THE ANZ PRIVATELY-OWNED BUSINESS BAROMETER · 2015-07-14 · The ANZ Privately-Owned Business Barometer is one way we can share information about the key issues for the sector and

PRIVATELY-OWNED BUSINESS

BAROMETER

THE ANZ

DAIRY KEY INSIGHTS 2015

DAIRY BUSINESS KEY INSIGHTS

PAGE 01

To stretch a rugby analogy further, no forward pack can be on top all the time. There are ebbs and flows within every game, and the best teams respond to those periods by changing their game plan where they need to.

Dairying has always been a cyclical business and dairy farmers are practical, resourceful people. This year’s Privately-Owned Business Barometer shows that they are responding to the current cycle by looking hard at how these run their business.

This year’s Barometer also identified a renewed focus on the bottom line, and on driving profit through gains in efficiency. We think that’s a positive development – especially given the likelihood of increased volatility and increased competition in global markets. The key to the long-term success of the sector lies in building the resilience that will allow it to respond to these and other challenges.

Another key to long-term success is tackling the issue of succession. In this year’s Barometer we noted a significant shift in mind-set, with farmers increasingly seeing themselves as

business owners rather than land owners. This shift has seen the emergence of a multi-generational business model which offers new options – and new challenges.

The ANZ Privately-Owned Business Barometer is one way we can share information about the key issues for the sector and what farmers are doing to address them, and I’d like to thank all those farmers and industry participants who contributed to this year’s ANZ Barometer. We hope you find it useful and relevant.

Above all, we look forward to continuing the discussion and continuing to play a major part in this vital sector.

Graham Turley Managing Director — ANZ Commercial & Agri

The dairy industry is enormously important to New Zealand. To use a rugby analogy, it’s the forward

pack that provides the platform for our economy, and allows others further out to prosper.

BUILDING RESILIENCE


PAGE 02

If there’s one thing you can say about the dairy industry, it’s that it’s never boring. Last season’s record pay-outs have given way to a slump in dairy prices, with flow-on effects for dairy farmers and indeed for the New Zealand economy.

It’s nothing new. Dairy farming is a cyclical business. The weather, the markets, the economy and other factors all have their own patterns and cycles, which affect the daily fortunes of dairy farmers and which are largely out of their control. Those who have been in the industry for a while know that what goes up will eventually come down – and vice versa. They’re pragmatic about what they can influence and what they can’t.

But every cycle also has its own challenges. This year’s ANZ Privately-Owned Business Barometer showed that while confidence in the future of the industry remains high, dairy farmers are currently grappling with a range of issues. Some are short-term, such as managing costs and cash flow in response to the downturn in commodity prices, and the flow-on impact on revenue. Others are much longer term, such as where future growth will come from given the constraints on land use, and the complex choices to be made about succession and ownership structures into the future.

What is clear is that finding solutions to these issues will require farmers to challenge existing ways of doing things. One of the features of this year’s Barometer was a strong emphasis in high-performing farms on achieving efficiency gains in all areas of their operation.

There is no magic bullet to surviving and thriving through the current dairy cycle. However in our survey and discussions with the sector during this year’s Barometer, we found many pithy insights into long-term sustainable success, six of which we explore here.

A SNAPSHOT OF RESPONDENTS

369 dairy businesses (farming and support) completed this year’s ANZ Privately-Owned Business Barometer, compared to 201 in 2013. Respondents varied in size, location, profit and ownership structure.

Those who take action now will not only be better placed to manage through the short-term challenges

that come with this stage of the cycle, they will also be better placed to prosper when the cycle turns.

THE QUESTFOR EFFICIENCY

INTRODUCTION


PAGE 03

Percentage of respondents (%)

$11m plus

$5m – $10m

$2m – $5m

$1m – $2m

$500k – $1m

$250k – $500k

$100k – $250k

Less than – 100k

OWNERSHIP STRUCTURE OF DAIRY RESPONDENTS

69%

1%

15%

12%

7%

Farming equity partnershipSomething elseFamily owned businesses

Maori business or Maori-owned businessNot for profit

FARM PROFIT OF DAIRY RESPONDENTS

0 5 10 15 20 25 30


PAGE 04

In this year’s Barometer, the level of optimism expressed by farmers about the future of the dairy industry depended on how far into the future they looked. Dairy farmers were amongst the most pessimistic of any group about the short-term outlook.

Dairy businesses were by far the highest of all sectors reporting a decrease in profit in the last year (43%) and the lowest of all sectors reporting a rise in profit (27%).

TAKING ALONG-TERM VIEW

INSIGHT ONE: LONG-TERMCONFIDENCE IN THE FUTURE

DAIRY RESPONDENTS’ PROFIT CHANGE OVER THE LAST FINANCIAL YEAR

Perc

enta

ge o

f res

pond

ents

(%)

35

30

25

20

15

10

5

0

Down > 25%

-11% to -25%

-5% to -10%

-1% to -4%

+1% to +4%

+5% to +10%

+11% to +25%

Up > 25%

About the same

Negative Positive

DairyAll industries


PAGE 05

What’s more, some don’t see things improving much over the next 12 months. 16% of respondents also expect a decrease in profit growth in the next year.

They are also more pessimistic about the New Zealand economy over the next 12 months than any other group. It’s not hard to understand why. The fall in milk prices has been significant and further downside risk remains, creating considerable uncertainty amongst farmers.

Yet it’s interesting to note that when you look out over a three year term, they are generally optimistic about both their business and the New Zealand economy. Over a three year horizon levels of optimism are around the same as other industries, reflecting a long-term confidence in the future of the industry.

That positive outlook has long been a feature of the New Zealand dairy industry. In dairy focus groups held following the survey, many farmers felt that having a positive attitude, and taking a long-term view, was critical to their success. So is the experience that comes with living through the cyclical ups and downs that are a fundamental part of the industry. As a result, farmers generally don’t worry too much about external factors that they can’t do anything about. They put their effort instead into the things they can control.

However, there is a danger in complacency. Cycles come and go, but continuing to do what you’ve always done is no longer enough. There is a break point developing between farmers who plan and adapt their business models to a changing environment, versus those who operate from a self-imposed rule book.

35

30

25

20

15

10

5

0

DAIRY RESPONDENTS’ EXPECTED PROFIT GROWTH NEXT FINANCIAL YEAR

Perc

enta

ge o

f res

pond

ents

(%)

Perc

enta

ge o

f res

pond

ents

(%)

DAIRY RESPONDENTS’ EXPECTATIONS FOR THE NZ ECONOMY (12 MONTHS)

1

Very pessimistic Very optimistic

2 3 4 65 1

Very pessimistic Very optimistic

2 3 4 65

35

30

25

20

15

10

5

0

DAIRY RESPONDENTS’ EXPECTATIONS FOR THE NZ ECONOMY (3 YEARS)

Perc

enta

ge o

f res

pond

ents

(%)

35

30

25

20

15

10

5

0

DairyAll industries

DairyAll industries

DairyAll industries

Negative Positive

Down > 25%

-11% to -25%

-5% to -10%

-1% to -4%

+1% to +4%

+5% to +10%

+11% to +25%

Up > 25%

About the same


PAGE 06

The two key issues for farmers in the current environment are:

• Managing their cash flow in the face of a significant decline in milk prices, and;

• Driving for the efficiency required to remain competitive in the face of growing world competition.

An additional challenge for farmers is that the two can be mutually exclusive – for example, cashflow restraints limit high returning capital investments.

Managing through tough timesFigures from ANZ’s Rural Economics team suggest that compared with last year, dairy farmers will experience an average reduction in income of $292,000 in the middle six months of 2015. As a result, DairyNZ is predicting that many will remain in overdraft for the whole year rather than returning to the black at some stage during the summer months, as per the normal seasonal cycle.

Interest rates are low, and as a result, debt levels are not the issue they were a decade ago. However, 25% of farmers have debt of $33 per kg Ms produced,* and this is difficult to sustain in anything but the most efficient of operations.

The high pay-outs of 2013-14 have provided some wriggle room for farmers – but this has now run out in the 2015/16 dairy season.

DairyNZ predicts in 2015 the average farm will break even at about $5.75 kgms. That’s down from $6.21 in 2013/14 as a result of farmers actively seeking and achieving operating efficiency – but there will still be a lot of pressure on farm budgets.

Feedback from the Barometer indicates that farmers are responding to the drop in prices the same way they always have – by looking very hard at capital expenditure and discretionary costs, cutting back where they can (for example on things like track maintenance) and setting very clear priorities for spending.

* Source: 2013-14 Dairy NZ Economic Survey

The key is finding innovative approaches to help manage through the current tough times, while

maintaining productive capacity and positioning to take maximum advantage when the upturn comes.

DRIVINGEFFICIENCIESINSIGHT TWO: “NEVER WASTE

A GOOD CRISIS”


PAGE 07

That’s not a bad thing – it’s an opportunity and an incentive to focus on creating a low-cost business model that will enable farmers to do well in bad times as well as good. The question for trimming costs is what is fat and what is muscle? Farmers are examining much more carefully how much capital expenditure costs are included in their historical operating expenditure, to help them get a clearer picture of how much costs can be reduced.

The challenge, of course, is in striking the right balance. Farmers should be wary of cutting back in areas that will have a negative impact in the long run. They need to cut fat – not muscle.

Investing in efficiencyThe current environment of volatile commodity prices and increased offshore competition requires adaptation based on solid evidence and planning, rather than instinctive reactions.

There has been considerable industry debate over the merits of low, medium and high input business models, but in fact the

range of financial results from each system are quite similar. Most variation shows up because of the farm operating efficiency.

Commentators have predicted a return to low input systems as a response to current commodity prices, but this isn’t being borne out by the evidence. Instead, farmers are driving for efficient spending, where marginal returns outweigh margin costs.

Capital expenditure has been discretionary, based on having available cash. However, while more farmers are realising they need strong disciplines on capital spend, they are also realising that they may need it if it increases business efficiency – whatever their current cash position.

The key is finding innovative approaches to help manage through the current tough times, while maintaining productive capacity and positioning to take maximum advantage when the upturn comes.

Source: DairyNZLow = System 1 & 2, Medium = System 3, High = System 4 & 5

RETURN ON ASSET 2013–14

25

20

15

10

5

0

Retu

rn o

n da

iry a

sset

s (%

)

Low Medium High

50

40

30

20

10

0

WHERE DAIRY RESPONDENTS HAVE SPENT LESS MONEY IN THE LAST 12 MONTHS

Perc

enta

ge o

f res

pond

ents

(%)

Other capital

expenditure

Plant and/or

machinery

Livestock feed

purchase

Debt repayment

Research and

development

None Staff

47% 43% 32% 25% 16% 13% 13%

BREAK–EVEN MILK PRICE

Source: DairyNZ

2012 –13 2013 –14 2014 –15 estimate 2015 –16 forecast

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

Interest and rentDrawing less stock incomeTax

Farm working expenses

Pric

e in

NZ

Dol

lars

($)

$4.01

$1.37

$5.98 $6.21$5.80 $5.75


PAGE 08

In the previous ANZ Business Barometer we noted a shift in mind-set in the agri industry towards focusing on profit. That theme came through strongly once again in this year’s Barometer.

Respondents from the dairy industry identified a number of reasons for that shift:

• The Global Financial Crisis, and more recently the fall in milk prices, has shown how quickly things can change, and how volatile markets can be.

• The industry is facing increasing competition in global markets, with the removal of milk quotas in Europe, and the growth in large-scale operations.

• Some dairy farmers are asking whether the industry is reaching the limits of production. Land availability and environmental impacts are major constraints, which raise questions about where growth will come from (however, others view the rate of emergence of new science and technology as driving significant new opportunities).

Controlling costs, of course, plays a big part in increasing profitability. Average operating costs have remained relatively stable (thanks in the main to productivity increases) at around $4.10/kgms, while the total cost structure in the industry (taking into account interest and other expenses) has averaged around $6.37 over the last five years* – though it will be higher for some operations. Given the current milk price, this raises questions about the long-term sustainability of those operations. In an environment where price volatility is likely to continue, farmers will need to continue to refine their systems to build resilience and ensure they can return a profit when prices are low.

To quote well-known Canterbury farm accountant Pita Alexander: “Production is vanity and profit is sanity”.

However, to make good decisions, farmers need to understand profit, and this is not as easy as it seems at first sight. With an increase in farm governance, and diverse advice, more businesses are looking at the measurement of financial performance.

FARMMANAGEMENT

INSIGHT THREE: P IS FOR PROFIT

* As estimated by ANZ’s Rural Economics team


PAGE 09

“Production is vanity and profit is sanity”Pita Alexander, Canterbury

CASH TAXMANAGEMENT ACCOUNTS

Positive It is essential to understand and predict cash movement, so cash is controlled, and funding requirements met. Many dairy businesses will require significantly increased overdrafts in 2015-16.

This is required for legal compliance and to identify appropriate tax.

• Expenditure is matched to the period income is received in.

• Better demonstrates business performance, resilience and opportunity.

• It is a better basis for understanding the effect of investment decisions.

Negative May cause investment options to be missed.

Doesn’t show either cash or economic performance.

Not well understood.

Everyday example Stock feed system not put in place because of the effect on the overdraft, and livestock feed wasted feeding on the ground.

Farm accounts for the company, trust and partnership operating the farm put in the bottom draw after review of the tax summary.

Farmers who respond to price signals earlier when all dairy income is included in the year in which milk is produced.

How profit is measured can influence investment decisions. Simplified, the choices to measure profit are to report and budget projections on a cash, tax or management/accrual basis.

It’s important to understand the positives and negatives of each approach:

MEASURINGPROFIT


PAGE 10

DRIVING PROFIT THROUGH INCREASED EFFICIENCY

Dairy farmers are responding to the challenge of increasing profitability in a number of ways. We asked farmers, advisers, bankers and representatives of supplier industries to identify strategies to increase efficiency that they are using or aware of.

The examples below illustrate some of the responses to the drive for efficiency.

These examples show that despite calls within the industry for a return to more traditional, grass-based farming systems, the focus for many farmers remains on looking for opportunities to increase production.

INPUTS MANAGEMENT OUTPUTS

LabourMany are reassessing shareholders’ salaries and drawings.

Livestock feedMost are not reducing feed inputs, but the move is to lower cost feed, away from blends. Palm kernel is being heavily used still.

LandConsidering buying run-offs rather than grazing as they can grow supplements and better control replacement quality.

GrazingHeifer and cow grazing is reduced, with stock bought home, and fed on crops and bought-in feed.

FertiliserFarmers are closely examining fertiliser levels, and use of nitrogen to maximise feed growth.

PasturePasture is cheaper than stock feed, but still expensive if the cost of land is included. The way to reduce cost is to increase volume grown by better pasture management and increased renewal with new seed varieties.

ForagesThere is a significant increase in forage plantings. Fodder beet has been described as a game changer.

Infrastructure and precision agriculture Farmers are increasing their use of new technology in areas such as irrigation control, fertiliser application, livestock recording and management.

Financial managementReactivating their financial management practices/planning, budgeting and tracking, and deeper analysis of marginal cost versus benefits, and returns on capital investment.

Pasture managementRefocusing on this critical success factor, whatever system they are operating.

LivestockCows are being culled heavily and early so low performers don’t consume expensive feed.

Labour cost Large-scale operators are relooking at sharemilking for management quality, labour cost and efficiency.

In other cases, farmers are planning a move from 50/50 and variable order sharemilker models towards contract milker roles, to provide certainty around labour costs.

AdviceSuppliers report high demand for advice – particularly in agronomy and nutrition.

Few farmers expect to reduce production.

In some cases, farmers are planning to increase production to spread fixed costs and reduce break-even milk price.

Beef production through increased calf rearing and animals being finished to greater weights.


PAGE 10


PAGE 11

BUSINESS MANAGEMENT PRACTICES

When it comes to managing their business, the common perception of farmers is that most don’t have a budget – and for those that do, it exists in their head and not on paper. However, the 2015 ANZ Business Barometer revealed a surprisingly strong result when it comes to budgeting.

Fifty one percent of dairy industry respondents said they compared budget to actuals on a monthly basis. Some reported doing this more frequently, as it helped them manage their GST and cash flow better – as well as helping them sleep at night! Some 36% said they benchmark their businesses against similar operations annually.

We are seeing a significant increase in the use of accounting and financial management tools like Xero and Cash Manager.

In businesses with larger, more corporate structures and businesses with boards, there is evidence of the value of the more formalised business management and decision making processes.

These ‘corporate’ processes are often very different to what many farmers are used to. However, most see this as a positive change as they impose disciplines on the business that are both necessary and beneficial – and data from the Barometer indicated that they have a beneficial impact on the bottom line.

HOW OFTEN DAIRY RESPONDENTS COMPARE BUDGET TO ACTUALS

Perc

enta

ge o

f res

pond

ents

(%)

At least weekly Monthly Quarterly Half-yearly Annually

60

50

40

30

20

10

0

60

50

40

30

20

10

0

Perc

enta

ge o

f res

pond

ents

(%)

HOW OFTEN DAIRY RESPONDENTS WORK OUT OPERATING PROFIT

(WITH BOARD VS. WITHOUT)

At least weekly Monthly Quarterly Half-yearly NeverAnnually

Dairy with boardDairy without board

Perc

enta

ge o

f res

pond

ents

(%)

HOW OFTEN DAIRY RESPONDENTS CALCULATE RETURN ON ASSETS (WITH BOARD VS. WITHOUT)

60

50

40

30

20

10

0

At least weekly Monthly Quarterly Half-yearly NeverAnnually



PAGE 12

It’s interesting to note that over 30% of the dairy businesses in the Barometer have boards – a much higher percentage than the commercial sector as a whole. This is a reflection of the increasing size and complexity of dairy businesses and the growth of new ownership structures such as equity partnerships, both as an alternative path into farm ownership and as a means of succession.

BOARD SKILLS REQUIRED

Key concerns for farmers in this year’s Barometer was commodity price volatility, along with the consequences of environmental and occupational health and safety non-compliance. It’s clear that managing risk has become a significant concern for many farmers, and an area where they are looking for advice.

CHANGE IN DAIRY RESPONDENTS’ PROFIT OVER THE PAST YEAR

Perc

enta

ge o

f res

pond

ents

(%)

Down > 25%

-11% to -25%

-5% to -10%

-1% to -4%

+1% to +4%

+5% to +10%

+11% to +25%

Up > 25%

About the same

Negative Positive

35

30

25

20

15

10

5

0



PAGE 13

The impact of boards Most equity partnerships have boards, and it was interesting to note that equity partnership respondents to the survey and at focus groups showed quite a different result to that from family businesses.

The increased scrutiny boards place on budgets and results caused equity partnership farm managers to examine and prepare recommendations more thoroughly, and with more analysis.

It was expected that current commodity prices would most impact large-scale South Island dairy operations converted in the last decade, but there was some feedback from advisers that family farmers are finding conditions a greater challenge for this reason.

SOURCES OF ADVICE

One perhaps surprising insight from the 2015 Barometer was the continuing reliance by dairy farmers on their accountant and bank for advice when making significant business decisions – higher than for New Zealand business owners as a whole. They are also more likely to seek advice from their family and friends.

There is, though, a growing interest in using independent advisers. The driver for this is to bring new perspectives to the table, challenge existing paradigms and ask the ‘dumb questions’ – which very often turn out to be not so dumb at all. However, finding the right people, with the right skills and knowledge (particularly when it comes to strategic decisions), can be a challenge – especially for businesses without boards. Complicating the issue is the fact that dairy is a tight-knit industry, which can make it difficult to get truly independent advice.

One option for introducing new perspectives is via other high-performing dairy businesses. While dairy farmers are less likely than the commercial sector as a whole to seek advice from other business owners, one of the characteristics of the top performers is that they tend to talk to each other and share information and knowledge that can drive improvements in performance.

Agri suppliers see provision of advice as critical to retention and seeking to increased sales. All the larger businesses are investing heavily in developing staff with the ability to add value for farmers’ decisions.

One sales manager of a large agri supply company described advice as a commodity. Farmers expect high-quality staff advice as a condition of doing business, and will shift suppliers if it doesn’t meet their expectations, but they are not willing to pay for it.

Bringing in different perspectives from other industries and greater commercial skills can also help. One example discussed in a Barometer focus group was the under-subscription of Fonterra’s recent guaranteed milk price offer:

“Dairy farmers are used to fluctuations in the price they receive for their milk. As a result, many made their decision on the fear of ‘missing out’ if the final price exceeded the guaranteed price. Other industries, however, place a greater value on the benefits of price certainty in terms of budgeting and investment. Having that different perspective may have provided a useful input into farmers’ decision-making processes.”

TOP FIVE SOURCES OF ADVICE WHICH WERE HELPFUL IN LAST BIG BUSINESS DECISION

Bank Accountant Family/ friends

Farm consultant

Colleagues

Perc

enta

ge (%

)

80

70

60

50

40

30

20

10

0

67%66%

39%37%

21%

Perc

enta

ge o

f res

pond

ents

(%)

Strategy Risk management

Regulation and

compliance

Finance Industry-specific

expertise

45

40

35

30

25

20

15

10

5

0

42%41%

40%

35% 35%

TOP FIVE SKILLS WANTED TO STRENGTHEN BOARD


PAGE 14

HANDS-OFF OR HANDS-ON? THE ROLE OF TECHNOLOGY

While the fundamentals of dairy farming haven’t changed much, technology is continuing to change the way those fundamentals are carried out. Barometer respondents noted the impact of technology on all aspects of farm operations.

For example:

• Mobile technology allows farmers to monitor and manage what’s happening on the farm from anywhere, in real time, and farm workers to access herd records on farm.

• Technology is allowing irrigation to be maximised by targeting it to specific soil profiles.

• Business modelling software like Farmax and Udder are helping farmers look at different scenarios and optimise their farming system – and the list goes on.

Perc

enta

ge o

f res

pond

ents

(%)

Perc

enta

ge o

f res

pond

ents

(%)

EXTENT TO WHICH MOBILE TECHNOLOGIES HAVE CHANGED DAIRY RESPONDENTS’

BUSINESSES

1

No change at all

Totally changed

Improved productivity

Better payment solutions

Improved staff

satisfaction

Reduced costs

Something else

Improved customer

satisfaction

Increased sales

2 3 4 65

30

25

20

15

10

5

0

30

25

20

15

10

5

0

MAIN BENEFITS DAIRY RESPONDENTS SEE FROM MOBILE TECHNOLOGY


PAGE 15

The new generation of farmers will require new skills to be comfortable with and make the most of technology. But they will also need to keep sight of the fact that technology is an enabler, not an end in itself. Participants in the Dairy Focus Groups noted that young people increasingly want to manage farms, as opposed to working on them. But while technology will become increasingly important, it is still no substitute for practical, hands-on farming knowledge and a passion for the industry.

BEYOND THE FARM GATE

As already noted, a lot of the things that impact farmers’ income are beyond their control. That’s why they tend to focus on managing the things they can control – which is everything that happens up to the farm gate.

However, the Barometer revealed an increasing concern about what happens to their milk – and the returns they get from it – after that. A number of respondents questioned the industry’s focus on continually increasing production, when the focus should be more on increasing value – especially in the context of the current discussion about whether the limits of production are being reached.

New Zealand dairy farmers feel they are producing a premium product, but some feel they are not necessarily receiving a premium price. One response is to seek more control over their supply chain, and ultimately the price they receive for their product.


PAGE 16

Barometer respondents are predominantly looking to invest profits in reducing debt, and back into the farm. The main areas for on-farm investment reflect the focus on increasing efficiency. In particular:

• Over 50% are planning to invest in renovating pasture or planting more area in forage crops,

• 45% are planning to invest in improving animal genetics,

• 42% are planning to invest in improving feed budgeting.

FARMINVESTMENT

INSIGHT FOUR: OBJECTIVELY ANALYSED DECISIONS SET HIGH PERFORMERS APART


METHODS CONSIDERED BY DAIRY RESPONDENTS TO INCREASE FARM PRODUCTION

0 10 20 30 40 50 60

Renovating pasture or planting more area in forage crops

Feed conversation systems and feeding systems

Animal identification and performance measurement

Acquire more land

Increasing fertiliser application

Increasing irrigation area

New land under irrigation

Livestock standoff shelters/paperpads

New fencing

Improving animal genetics

Improving feed budgeting


PAGE 17

Investments to increase efficiency include:

• Feeding Systems leading to reduced losses, plant and labour costs

• Effluent systems reducing fertiliser cost

• Irrigation scheme extension and application methods e.g. gun to spray

• Cow barns increasing feed conversion efficiency

• Cowshed plant reducing labour

In each case, advanced technology is an enabler.

Doing the numbersIn terms of the process for making investment decisions, most were made on the basis of gut feel to improve production, rather than through a formal return on investment (ROI) process. And once investment decisions were made, the returns on those investments were rarely, if ever, formally tracked or monitored.

There are a number of reasons for this. Farmers have traditionally relied on gut feel and instinct when making decisions, and it can be difficult to get relevant data, both for evaluating different scenarios and tracking the return on investment.

But while gut feel has worked well for farmers in the past, the increasing complexity of farming makes it important to supplement that with hard data and an objective process for evaluating different options.

The relationship between inputs and outputs is complex, and many farmers put formal analysis in the too hard basket. However, resources such as DairyBase, and planning and business modelling software such as Farmax and Udder, provide agri industries with very effective tools to support business optimisation and efficiency decisions.

They can help farmers prioritise investment decisions and apply their hard-earned dollars not just where they will get a return on their investment, but where they will get the best return for their business.

BenchmarkingFarmers use benchmarking heavily, but too often they use averages rather than that required for an examination of the factors which lead to outperformance.

Focus group farmers expressed demand for more granular benchmarking, along with detailed information about similar businesses gaining better results than them, that they can learn from. These become a basis for potential investments and changes to farming practice which drive efficiency and profit.

From the survey and focus group feedback, high-performing businesses are also continuously doing partial budgets to examine opportunities. Calculators and spreadsheets are being used every day.

Focus group farmers described this multitude of small objectively analysed decisions as a key discipline that sets apart high performers from the average. Many farmers are still making investment decisions on instinct and preference. Farmers express this as “I just like to farm that way.”

But as the case study on the following page shows, when financial goals aren’t set and there is little or no ROI analysis, financial results are often mixed.

THE ROI CALCULATION

Increase in EBIT for the investment period

Investment required to achieve the increase

The % return on investment

40

35

30

25

20

15

10

5

0

HOW OFTEN DAIRY RESPONDENTS BENCHMARK AGAINST SIMILAR FARMS

Perc

enta

ge o

f res

pond

ents

(%)

At least weekly

Monthly Quarterly Half-yearly NeverAnnually


PAGE 18

AN INVESTMENT–DECISION MAKING MODEL

• This includes the current earnings, but also modelling the marginal improvement in production as a result of any new expansion capital spending.

• How much is being invested to maintain the current business?

• How much is being invested to increase production?

• Identify and measure the combined cost of debt and equity.

• Identify the time period required to achieve the required return.

Borrowing is leveraging a future cash flow

Make a plan, identify key performance metrics, monitor

and make improvements

INVESTMENT ANALYSIS EXAMPLE – WINTERING BARNS

DairyNZ and AgFirst Farm Consultants recently examined the returns from investment on freestall barns and cow shelters, from an environmental and economic standpoint. They examined 14 completed projects on the basis of a $6.50 milk price and 8% depreciation:

• Four projects showed financial returns greater than the cost of capital

• Eight showed insufficient return

• Two showed a loss

• Environmental results were generally marginal or negative as a result of the higher stocking rates after barns were built.

Most projects were entered on the basis of farmer judgement and intuition. However, the best results were two projects which showed an internal rate of return (IRR) in the 14-15% range. They improved business efficiency by increasing pasture grown due to

reduced pugging, reduced fertiliser application through capture and reapplication, reduced wasted feed and improved feed conversion. Marginal costs were significantly less than the value of additional milk produced.

For more information see www.dairynz.co.nz/news/latest-news/wintering-barns-no-quick-fix-for-profit

Farmers who can replicate these results will increase their business efficiency and profit, and their investment will be fully justified. Without good investment analysis, it is not possible to identify opportunities to increase efficiency, and reject options which don’t.

In considering the reasons for the difference in returns on these examples, we take the view that analysis gives an understanding of where returns might come from, and a basis for managing to achieve those results. The dairy industry has an opportunity to invest for increased efficiency, but needs to apply financial disciplines to do this effectively.

You need to understand and predict the cash flow

What is earned from production What needs to be invested Does it justify the cost of capital

CASE STUDYINVESTING IN WINTERING BARNS


PAGE 18


PAGE 19

A STRATEGIC PLANNING PROCESS

We included the model below in the 2013 Privately-Owned Business Barometer Agri Key Insights paper, and we think it’s worth including again. We have found it a useful way to think about business planning and business management from a strategic perspective. It’s also helpful in making decisions about the best use of your resources.

Evaluate: Where is your business now and where do you want it to go? What are your key goals and priorities?

Analyse: Review your options and evaluate the consequences of each, including calculating the return on different investment options.

Plan: Prepare a plan and budget for the option(s) you have selected.

Activate: Implement your plan effectively.

Monitor: This step is often forgotten, but it’s essential to review what’s happened against your plan to secure your return on investment, and make any adjustments needed to ensure you achieve your objectives.

Remember: The dairy industry is cyclic; so should your planning process.

Your business, and the environment you operate in, are always changing – so it’s important that this strategic planning approach is a continuous cycle, not a one-off activity.

Farmers continuously apply research to optimise business performance, and that process is essential to sustain success. Advances in the biological sciences, applied farming research and technology mean increased opportunity, but farmers need greater skills to seize those new opportunities.

Activate

Monitor

Evaluate

Analyse

Plan


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DAIRY RESPONDENTS’ VIEWS ABOUT SUSTAINABILITY AND THE ENVIRONMENT

Consumer goods companies are increasingly looking to ensure their entire supply chain is aligned with their

environmental standards.

THEENVIRONMENTINSIGHT FIVE: AN INVESTMENT

MINDSET IS EMERGING

Environmental issues continue to be a major focus for the dairy sector:

• Over 50% of respondents said they were aware of and have a plan to manage the environmental impacts of their business.

• 46% said environmental management was a key factor in their business decision making.

• Encouragingly, 41% said being proactive about investing in managing environmental impacts was good for their business.

My entire business is built on commitment to

sustainability

Being proactive about environmental investment

is good for business

Environmental management is a key factor in business

decision making

Environmental impacts are risks I am aware of and

have a plan for

Environmental considerations bring

significant extra costs

0 10 20 30 40 50 60

DairyAll industries


PAGE 21

Push and pullWhat’s driving this environmental focus is a mixture of ‘push’ and ‘pull’ factors. Respondents reported that a lot of the investment in environmental improvements has been and continues to be driven by compliance. But dairy farmers also understand that it’s also being driven by the market.

Consumers are increasingly making choices based on environmental considerations and the industry has to follow. Consumer goods companies are increasingly looking to ensure their entire supply chain is aligned with their environmental standards. It’s increasingly common for farmers who supply those companies to have their on-farm practices regularly reviewed.

An investment mind-setWhile compliance has been the primary driver, at the same time there is an acknowledgement amongst farmers that investing in environmental improvements is ‘the right thing to do’.

Most farmers understand that environmental investments can have significant long-term benefits for their farming business. However, most also still approach environmental issues with a compliance mind-set, rather than from an investment case perspective.

There is an opportunity for the industry perhaps to do a better job of understanding the opportunities for environmental investments to improve efficiency and add value – for example, fencing of creeks creates a better asset, and improves pasture management, while investing in effluent spreading solutions can reduce the need for fertilisers. As the DairyNZ study of farm investment in wintering barns shows, (see page 18), some farmers who follow a rigorous and considered process are achieving considerable returns from their environmental investments.

Despite the focus on environmental issues across the industry, it’s disappointing that more than 15% of Barometer respondents still don’t have a plan to manage environmental considerations. Farmers at focus groups expressed disappointment in those of their peers that have ‘let the industry and themselves down’ and undercut the value of the investments they have made.

This is still a significant risk in a sector that is facing increasing pressure to improve its environmental footprint, and one that the industry urgently needs to address.

However, it’s important to note that the percentage of dairy farmers who actively include environmental considerations in their business planning is much higher than in other industries. Despite the challenges and costs, dairy farmers have brought into the need to reduce their environmental footprint, and have invested heavily in it.

PAGE 22

Perc

enta

ge (%

)

IS SUCCESSION AN ISSUE IN YOUR BUSINESS?

Yes, it is an issue No, it is not an issue

80

60

40

20

0

It’s no surprise that succession continues to be a major focus for the dairy industry. Some 60% of

dairy industry respondents saw succession as an issue – more than any other sector except red meat.

THE FOCUS ONSUCCESSION

INSIGHT SIX: LESS ‘SUCCESSION’, MORE ‘TRANSITION’

DairyAll industries


PAGE 23

The reasons succession is problematic are well known – high land prices, the increasing size and complexity of dairy farms, and issues with traditional pathways into farm ownership are all factors. The view of succession as a transaction or event, rather than an ongoing process – a view unique to New Zealand – is also a complicating factor as it has tended to limit the options to simply selling the farm for some.

This year’s Barometer showed that, while more traditional methods such as the sale of all or some farm assets to family members or the open market remain options, the continuing, multi-generational family business is emerging as the predominant succession model.

This is a significant change, which has gathered momentum in the last five years.

Under the continuing family business model, the succession transition isn’t marked by a land sale transaction to the next generation, but a progressive transition of roles between the generations. The paths being taken to achieve that goal are many as illustrated by the graph below.

DAIRY RESPONDENTS’ STEPS TO ACHIEVE SUCCESSION


Family members take over management of the farm

Family take up shares in the business

Move into a governance role

Family take up shares/management;

I take money out

Sale of some farm assets to family member(s)

Buy a house and live away from the farm

Open market sales of all farm assets

Open market sale of some farm assets

Appointment of non-family manager

Sale of all farm assets to family member(s)

Sale of shares to non-family

0 5 10 15 20 25 30 35


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KEY SUCCESS FACTORS

The emergence of a transition model reflects a shift in mind-set amongst many farmers from thinking of themselves as land owners to seeing themselves as business owners. This brings new opportunities – and new challenges. Fifty six percent of dairy respondents described themselves as business owners (owner, director, trustee, equity partner, chairman, shareholder or investor), while only 27% described themselves as land owners (owner-operator or non-operating owner).

From the survey and focus groups, effective governance has developed as the critical success factor in family business succession. One of the key challenges is the need for new skills and mind-sets. Ownership, management and governance are all different roles and a clear understanding and separation of

those roles is vital, as is the development of the skills required to fulfil those roles. Where these aren’t present, significant challenges will emerge, and advisers need to rise to this challenge.

Multi-generational businesses place additional premiums on clarity of goals and clear communication across all parties – particularly as these kinds of succession processes can take place over a number of years.

For a more detailed discussion of the issues involved in running a successful multi-generational family business, see ANZ’s research paper “Passing the baton”. You can download a copy from anz.co.nz (Rural > News and Insights > Research Reports), or request a copy from an ANZ Agri Manager.

“We are looking down the barrel of a major change in structure in the industry”

Dairy Farmer, Taranaki

ROLE OF DAIRY RESPONDENTS

Share farmersLand ownersBusiness owners

General managers/managers

56%

27%

11%

5%

1%

Other


PAGE 25

Long-term confidence in the sector is also based on the demonstrated ability of the New Zealand dairy industry to innovate through improved plant and animal genetics and the application of technology to increase efficiency.

In their own businesses, dairy farmers are focused on by reducing costs – but the focus is on cutting fat, not muscle. There are many opportunities to increase efficiency but most require investment. The challenge for farmers is to:

• Better understand their operating costs and how they contribute to profit

• Look carefully at opportunities to cut or target spending to increase profit

• Calculate returns on investment options and prioritise them to increase future profit.

Better information, analysis and advice is the key. There is a real opportunity for those who are prepared to look hard and objectively at their business to lay the foundation for long-term future growth and gain real advantage when market conditions change – as they inevitably will.

NEXT STEPSWHERE TO FROM HERE

There’s no doubt that the dramatic decrease in dairy prices will cause significant issues for many farmers in the short-term. But farmers also understand that

market volatility is a feature of the industry, and that markets can – and will – rebound.


PAGE 26

We invited owners of small-medium businesses (those with turnover of less than $2 million per annum), commercial businesses (those with turnover of more than $2 million per annum), farmers, and Maori businesses to take part in an online survey.

To interpret the survey findings, focus groups were held across New Zealand, each representing different sectors of the privately-owned business community. These included small-medium

and commercial businesses, exporters, Maori businesses and agribusinesses (dairy, cropping and horticulture, and red meat farmers).

More information on the ANZ Barometer and this year’s findings can be found at anzbarometer.co.nz

ABOUT THE ANZBAROMETER

The ANZ Privately-Owned Business Barometer is a survey of privately-owned businesses

conducted on behalf of ANZ.


PAGE 27

ABOUT ANZ

We recognise that strong relationships are important for business and farming success, which is why here in our Commercial & Agri division, we support our clients with access to knowledge, insights and connections to help them grow.

Our Agri Managers are active in communities nationwide, and through them our clients have access to the largest specialist banking teams in New Zealand. This means that we can contribute an in-depth understanding to the solutions agribusinesses need to manage their payments, mitigate their risks, fund their growth and ultimately manage owners’ personal wealth.

As New Zealand increasingly looks to markets across the Asia-Pacific, we provide clients with access to banking knowledge and expertise in offshore markets to help New Zealand agribusinesses achieve their growth aspirations.

For information about our services see anz.co.nz/rural

We hope you’ve found the 2015 ANZ Privately-Owned Business Barometer – Dairy Insights report thought-provoking and useful. If you would like to discuss any of the findings in this report, would like to be involved in the next Barometer, or if there is anything we can do to help your dairy business succeed, please contact your ANZ Agri Manager, email [email protected], or contact one of our General Managers.

ROSS VERRY

General Manager, Agri & Business Strategy E. [email protected] T. (09) 252 3041

DAVE HADEN

Head of Agri Initiatives E. [email protected] T. (07) 557 7235

MARK HIDDLESTON

General Manager, Auckland & Northland Region E. [email protected] T. (09) 252 3509

IAN ROSS General Manager, Northern Region E. [email protected] T. (07) 837 8743

JOHN BENNETT General Manager, Central Region E. [email protected] T. (04) 436 6679

TROY SUTHERLAND General Manager, Southern Region E. [email protected] T. (03) 368 3958

ANZ is proudly New Zealand’s largest financial services provider, with almost half

of all New Zealanders having a banking relationship with us.


PAGE 27

Disclaimer This document has been prepared by ANZ Bank New Zealand Limited for informational purposes only. It is a necessarily brief and general summary of the subjects covered and does not constitute advice. You should seek professional advice before acting on the basis of any opinions or information contained in it. While the information contained in this document is given in good faith, has been derived from sources perceived by ANZ to be reliable and accurate, ANZ cannot warrant its accuracy, completeness or suitability for intended use. ANZ shall not be obliged to update any such information after the date of this document. To the extent permitted by law, ANZ nor any other person involved in the preparation of this document accepts any responsibility or liability for any opinions or information (including the accuracy or completeness thereof ) contained in it, or for any consequences flowing from its use. In New Zealand, ANZ is ANZ Bank New Zealand Limited. Elsewhere, ANZ is Australia and New Zealand Banking Group Limited and its affiliates.

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Z Bank New

Zealand Limited 06/15 17897

Documents

THE ANZ PRIVATELY-OWNED BUSINESS BAROMETER · 2015-07-14 · The ANZ Privately-Owned Business Barometer is one way we can share information about the key issues for the sector and