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International dairy producers compare their industries to U.S.

PD Editor Karen Lee Published on 10 June 2013

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Three dairy producers – from Mexico, New Zealand and England – traveled to Wisconsin in March to share what it is like to dairy in their respective countries at the PDPW Business Conference.

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Each producer discussed milk pricing, cost of production, feed availability and other factors that affect their bottom line.

They also shed light on issues affecting the way they farm.

Jaime Suarez
Mexico

The family dairy business Jaime Suarez belongs to milks 3,700 cows three times a day at two locations. The dairy raises all replacements. The farm works 1,100 acres and buys the majority of its feed from other producers. It employs 160 people.

Suarez’s great-grandfather started the farm near México City. He started bottling milk and selling it into the city.

They were the first clients of Tetra Pak, which merged with Alpura in the 1970s and doubled its capacity.

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In 1998, the Suarez family moved one dairy to Querétaro, two hours north of the city.

When the co-op would not take any more milk, they began selling milk to Santa Clara in order to keep expanding.

MARKET: The milk company, not the government, sets quota.

For Alpura, the second-largest fresh milk processor in Mexico, one milk share in the company gives a farm permission to deliver 50.6 pounds per day at $24.44 per hundredweight (cwt) plus 11 pounds per day priced at $21.05 per cwt.

“Alpura has always tried to keep the prices paid to the producer as high as possible to keep us profitable,” Suarez said.

The price paid to producers ranges from $15.23 to $25.38 per cwt, with most producers receiving the lower end of that range, he said.

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The average cost of production on a modern dairy is $20.31 per cwt. That is mostly feed costs and does not include payments on borrowed credit.

There are a total of 130 dairy companies in Mexico that manage a supply of 11 billion pounds of milk. Since the country consumes 15.1 billion pounds of milk, it has always been on the importing side of the industry.

He said, “There’s only one rule when it comes to consumers: ‘The only thing that matters is price.’ They don’t even read the labels. They don’t care about quality. The majority just sees the price tag.”

ENVIRONMENT: According to Suarez, there are no restrictions on the use of manure or fertilizers. The only environmental regulation is on wells because water is hard to find in some areas.

The government does not have the money or infrastructure to spend on regulations and enforcement, but it is trying to implement programs to better the use of resources through solar energy, anaerobic digesters, water treatment plants and better irrigation.

Government aid has not yet been made available for those projects so at this point dairies have to cover the full cost, he said.

CREDIT:
Interest rates are high with personal credit at 24 to 48 percent, business credit at 15 to 20 percent and mortgage credit at 9.5 to 13.5 percent. “It is really expensive to get money in Mexico,” Suarez said.

Any money deposited within the country does return 3.5 to 8 percent.

When it comes to ag lending, most financial institutions don’t have an agricultural sector. In general, he said, they are scared to lend to agriculture because they don’t want to end up owning dairies or ranches.

Federal money with subsidized rates can be obtained, but it is difficult to access.

Since it is so complicated to obtain credit, many farmers end up having to work with their own capital.

Receiving money from the outside is also difficult as the country’s constitution blocks foreign investment.

For example, no foreigner can own more than 10 percent of a co-op. No more than 49 percent can be owned by a foreigner in any company, and in order for a foreigner to buy land, a permit must be granted by the government.

Land is rather pricey, too, selling at $155,000 an acre where Suarez lives.

FUTURE: Suarez said he sees a bright future in Mexico. Santa Clara was recently purchased by Jugos del Valle (backed by the Coca-Cola Company). The goal is to increase processing of Santa Clara from 250,000 pounds per day to 4,000,000 pounds per day in approximately five years.

They have the money and market share to make this happen and will have to increase the prices paid to producers to keep milk coming their way, he said.

The biggest challenge is that the farmers have to pay international prices for feed. Last year’s prices increased nearly 60 percent from the year before, plus they have the added cost of transportation.

ADVICE FOR U.S.: His advice for U.S. dairy producers is to find a solution to immigration.

Suarez’s suggestion is to reformulate the H-2A Visas to include year-to-year contracts, form workforce groups, send immigrants back and forth, and create a legal workforce to contribute more in taxes, reduce the fear of raids and give producers better control over who they hire.

Andy MacFarlane
New Zealand

The country of New Zealand is similar in size and climate to the state of Oregon. While part of the country receives adequate rainfall, the east side of the South Island is completely dependent on irrigation to grow crops.

There are as many dairy cows as people, about 4.5 million. Forty percent of the farmland is used for dairy, with the remaining balance mainly for sheep production.

Andy MacFarlane, along with his wife and brother, owns a 550-acre farm where he milks 770 cows, which is an average size for his district. He is also a partner in three other dairy operations.

Because almost all milk is sold for exports, the farm is only paid on solid content and is penalized for volume.

The milk solid content of MacFarlane’s herd is 9.1 percent or 5.2 percent fat. Production per cow, corrected to 3.5 percent fat, is 15,000 pounds per year.

They milk seasonally, giving the farmers a holiday in the winter when nobody wants to milk and there is not much demand for fresh milk, he said.

Four people are employed at this dairy, with their wages amounting to 16 percent of total costs.

The herd is milked in a 50-cow rotary parlor.

Most of the herd is three-quarter Fresian, one-quarter Jersey crossbred cows. They have to walk up to 1.5 miles per day, so crossbreeding helps to prevent lameness.

When cows are dry for two months in winter (June and July), they eat a ration consisting of two-thirds fodder beets and one-third silage.

After they calve in August and September, 90 percent of the ration is grass or pasture. Grass silage and maize silage is also fed. He does not feed grain on his farm.

MARKET: “We supply milk powder to countries that can’t supply themselves with fresh milk,” MacFarlane said.

All but 3 percent of the country’s milk is exported, more than half of which is whole milk and skim milk powder.

Even though New Zealand’s milk supply is only at 2 percent of the world’s milk production, it does represent about 35 percent of cross-border trade.

The price of milk received on-farm is a direct reflection of the world price. “There are no subsidies; we take what the world delivers us,” he said.

There is a lot of volatility in the milk price, not just from global milk price but also from the fluctuation in the exchange rate of New Zealand currency. In terms of U.S. dollars, the exchange rate has increased from 55 cents to 83 cents in the last four years, placing an additional burden on milk producers.

ENVIRONMENT : The standards in New Zealand are equal to the standards of the toughest country where its products are exported. Historically, the European Union and Japan have been the toughest export markets, he said, but China has extremely high standards now.

“Quality standards of developing countries are just as high as developed countries,” MacFarlane said.

New Zealand has very high environmental standards, which is different than 20 to 30 years ago, when there weren’t nearly as many cows or people. Specific standards revolve around distribution of effluent and nutrient management plans. “You can’t supply (milk to) a dairy company in New Zealand without a nutrient management plan,” he said. “You also need a water management plan.”

The cost of non-compliance is a heavy fine and non-collection of milk.

There are benefits to the environmental regulations, he said. His farm now produces 3.5 times more milk per millimeter of irrigation water as it did 20 years ago.
Almost all capital expenditures on his farm are going into areas that improve environmental outcomes. He’s averaging about $20,000 a year towards better irrigation, better effluent storage and better effluent distribution.

CREDIT:
Dairy farm credit is readily available from four major Australian trading banks and Rabobank. This has resulted in New Zealanders being the third most indebted dairy farmers in the world, behind Denmark and the Netherlands. Their average debt levels are at 45 percent.

On average they are paying 6 percent in interest for a five-year fixed rate and 5 percent for a variable rate, which are historic lows; a few years ago interest rates were at 9 percent.

PROFITABILITY:
Using U.S. dollars, MacFarlane said they are averaging $23 per hundredweight, but when adjusted for the fact they have 45 percent more milk solids, that amounts to only $15.25 per hundredweight. (This is the price after his $1.50 per hundredweight dividend to Fonterra is removed.)

Adjusted farm working expenses are at $10 per hundredweight. He pays $2.50 for interest (the average in New Zealand is $5), 70 cents for capital investment and 50 cents per hundredweight for taxes. This leaves him with an adjusted surplus of $1.55 per hundredweight.

MacFarlane calculates his farm is worth $11 million, including his shares in Fonterra, his land valued at $16,000 per acre and his animals at $1,650 per cow.

FUTURE: In accepting world prices, the New Zealand dairy industry has learned to farm with volatility.

The ability to generate cash flow and grow equity really excites the next generation. They are seeing a resurgence of young people in the industry, with 40 as the average age of a dairy producer in the country.

The diversification of ownership models has also encouraged young people to get involved. Contract milking, sharemilking and equity partnerships are all common ways to enter the business.

The proportion of employees is also rising as farms increase in size. They are averaging one employee per 200 cows.

Approximately 25 percent of industry participants have vocational qualification, and 8 percent have degrees in agriculture. The industry has an objective to have every farm owner or manager have a degree in ag.

MacFarlane said growth of the industry will decelerate as credit availability slows and environmental compliance requirements tighten further, halting dairies from being placed in certain areas.

ADVICE FOR U.S.: “Don’t be afraid of competition. Don’t be afraid of international markets. Don’t be afraid of volatility,” MacFarlane said. “Part of the penalty you pay for slightly increasing prices globally is more volatility from bouncing around the bottom of the supply bucket.”

Jane Dyson
England

Jane Dyson farms with her parents and her husband, Neil. They milk 470 cows and raise 200 replacement heifers on 650 acres near Oxford, England, in the United Kingdom (UK).

The UK is the third-largest milk-producing nation in the European Union (EU), behind Germany and France.

The average herd size in the EU is 45 cows, and the average yield per cow is just less than 15,000 pounds per cow. The use of both rBST and Rumensin are banned in the EU.

One-half of all milk produced in the UK is for liquid consumption; cheese and powder are the next two biggest end users of milk.

Citizens of the UK consume a lot of liquid milk, she said. Their average consumption is 240 pounds per person compared to 170 pounds by U.S. citizens.

Like Mexico, the UK isn’t fully sufficient in supplying its country’s dairy needs (only 80 percent); therefore, it imports products like cheese and butter.

Most of the dairy production is concentrated in the western part of the country where there is good rainfall and free-draining soil types. Seasonal grazing herds are prominent here, which is not favored with the country’s year-round need for fluid milk.

Dyson farms in the center of the country, 40 miles outside London. Here, rainfall is relatively low and the climate is not as mild, with temperature swings from 15˚F to 85˚F.

Since they cannot operate a successful grazing system, her farm relies on conserved forage. They grow as much corn silage as they can on the lightest soil types, followed by wheat silage and two-year to five-year grasses on the heaviest clays. They do graze their permanent grass stands.

Cows are housed mostly in freestalls with mattresses and sawdust bedding. A TMR is fed to the highest-yielding cows all year. Medium-yielding and low-yielding cows will graze in the spring and summer.

The farm averages 18,400 pounds per cow at twice-a-day milking. Components average 4.07 percent fat and 3.37 percent protein.

The farm employs six full-time employees, two of which are EU nationalists.

MARKET: Milk production in the EU is regulated by a quota system, where every country has its own quota.

Agriculture has since been supported with direct payments, and the quota is due to end in two years.

The UK has had one of the most flexible quota systems. Quota can be freely traded across the UK at any time of the year. There are also no upper limits on how much one farmer can hold.

“Those have all been good features to us because we can maximize the use of our national quota,” Dyson said. “Those who want to fill it can fill it. Those who want to expand can expand.”

Dyson started with two billion pounds of quota and now holds enough quota for 10 billion pounds.

The farm has a liquid milk contract with a supplier to a supermarket chain. Unlike other contracts, they do not have to supply a level volume of milk throughout the year, but there are big deductions if they produce greater than their average from January through June.

Those deductions are market-related but could be as much as $2 to $3 per cwt, she said.

In January, they received $21.17 per cwt.

ENVIRONMENT : The Red Tractor Farm Assurance program is a group of voluntary schemes covering all farming sectors in the UK. Around 65 percent of horticulture, beef and sheep operations participate and upwards of 95 percent of poultry and dairy production is covered in the program.

At the retail level, the Red Tractor logo is used on packaging to show the consumer the food is safe, welfare friendly and environment friendly. It is mainly found in supermarkets, but has been picking up with some fast food chains, she said.

A Red Tractor logo at the farm means it operates to the standards of the program. An independent inspection is performed at the farm every 18 months to observe alternate summer and winter performance.

The dairy scheme has been around for about 15 years. Its standards are set by a board, which is comprised of dairy farmers, milk buyers and processors, veterinary, retail and animal welfare experts.

In total, the dairy scheme has 137 standards, which cover:

During a routing inspection a lot of the plans are just reviewed to see that they exist, but the areas of trace

  • Facilities and housing – focusing on cleanliness and biosecurity, but also includes lighting, ventilation and spacing (maximum stocking density of one cow per freestall)
  • Feeding – trough space, feed sources, documented feed plan
  • Health and welfare – written health plan, written biosecurity plan, no tail docking, well-documented health records
  • Traceability – cattle identification and record of movement
  • Environment – pollution control, ag chemical plan, manure plan, soil protection plan

ability and environment can have standalone inspections, which require a lot more detail, Dyson said.

Within the standards, 50 of them are key standards and non-compliance means immediate suspension of the ability to ship milk. For the remaining standards, non-compliance results in a warning and 28 days to correct the situation.

The Red Tractor program grew largely out of the bovine spongiform encephalopathy (BSE) crisis that began in 1986. During the crisis, some cattle were slaughtered and meat and bone meal was no longer fed to dairy cattle. When the link to Creutzfeldt-Jakob Disease (CJD) in humans was found in 1996, beef consumption dropped by 25 percent. There was a rather negative consumer reaction to BSE, but the beef market did recover in two years time, she said.

In addition to the Red Tractor Program, a food standards agency was set up and cattle movement and ID systems date back to that time.

The 2001 outbreak of foot and mouth disease was very different, she recalled, as it started with a single, almost random event. The spread was so rapid and the huge personal cost to individual farmers brought about a very different reaction.

Many farming communities had rock bottom morale after the epidemic and they received a very high level of public sympathy, Dyson said.

The aftermath of that was tighter regulation of sheep identification and movement, as well as a six-day standstill period after any animal is brought on to the farm.

FUTURE: The dairy sector in the UK is fortunate to have a growing consumer demand for dairy products, farms that are mostly large enough to be sustainable and the potential to grow really high yields of consistently high forage.

Because the industry has languished near the bottom of the European milk price, she said many farmers have adapted to operating with a lower cost of production.

Challenges in the UK include a supply chain dominated by a handful of supermarket retailers, price volatility and the inability to forward contract, and animal health issues with tuberculosis and other viruses without an available vaccine.

In addition, she said they struggle to find skilled labor. To combat this, Dyson and her family have developed their own training program to take a student to a herd manager in two years. The program includes technical coursework, financial benchmarking, a research project and an overseas study tour.

ADVICE FOR U.S.: “It’s about adaptability,” she said. “Play to your strengths to get the best of a situation.” PD

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Karen Lee
Editor
Progressive Dairyman

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