Economist David Beca says pasture holds key to dairy industry revival

But Australian dairy farmers seem unwilling to ask themselves hard questions about their businesses, instead focusing on outside factors as the cause of their woes, Red Sky Agricultural managing director David Beca said.

The Australian milk production implosion was down to one factor - falling real profitability.

And Mr Beca said this fall in profitability (return on total capital) had one main cause - the declining percentage of directly grazed pasture in the diet of dairy herds.

READ MORE: Australian milk production continues to plummet

Other factors blamed for the decline such as climate change, milk prices, availability of labour and farm succession issues were not unique to the Australian dairy industry.

Dairy industries in other countries faced similar challenges, as did other industries in Australia, but were not shrinking.

"This present long-term trend of reducing national milk production is unique to the Australian dairy industry amongst major milk-producing nations, especially those with an exporting sector, which does suggest there should be an opportunity to reverse the present trend," Mr Beca said.

Mr Beca said the opportunity for dairy farm businesses in temperate regions around the world to lift profitability was huge.

He pointed to a paper he had published in December in Agrekon, the journal for Agricultural Economics Research, Policy and Practice in Southern Africa.

This research on South African dairy farm performance has direct applicability to Australian dairy farm performance, as well as for farmers in other countries utilising pasture-based farming systems, Mr Beca said.

South Africa was a dairy success story - boosting pasture harvest and milk production, despite operating in a largely deregulated market since 1996.

Data from the Food and Agricultural Organisation reveals South African production grew 66 per cent between 2000 and 2021 at the same time as Australian production fell 18pc.

Pasture-based farmers in South Africa increased milk production at an annual average rate of 6-7pc, while feedlot or total mixed ration farmers increased milk production by 1pc.

READ MORE: Dairy facing a 'milk implosion' as production continues to slide, say analysts

Mr Beca said from 2003 to 2021 average pasture harvested on South African dairy farms has increased from 9 tonnes dry matter per hectare to 12 t DM/ha.

"In the 1990s, some South African farmers and their advisers recognised that pasture-based dairy farmers had an opportunity to increase the pasture grown and harvested per hectare, reduce the cost of feed supply and increase farm profit," he said.

Two factors were behind the big lift in pasture production.

The first was farmers took advantage of irrigation and an under-utilised water resource.

The second was farmers focused on gaining knowledge and applying the best practice pasture management principles.

This included using New Zealand and Irish know-how on walking and measuring pastures and focusing on accurately allocating what was offered to cows.

Many of the South African farms were based on kikuyu, which could be tricky to manage, but they developed systems based on oversowing ryegrass into kikuyu swards in the autumn to lift pasture harvest.

Mr Beca said the turnaround in South Africa was notable for a couple of reasons.

Firstly, it was the only industry in the world that had been heading down a pathway to increased high-input systems that had switched direction.

Secondly, the change was led not by industry organisations or advisers but by some top farmers who were frustrated at declining profitability in their businesses.

These farmers brought in experts from other countries and were able to get huge gains in pasture production.

The results were astounding.

Farms adopting this approach during the 2000s were consistently achieving 10-15 per cent return on assets, while the top farmers were achieving 20-30pc returns.

But farmers in South Africa - and Australia - could do more to lift profitability and make their businesses more resilient, Mr Beca said.

The key was to increase the pasture component and proportion in the diet of dairy herds.

Mr Beca said his latest research revealed that if South African farmers progressively increased the pasture proportion from an industry average of 41pc to 57pc, they could increase profit.

It would lead to a 26pc increase in return on capital, a 59pc increase in profit margin per litre and a 7pc decrease in cost of production per litre.

"If this change in production system to increased use of pasture and less use of supplementary feeds was replicated across the entire South African pasture-based dairy industry, farmers in the industry would be significantly more profitable and their businesses would be more resilient than under the current feeding regimes that are used," he said.

This also applied in Australia.

Mr Beca acknowledged that such a change in direction could be challenging for many farms in Australia and elsewhere.

"Farmers tell me that if they went down this path, their cows wouldn't cope, they wouldn't be able to get them in calf," he said.

This would be correct for a significant number of Australian dairy farmers, but that meant they needed to change the type of cow they were milking to one better suited to pasture systems.

"By changing the genotype of the cow, farmers would be able to bring down the cost of production," he said.

Farmers also needed to focus firmly on pasture - not other types of homegrown feed.

Pasture grazed in situ was by far the cheapest form of homegrown feed - crops grown for silage could not compete.

Those crops might be cheaper than bought-in feed but they were still 50-150pc more expensive than pasture, even in places like northern Victoria, Mr Beca said.

The fundamental principle was that lifting the percentage of pasture in the diet from 40-50pc to 50-60pc lifted the profit margin.

Mr Beca said these principles applied just as much to farms with a flat milk supply curve as to farms that are seasonal calving.

The only difference would be that those farms required to have a flat milk supply would need to transfer a higher proportion of the pasture grown in one season to another by storing it as silage.

Mr Beca's latest South African research echoes findings from earlier research he did on the Australian industry.

That research showed the impact of moving from 70pc pasture in the diet to 30pc would increase the average cost of feed by about 50-60pc (from $190 to $305 per tonne of dry matter based on a variable pasture cost).

This had a huge negative impact on feed expenses per kilogram milk solids, which then had a similar negative impact on cost of production and profit.

"Significantly decreasing the percentage of pasture in the diet, as the majority of dairy farmers in Australia have done in the past 20 years, effectively undermines the advantage pasture can deliver within a low cost of production dairy business," Mr Beca said.

A paper on Irish research published in the American Dairy Science Association's Journal of Dairy Science in 2018 analysed data from a large data set across an eight-year period.

This paper concluded that each additional tonne of pasture dry matter used increased gross profit by 278 euros and net profit by 173 euros on dairy farms.

It also concluded that a 10pc increase in the proportion of purchased feed in the diet resulted in a reduction in net profit per hectare of 97 euros and net profit by 207 euros per tonne of fat and protein.

"The profitability of pasture-based dairy systems is significantly associated with the proportion of pasture used at the farm level," the research found.

New Zealand research published in the CSIRO's Animal Production Science journal in 2019 analysed 12 years of data on the NZ DairyBase system.

It found the greater profitability of the top farmers was associated with greater pasture and crop eaten, greater stocking rate and production per cow, and lesser operating expenses per hectare and per kilogram milksolids (MS).

However, greater profitability was not associated with greater use of imported feed.

Although it found that in times of high milk price, systems with greater use of supplementary feed could be more profitable, these farms were less resilient when prices were lower.

It also found that maximising pasture harvested, and minimising reliance on supplementary feed, and effective cost control (minimising expenditure), were the key factors that lead to profitable businesses that are also resilient to the low milk prices that occurred in volatile markets.

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