Low cost methods ‘set group for future’

Corporate investment in the WA dairy industry was almost a sure thing less than a decade ago.

Many family-owned farms also invested heavily in what was expected to be booming times for milk producers.

While the outlook for WA’s dairy industry has changed substantially since, Scott River corporate farming group Lactanz director Chris Young still has hope of better times for the industry in years to come.

Speaking at this year’s Dairy Innovation Conference, Mr Young said it was the low cost sustainable dairy farming methods used across all four of the group’s farms that would put Lactanz in the best position to weather the lows of the industry while being prepared to take advantage of any future upswings.

Mr Young only recently become a director of the Lactanz group, following the passing of his father, John, who was the driving force behind the establishment of Lactanz in WA.

Mr Young said the Lactanz philosophy of low cost, sustainable farming methods followed the success of the Auroam farming group which was started by his father in 1988 and grew to a total of three farms and about 2200 milking cows.

When the Auroam group wound down in 2005 it showed a return on capital for investors of 926 per cent over 17 years, which equates to 54 per cent per year capital return.

Mr Young said the return highlighted in part the dramatic land value appreciation in New Zealand, one of the reasons why further investment in NZ was not looked at when embarking on the Lactanz project.

“Three years prior to Auroam selling up, the group started looking at other opportunities and it is these investors who became the cornerstone shareholders in Lactanz, ” Mr Young said.

“With equity from Auroam and funds raised through securing a number of other investors, Lactanz embarked on a new dairy farming venture with three main objectives.

“These were to capture the economies of scale in pasture-based dairy systems, to have a sharemilking proposition that was attractive to labour and to create a farming venture that could be readily benchmarked against the Auroam model, and also against each other.”

Mr Young said several countries were considered and Australia was selected because it was English speaking and NZ-owned milk processor Fonterra was already operating there.

“We went on to select the Scott River region of WA for five main reasons, ” he said.

“Fonterra was processing milk in WA at the time with a plant located within 100km of the area.

“Dairy deregulation had occurred, seeing a number of families leaving the industry and creating a shortage of milk, research indicated WA had the potential of supplying fresh milk to the South East Asian market, there was growing domestic demand for milk fuelled by the population explosion associated with the mining boom and the area usually experienced reliable rainfall.”

Mr Young said since Lactanz bought its first farm in Scott River in 2002 it had gone on to purchase four farms and invested a considerable amount in all properties. They were now capable of milking about 1000 cows each.

Improvements made across all farms had focused on pasture improvement with a total of 1060 hectares now under irrigation. Each farm also has a 60-bale rotary dairy shed and new raceways and infrastructure to enable the efficient operation of each farm.

Mr Young said the conversion of each farm had been a major undertaking. Securing contractors for the construction of buildings at times had been difficult because of competition from the mining industry.

Connecting three-phase power on the last farm, Lactanz 4, had also taken longer than expected. The farm had to operate using generators for the first 12 months which caused considerable costs for the Lactanz group.

Mr Young said the cows on each farm had been purchased locally by the share farmers operating each farm. NZ semen was used with these cows to change the herd’s performance slightly towards more milk solids.

“We have found share-milkers best suit off-farm investors — it allows good growth in the share-milker’s business which in turn helps ours, ” he said.

“This system was very successful on the Auroam farms, dad was always very proud that all our share-milkers at Auroam went on to buy their own farms.”

Mr Young said with farm infrastructure and personnel now firmly in place, Lactanz was in a position to take advantage of any future upswing in the WA dairy industry.

When it came to future challenges, Mr Young said milk price volatility was here to stay.

“This is what we are being told the world over, ” he said.

“However, WA has seen almost a 25 per cent drop in milk price over the last two years during which time the world milk commodity prices have more recently increased.

“I ask the question, why are WA farmers, or even Australian dairy farmers, subsidising domestic users of milk?”

Mr Young said recent prices that highlighted this difference showed Australian supermarkets were selling two-litre home brand and supermarket brand milk for $1 a litre, whereas the same product in NZ was being sold for $4.39 and $4.59 respectively (for a two-litre carton of milk).

He said name brand product in WA was selling for $2.89 for two litres, whereas name brand product in NZ was selling for $5.39 for two litres.

“NZ milk prices are based more on what milk is worth around the world, ” Mr Young said. “NZ producers have been told these prices will hold for the rest of the year.”

Mr Young said the milk processing industry in Australia must realise that without farmers they have no industry, so a sustainable long-term payment system must be implemented.

“The system of dropping prices as supply increases hardly seems a long-term plan, ” he said.

“After all, we are supplying a high-quality food item.”

Mr Young said in his opinion if he had his time again with regard to choosing WA as the place to develop the Lactanz group, the one thing he would change would be to invest more time in following what the WA industry was doing.

He agreed with many in the industry that in early 2000 processors had indicated more investment was going to be made in WA and it was fair to say this not eventuating had been a disappointment.

However, despite this disappointment, the people behind Lactanz were committed to the industry and felt confident they were ready to take advantage of any future upswings in the WA dairy industry.