great place, but no disrespect to Aucklanders, I didn’t really look forward to doing that at all,” he said.

“I was offered this opportunity and took it up.”

That was in November 2000. He stayed on at the Dairy Board for a few months, “so we could particularly get the industry goods part of the industry sorted out before I moved on”.

Changes

From his perspective as the country’s biggest corporate farmer, Kelly talked frankly about the big changes he had overseen and the challenges he saw facing dairying generally in the future.

The biggest change in Kelly’s time at Landcorp has been the increasing importance of dairying. When he arrived to take over as chief executive, about 85% of the state-owned enterprise’s (SOE) revenue was from sheep and beef farming and some from deer, “and the rest was rats and mice and a small amount of dairying”.

Dairy cow numbers effectively were zero. The few dairy farms it did have were sharemilking operations.

Today about 55% of Landcorp’s revenue is from deer and dairying and 45% from sheep and beef.

Sheep and beef numbers have remained about the same. But in 2011/12 Landcorp recorded milksolids (MS) production of 13,400 tonnes and at the season’s peak in November 2011 the company was milking 35,922 cows.

The company’s dairy farms are scattered throughout the country but are predominantly in Northland, Waikato, Bay of Plenty, central North Island, Manawatu, Wairarapa, Canterbury, Westland and Otago. Herd sizes range from 200-2000 cows, which are milked through a variety of farm dairies from 20-aside herringbones to 80-bail rotaries.

Cow numbers are still growing. Landcorp has bought about 15,000 more under the deal with Shanghai Pengxin to manage the former Crafar farms and it will continue expanding dairy production in other areas, including Wairakei Estate in the central North Island.

Deer numbers, meanwhile, have gone from about 20,000 to about 150,000.

“So that’s been a major change,” Kelly said of the shift from sheep and beef.

This had been done largely with the help of productivity improvements and by using humping and hollowing techniques to convert marginal swampy land on the West Coast to good pasture for developing dairy farms.

The furthest north farm developed so far is Sweetwater Station, north of Kaitaia. The complex comprises three dairy units and a support block, milking a total of 2650 cows (Dairy Exporter, January, page 26). The furthest south is Waitepeka, on the Owaka Scenic Highway southeast of Balclutha (a 920ha dairy support property that provides baleage and silage to two adjoining dairy farms, grazing about 500 calves, 450 yearling heifers, 1000 breeding ewes, 800 hinds and 700 fawns, and winters dairy cows).

Several joint ventures have been established with other companies. Landcorp sold a half-share in its genetics business last year and with Rissington Breedline formed a new company, Focus Genetics, based in Napier.

It has a joint venture with Wairakei Estate in the central North Island and intends expanding dairy production by converting land from forestry to farming. It entered this joint venture in 2004 to develop about 22,000ha of land into drystock and dairying but the project was halted at the end of 2010 when a carbon tax was imposed under the Kyoto Protocol and the emissions trading scheme (ETS) was introduced.

Slumped

But the cost of carbon has slumped from about $22/tonne to less than $3, making it cost-effective to buy credits and use them to offset deforestation. Kelly said carbon credits now are “as cheap as chips (less than a dollar for East European credits before Christmas), so we’ve started up the tractors there again”.

Then there’s the joint venture with Shanghai Pengxin. It had been a bit of nightmare to get through, Kelly said, but they were through the worst of it and were starting to do the work.

The office structure has also been consolidated. When Kelly joined Landcorp it had an office in Wellington plus regional offices in Rotorua and Christchurch. The company was run on a geographical basis – a South Island person and a North Island person.

“Now we all reside in the same building, which is in Wellington, and we run the company more on animal lines,” he said. “So we have a dairying person, a deer person, and so on.”

Staff numbers have risen from about 350 to about 600. This will increase by another 85 when Landcorp takes over the Crafar staff.

Kelly’s contract had been due to expire this month but the board asked him to stay until about July, to help get the Shanghai Pengxin deal and the Wairakei development up and running.

Did he think about another six-year term at the helm?

“Not really,” he said. “I love the job, don’t get me wrong. I think it’s a wonderful company and I’ve loved every minute but there comes a time in every CEO’s life when you need to say someone else can add more value to the company now.

“And I think it’s quite reasonable that someone else can climb on board and take over.

“They will do things differently and change a few things around.”

He is the director of a few companies – a mix of agriculture and education – and will probably continue to do that work when he leaves.

“But I haven’t given it much thought yet,” he said.

When asked what had been the main challenges he had dealt with at Landcorp, he said many things came down to people issues.

“When I joined we did have a dairying presence. It wasn’t large but it was run through sharemilkers, so we had no direct involvement with dairying as such.

“Our staff were all bloody good at sheep and beef but didn’t know much about dairying. So we had to get them up to skill level and make sure we could handle our rather large herds, because we tend to have bigger herds than normal.”

Asked what had been his over-riding achievement, Kelly said it was the company’s culture change. He recalled Landcorp being formed from the former Lands and Survey Department, a transformation involving regional offices spread around the country.

“There were lots of little fiefdoms and the company didn’t work together very well,” he said.

He describes Landcorp now as one farm and 119 paddocks.

Change

“That was quite a cultural change, so like many of these things the challenge was getting the culture right, getting the right people on board with a new strategy and building it up to what it is now.”

For example, he had been involved not long before the end of last year in a round-table session on what had to be done as Hawke’s Bay became seriously dry.
“And all our farms are pulling together now,” he said.

“We are going to destock some of our Hawke’s Bay farms and ship stock around among the others.

“That didn’t used to happen when I joined. Everyone was in their little silos and that’s the way the company was used to being run.

“And so I think there are a lot of physical changes, like lots more cows and people, but it’s the attitudinal change in the company that I probably will remember the most.”

Asked about the challenges he saw facing dairying generally in the future, Kelly started with the management of large-scale dairy farms to increase productivity. Inevitably, dairy farms were getting fewer and bigger and herd numbers were increasing. Trying to manage those large-scale herds effectively and get good productivity gains was demanding, he said.

“People often say if you are used to managing 300 cows you can easily manage 900 – you multiply everything by three. But it doesn’t actually work that way.

“And embracing the new technologies like in-line milk meters. All those sorts of things – that’s going to be a challenge.”

Another big issue was dairying and the environment, he said.

“As we continue to intensify I don’t think yet we’ve solved the problem of being able to model things like nitrogen (N) leaching.  

“We’ve got Overseer but it’s not without its faults. It’s the best we have but I think it needs a bit of work on it.”

The increasing development of large-scale irrigation projects was another issue. It would require changes in land use and greater intensification, which inevitably would call for more monitoring and possibly resource consents and so on from local councils, he said.

“This whole issue of change of land use is going to become a real problem.

There was also the issue of getting the right people and the right skill set.

“We still have a dearth of really good people in the industry. That starts at school level really and it’s an ongoing issue.

“I know DairyNZ and Beef and Lamb do a lot of work in that area, but it’s still a big challenge.”

Kelly’s observations on land use and intensification prompted questions about Horizon Regional Council’s controversial One Plan as the key to environmental regulation in Manawatu-Rangitikei. It’s been criticised by Fonterra, Federated Farmers and primary production organisations as much too stringent and the Environment Court ruling that upheld it is the subject of a court appeal.

Landcorp has several farms that border the banks of Manawatu River so is affected by One Plan and it’s part of the accord signed by Fonterra and others to clean up the river.

But Landcorp had no plans for an immediate land use change, Kelly said.

“We are currently existing dairy farmers there and will continue for a while.”

He sees problems with the Horizons’ approach because it relies on a theoretical modelling concept of a farm. He and others question whether the model is robust enough to make far-reaching decisions.

Solution

Trying to have a rules-based solution based on somewhat arbitrary standards of N output was challenging, he said.

He would like to see more money spent on developing a better model and to look at outcomes rather than individual outputs.

“But it’s a vexed issue.”

He was aware Environment Southland was also looking at a rules-based system.

“That’s the most logical and easiest thing to do of course, but it has a real downstream effect on farming.”

Does he see a limit to the size of the national dairy herd?

“The short answer is ‘I hope not’. But without trying to scare your readers I’m not thinking we should just grow and grow and grow and we will have cows on every square hectare of land.”

Techniques were available to mitigate N run-off, he said.

“You can have things as mundane as large riparian strips, or have cows off the pasture when it’s winter and all those sorts of things.

“I think the trick is to start embracing some of these new technologies, which we already have been doing, and use other means of cutting down our environmental footprint. In that way, hopefully, we will be able to expand.

“Because at the end of the day you and I know perfectly well dairying – agriculture generally, but dairying in particular – is the only game in town to dig NZ out of its debt problem and we just need to remember that.

“It’s all very well criticising dairying, and farming, but without it NZ would be a lot sadder place than it is now.”

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