Rural view from New Zealand

Tom Bishop, farmer and land agent with BCM, explores farming without subsidies in New Zealand


12th July 2018

Mackenzie Country, South Island


DO OUR FARM COMPARISONS MEASURE UP?

So often UK farmers measure success in tonnes harvested per hectare or £s per kilo.

New Zealanders say they can reach a 45kg liveweight for their lambs or 10 tonnes of wheat per hectare but what they really want to know is return on capital employed, drilling down to the return per kilogram of nitrogen applied or the return per kilo of dry matter produced where animal feed is concerned.

This was one of my most valuable lessons so far. I have been dwelling on it during the depths of South Island winter. Either pre- or post-Brexit we should be considering that this type of review allows us to analyse our enterprises on a more critical level. Benchmarking against other farms is irrelevant because there are so many variations between them.

Any farmer could apply nitrogen to the maximum, spend above £250 per hectare on sprays, and farm thousands of acres in what outsiders may perceive the most perfect business but is it the most profitable one? Perhaps if we did some NZ benchmarking we would find that our best-performing farmers could rank among the UK's small-scale county council tenants rather than the large cooperative farming operations. Resourcefulness will be key post-Brexit.

The scale of the iconic New Zealand South Island “stations” and their productivity are outstanding. Sheep mobs (groups sub-divided from larger flocks) can be larger than the size of my entire two UK flocks while applying fertiliser and top seed dressing from aeroplanes is an eye-opener to me. However, the smaller, owner-operated farms use the same key performance indicators and regularly outperform the iconic stations for return on inputs.

Water is much in focus in the UK after the July heatwave. The importance of its availability, quality, and effect on the environment is something we all urgently need to consider. At home, I have never had much thought for water, especially with three springs on our Welsh hill farm, and I had the same mindset here in NZ until recently.

The CLA (The Country Land and Business Association) recently published a paper on land management and, importantly, water resource to help justify future subsidy payments. Lessons from NZ suggest we should take serious note as I have been to farms where land within certain catchment areas has been compulsorily purchased by the government, in one instance up to one third of a 6,000 acre farm.

The thinking is that removing livestock from the catchment will help improve water quality. It is a stark warning that should we not protect our watercourses correctly we may risk losing our land if the UK Government takes this approach.

While the farmer was compensated for the loss of land, the economy of scale for efficient production was affected. It may be worth identifying all land that may be hit by such a proposal on your farm, assessing how your business would cope with reduced production.

We find it hard to justify irrigation systems unless for high value crops in East Anglia. However, irrigation in NZ transforms a number of farms to allow the stock units to increase, animals to be finished, and fertility to increase in areas that receive only millimetres of rainfall a year while the nearby west coast at Milford Sound is deluged by up to seven metres!

Water is therefore essential to allow farms to be transformed and with climate change a hot topic, and the recent heatwave as reminder, I would urge everyone with extraction licences, watercourses, and historic boreholes to ensure that they are up-to-date, licences renewed, and catchment areas farmed with environmental factors given utmost importance. Who knows in the future how valuable this will become in developing alternative farming enterprises and transferring farming assets?



29th June 2018

Hawkes Bay, North Island


QUESTIONS IN THE AIR ABOUT BUSINESS 'BLIND SPOTS'

Having spent the last couple of weeks in Hawkes Bay, I write this latest edition while flying to the South Island. Whilst reading “Kia Ora”, Air New Zealand's in-flight magazine, you cannot get away from NZ's links to agriculture. The first pages were filled with an article about beef genetics to deliver the perfect steak together with a question and answer article with Tony Alexander, BNZ’s chief economist, on NZ's economic outlooks, with some interesting answers which I think we need to consider in our own current economic circumstances.

The first question that caught my eye was, “You have said that even in good times, businesspeople can have ‘blind spots’ about potential risks. What are the most common?”

The response was firstly labour availability. "Businesses need to give thought as to whether labour is going to be available at the quality, quantity and timeliness they want it."

With Brexit in mind, and the labour theme already heavily discussed, with East Anglian farmers most concerned, I do think that central southern farmers also need to consider this. Firstly, we need to work out our labour requirements for each specific business, perhaps when we feel the squeeze, extra labour or part time labour will be reduced. Alternatively, we will need to become more imaginative with labour sharing, apprenticeships, placement students, and foreign exchanges.

The average age of a farmer in the UK is 60 years and with an ageing working population, succession planning, not just among family members but also long-serving staff, may be key and need to run over a number of years. The retiring farm worker, for instance, may have worked many times around the very wet spots and tricky pylons of which the contractor or placement student may be ignorant!

With margins being squeezed tight, carefully bringing the next generation into farming while balancing the books through not over-compensating with labour is required. In addition a careful review of staff, future training, and succession planning is necessary for not only your workforce but also the management structure.

The second response to that question about blind spots was "simply margin pressure. In a low-inflation environment, where consumers can easily find alternative goods and services, if a company has its costs go up and simply whacks up its prices, consumers will look online for something cheaper."

This is one of my grave concerns for the UK agricultural sector. With diminished, or no, subsidies, farmers could demand an increase to their produce prices. But with lower costs and more efficient systems across the world, we could potentially be flooded with cheap food imports if the government does not provide protection. Here in NZ, the cost to finish an animal is dramatically lower than in the UK, largely because their system is grass-based and has low input costs. As an industry we really need to drill into our costs to ensure that we avoid dramatic price rises post-Brexit and as the subsidy regime changes. But we need to remember we are a “price taker, not maker”, due to such global economics - efficiency and knowing our costs is therefore key to survival.


CASE STUDY 5

Succession and generational changes

1,000 ha livestock farm, with lamb, beef and deer enterprises ranging up to 2,000 ft above sea level.

A staged succession is in place, with the son now owning the farm as part of a phased process while the father moves off the farm to a smallholding used as a run off and fatten block.

The father and son are still in partnership together but the percentage share for each has altered over time so the son now has the majority share (together with the debt!).

A second staged succession plan I have examined has looked at a husband and wife team running weddings, a B&B and events alongside their textile business. There has been a planned division and purchase of the property, with other siblings purchasing their own land and entreaties to create homes and businesses for all siblings at the farm. 



22nd June 2018

South of Hamilton, North Island


OVER CAPITALISATION

On the shooting field south of Hamilton (unfortunately only beating), I was discussing with a local farmer the over-capitalisation of farms and their true value.

Perhaps this is something we need to consider when buying, selling, or undertaking farm improvements (and I stress farms, as estates are more multi-enterprise and should be considered separately).

Over-capitalisation of farms embraces too many high specification residential units for farm workers, over-extended main houses for the owners and / or managers, and other superficial or cosmetic improvements.

Yes, we all like our farms and properties to look smart but perhaps farmers need to consider, and separate, “needs” from “wants”. Would you see concrete silage pads, internal concrete tracks, and listed cottages for staff in NZ? No, they would make do, put up some wire, and import a prefabricated dwelling.

I am not saying we should not improve our farms but when we look at profitability and farm budgets perhaps we need to concentrate more on how we separate those “needs” from the “wants”. We could then identify what the enterprise can afford and plan the improvement from a separate allocated fund.

Perhaps if most farmers were honest and stripped out the non-essentials that we have become accustomed to, many farm businesses may be more profitable than on first impression and this could help curb the loss of subsidy.

NZ farmers joke that when they arrived all they had was the No. 8 wire and as a result needed to be resourceful. Our equivalent is probably baler twine and post-Brexit will we be using our No. 8 wire more resourcefully?

However, some NZ farms, especially in the dairy sector, do give a factory impression. Is this what the general public want in the UK, fields and fields of factory farms, with reduced input into the countryside and environment, creating a loss of the true characteristics of the British countryside? With these considerations we also have to be careful about how we approach pre-fabricated or temporary homes for workers in the landscape – there are areas of the UK that are already despoiled by caravans and mobile homes in farmyards and field corners despite the undoubted landscape value of their surroundings. We would not want UK farming accused of increasing degradation of the countryside.

As I have previously mentioned, the disparity in objectives amongst the different land tenures could create friction, with the "needs and wants" somewhat differing, but if aims aligned and cluster groups were created with neighbouring landowners running similar enterprises, perhaps we could see benefits working in greater collaboration. 


CASE STUDY 4

Aratiatia Power Station is a hydroelectric power station on the Waikato River, in the north Island. It is the first hydroelectricity power station in the river and is located 8.1 miles downstream of Lake Taupo and owner-operated by Mercury Energy.

The installed capacity is 78 MW and annual generation is 331 GWH (nearly 40 times larger than the one I am working on for installation in Wales at the moment!).

As a result of the dam, it has formed the Aratiatia Rapids which several times a day are open and create quite a spectacle when the gates release 80,000 litres of water per second!

Although, when built it altered the flow of the river, surely the benefits of renewable energy of this scale outweigh the slight alterations to the environment?



25th May 2018

Kaipara Harbour, north of Aukland, North Island


A TASTE OF THE "REAL WORLD" THAT COULD AWAIT UK FARMERS 

"Welcome to the real world" was the first thing my host, a dairy farmer in South Northland, said as I outlined the threat to our beloved subsidies in the UK.

Without showing any compassion or concern, he detailed the tough ride that faces British farmers but he outlined there will be long term benefits for those who make it through, as he knows first-hand.

Having started as a share milker in the year subsidies were abolished as part of "Rogernomics" (policies introduced by Labour Minister of Finance Roger Douglas in 1984 for market-led restructuring and deregulation, ironically partly to help cope with losing a significant export market after the UK joined the EEC) and having had his newly-purchased herd drop by 50 per cent in value, together with the sharp decrease in milk price, he fought through and now owns 400 acres and milks 350 cows. He shares the view of many other farmers here with little or no sympathy for us, who they regard as a spoilt industry that must become aligned with other industries.

To survive the effects of Brexit, perhaps we need to roll up our sleeves and divorce the concept of land ownership and farming - if you truly want to be a farmer do you have to own land? There are a number of other formulae to get into farming and as young farmers are we too fixated on believing we can’t farm because land prices are too high when through some determination and off-farm income it could become a reality? How many opportunities could form as a result of Brexit? I am personally excited by the future!

Limited labour and resourcefulness, together with "making do", will perhaps be key factors, but could this come at significant detriment to our landscape and rural economy?

Lack of government aid could see our dry stone walls fall, ditches and drains overflow and uplands become overgrown with gorse and heather, which in turn could have an effect on a number of things, including tourism, should our landscapes fall into ruin. DEFRA Secretary Michael Gove has a complicated problem on his hands, especially when we see potential conflict arise between landowners and tenants over a number of maintenance and improvement matters, let alone rent reviews when a landlord wishes for larger environmental credentials and the farmer greater areas going into production. Rent reviews may get very interesting for the land agent community...



15th May 2018

Whangarei, North Island


TECHNO IS THE THEME FOR LOW COST GRAZING

I have learnt more about grassland management and efficiency in the last few weeks than in my entire farming career. This has been topped off by a fascinating visit to a Friesian bull beef farm looking at the concept of TechnoGrazing.

The system, developed here in NZ but now beginning to make an appearance in the UK, looks at the science behind grazing, grass growth and the nutrient cycle, together with low input farming. The TechnoGrazing concept can be used for beef or sheep and is based around high stocking densities in small areas but rotating the cattle in the subdivided fields every two days based on a 30-day cycle. Pasture is grazed hard and then left for 28 days which allows the grass to recover.

Widespread use is still relatively new but with low set-up costs using electric fencing, fibre glass fencing posts and bungee fence entrances it banishes the need to get off the quad to open any gates - you just go through them! Dramatically reducing labour time and using GPS for fences, areas, races and water connections, all mapped and plotted, allows for serious precision management.

Still using only grass as feed, with no concentrate but some cheap supplements, is all that is required. It slashes costs and means the unit of 900 plus bulls, split into groups (mobs) of 30 to 60, can be managed by a single man while still allowing time for additional off-farm income if required.

Having spent time on the hills looking at the extensive systems, TechnoGrazing seems to combine the low inputs required on the hills with the intensive stocking and production rates found on many lowland stock farms - mainly finishing at around 20-24 months.

This is a concept most farmers may need to adopt and something personally that I will apply post-BREXIT; intensive production but in a low cost system. With livestock feed and labour the biggest costs, eliminating these and livestock production here seems highly profitable. However, I keep reminding myself that NZ grass growth is more prolific than in the UK and, as such, may boost this type of system.

This type of farming may scare off the purists, with science, GPS, strict grazing rotations and policies integral to the concept, but farming as a whole must grasp the modern technology to improve efficiency.

In some ways it bears comparison to the grazing system for both cattle and sheep over the military training grounds on Salisbury Plain or the extensive grass-based dairy units where vast tracts of grassland are divided into substantial plots with electric fences that are regularly moved. But the NZ system of smaller grazing areas and faster movement between them is not yet a feature. Maybe it could be very soon!


CASE STUDY 3

A 550 acre farm based north of Whangarei, using TechnoGrazing concepts for circa 900-plus head of Friesian bull beef.

Cattle are finished between 20-24 months and purchased from a number of dairy farms and similar sources. One labour unit is all that is needed, while efficiency allows for earning additional off-farm income. There is no on-farm diversification due to the concentration on the bull beef enterprise.

TechnoGrazing requires significant infrastructure utilising electric fencing, internal races, and irrigations where required. Subject to price, this system is keeping up with diary on a NZ$/hectare basis, therefore providing substantial returns for low input costs. 



30th April 2018

Hokianga Harbour, North Island


LACK OF FARM SUBSIDIES RAISES ENVIRONMENTAL IMPACT

The lack of subsidies for New Zealand farmers gave them a tough ride but they face another over the next few years.

A result of the lack of subsidies has been more intensive production, especially in the dairy industry, which has meant an increase in surplus nitrogen, something the NZ government is becoming very hot on resulting in similar requirements to our NVZ regulations in order to protect the environment.

The obvious question for farmers is that if they are not paid any subsidies then why should they conform to regulations which in NZ will mean reducing cattle numbers, in turn cutting efficiency and therefore profitability?

Some adjustment, and perhaps lessons from the UK regime, may be required. NZ farmers seem allergic to buildings and concrete, something UK farmers are obsessed with, and having concrete pads, separation tanks, and fences for all water courses as a future requirement, together with no funding from the government, could be a huge financial headache, just as it has been in the UK for a number of years.

Therefore should we consider whether keeping a balanced environment is always going to hinder farmers in improving efficiency, productivity and their incomes and should farmers be compensated for providing this public service or perhaps farmers should take more responsibility for the environment. In the good times, I think all farmers will consider they are adding value to the environment, but should interest rates rise, prices reduce, and a drought occur environmental practices may be the first to go.

As DEFRA Secretary of State Michael Gove has previously mentioned, any payments will require greater environmental credentials as justification to the public but we should be grateful for getting any grants or funding, which is not as common here in NZ, and I would urge all farmers and landowners to take advantage now!

No Entry Level Stewardship (ELS), Higher Level Stewardship (HLS) or Countryside Stewardship (CS) schemes are available in NZ; farmers here think we have hit the jackpot with our weak pound pushing up our BPS payments, guaranteed environment support, and the raft of other grants - they keep asking how can we not make money? Having taken a step back from UK farming, perhaps they are right and Brexit will provide this shake-up required by the industry for a number of years.

However, we need to be careful when considering this as most farms are managed in hand here, with the traditional English estates consigned to the history books and “Downton Abbey”. The reduction in subsidies may have a much more all-round effect on landlords’ investments, the local community, and associated agricultural sector. Being paid for environmental obligations may not keep the rents up to today’s levels or even farmers’ first charges as part of a contract farming agreement. Could this therefore mean the objectives of the Landlord and Tenant / Contract Farmer become misaligned with one focusing on production and the Landowner concentrating on the environmental payments?


CASE STUDY 2

A 750 acre upland farm on the edge of the Hokianga Harbour, Northland, which until recently was part of a 1,500 acre unit, focusing on finishing store cattle on an extensive system brought up from the South Island, together with a herd of Aberdeen Angus. The holding was recently split as the two brothers in ownership decided that division would allow both parties to “plough their own furrow”.

Mentioning concentrate and supplementary feeding are dirty words on this farm, with low costs and low labour essential (a common theme so far). Paddocks are rotated regularly but as they average 50-plus acres they are much larger than those on the lowland drystock and dairy farms. Some silage may be used in a hard winter but given the grass growth, low stocking density, and cattle finishing in excess of 24 months the extensive system seems to work well with the owner as sole labour force.

Constant battling against scrub and rushes requires large amounts of work on steep banks to continue to improve the grass quality. Spraying is also a large part of the work; given the steep banks, the vast majority is done on foot or horse back.

This farm perhaps mirrors a number of our upland farms at home but is successful and making profit without any form of subsidies thanks to the use of effective low-cost solutions. Some alternative income is found through beehives and the use of an airstrip by neighbouring farmers for fertilising and spraying but here is an upland hill farm surviving with no government support. Less is more in this instance!



16th April 2018

Hamilton, North Island


LACK OF FARM SUBSIDIES DEVELOPS A DIFFERENT MINDSET

In New Zealand, farm subsidies disappeared at a stroke in the 1980s. That may not be the case in the UK after Brexit but one thing common to both scenarios is the need to develop a different mindset.

When I mention Brexit, the first thing all New Zealand farmers ask is less how will it affect us in the UK and more how will that benefit farmers in NZ? This is an example of the business-minded approach adopted since the abolition of subsidies with farmers always looking to reduce costs, turn a profit, and stretch their assets as they seek additional opportunities.

Farmers and landowners appear much more flexible and cooperative, something I have already predicted may be necessary in the UK. A number of people I have met are investing in farms together for business purposes and returns rather than to fulfil lifestyle ambitions or utilise tax advantages, as is the case with many UK buyers. Farms are bought and traded more frequently with less sentiment and more fluidity in changing farming enterprises. For example, here a retiring dairy farmer may turn to the less work intensive kiwi and avocado orchard, or upland sheep enterprises to lowland suckler. However, there are still a number of long term occupiers with ownership passing through the generations since arriving in the 1850s.

Individuals, groups, and investors also seem to have the luxury of buying up land and converting it into more valuable enterprises, such as from pasture to orchard or dry stock to dairy farms, to increase capital values and saleability. I cannot imagine this happening in the UK’s current tax regime but in NZ it helps as there is no Capital Gains Tax (CGT) or Inheritance Tax (IHT) making investments more credible and flexible and less about tax avoidance and strategy. The no-subsidy system drives efficiency and encourages true investment. NZ businesses would not accept a measly one percent return on investment as is the case in the UK.

Traditionally, values for NZ farmland were based on earnings potential but are now switching back to a more NZ$/hectare basis due to investors knowing that they may be more productive and also that potential sub-division (lotting a property) could be utilised. Splitting properties is much more difficult as a result of strict planning policy and the legal requirements to split the land titles and other such rights. Overall, there is a hybrid ownership system of both farmers and investors looking for true realistic income and capital returns. Subsidies are a distant memory and it’s something perhaps that farmers are proud of in now not relying on subsidies and other market adjustments. Although incomes can be more volatile as a result, farmers feel they are reaping the rewards of farming effectively through imaginative partnership and funding opportunities, something we in the UK will have to consider post-Brexit on all farms, no matter what basis, tenure, or enterprise.

It would seem that our current tax regime does not help; it reduces productivity and investment in land over fears of taxation and upsetting our inheritance tax strategies. We therefore need to consider how to be imaginative, balancing our complicated tax structure, valuation methodology and earning potential post-Brexit.



CASE STUDY 1

The first farm I stayed on was a small 140 dairy cow herd, across 550 acres west of Hamilton, south of Auckland on North Island. This owner-occupied farm utilises home labour of the father and son team, with contractors for all arable operations.

There is an extensive system milking once a day; its low input, low output makes a very basic parlour work for them and they always question why they would need to invest in concrete and buildings when they are just not required. I think they might struggle with this system in our UK climate but it is perhaps a good point to bear in mind when old buildings may have to be sufficient or merely modified rather than replaced when our subsidies dry up.

The team makes do without flash kit in order to maintain low inputs and reduce labour but interestingly they have hit diversification in a big way, unlike a number of farmers I have so far met. An existing horse trekking enterprise undertaken by the father utilises more than 70 homebred horses. They are looking to expand this via off grid camping, huts, and other accommodation together with putting a large emphasis on education. The only way the milking parlour would be replaced is if it became part of the educational enterprise with a glass viewing platform installed for guests to view milking.

Off-roading and motorcross are both being looked into for future events as they are real cash generators. The owners potentially see the farm as more of an events venue than a core farming enterprise due to the economies of scale now required and the coming need to meet new environmental regulations. Without the enterprises, milking would not keep them financially viable.

New Zealand, a rural economy at heart with tourism spread across the holiday hot spots and cities, seems to shy away from diversification as we know it in the UK, with many seeing either it as a distraction from their farming business or not having the ability of UK farmers to exploit their location or transport links. However, with the rise in regulations and environmental conditions creeping into the industry, diversification or adding value to their products may be something many Kiwi farmers review in due course.