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Focusing on efficiency in dairy production

The good old days aren’t coming back, but the Bassas believe success is still possible for farms that focus from top to bottom on efficiency

In 1991, Piet and Ina Bassa sold their dairy farm in Holland, packed up their family and headed to Canada, leaving not only Europe’s high costs but also its tough environmental regulations and manure quotas that made expansion almost impossible.

Importantly, their sons, Jan and Kees, were keen to start farming, so the family bought a farm near La Broquerie, Man. plus 65 kgs of quota for $7,100 per kg.

At the time, dairy quota grossed about $0.40/litre. Today, 25 years later, Manitoba dairy quota is worth about $28,000/kg and returns about $0.76/litre, says Jan. “On our farm, quota had a five-year payback. Now it’s more like a 10-to-15 year payback.”

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Like many supply managed farms, the Bassas leveraged on increasing quota value and accumulating assets as quota went from $20,000 to $33,000. But the brothers set limits. Once quota got over $30,000/kg they stopped buying. Jan says profit margins got too small at that point.

Today, the Bassas milk 450 cows three times daily to fill 604 kgs of quota, and they crop about 2,000 acres, renting only 100 acres. The farm employs nine full-time and eight part-time staff, and in 2010 Jan and his wife Tracy were selected as Manitoba’s Outstanding Young Farmers.

Under the supply management system, the Bassas weren’t afraid of debt as long as they could cash-flow it. However, that was during a time of rapidly increasing quota values. Now, with the 15-year cap on support promised by the former conservative government, it’s time for a rethink.

Today the Bassas are taking a more conservative strategic approach to their business. With not much land available to buy and its higher prices, they aren’t aggressively pursuing farms, although if one became available close by, they’d take a serious look to see how it could fit into their operation and their carrying capacity.

Jan and Tracy Bassa.

Jan and Tracy Bassa.

They have also stopped expanding their quota holdings, and they have developed a clear business focus.

“Our goal now is to get better, more efficient and pay off debt,” says Jan.

This shift isn’t only because of potential changes to supply management, but it’s also linked to career timing and succession. They don’t want to saddle the next generation with a high debt load. Jan and Tracy have four children, with the oldest being 17 years old and the youngest eight.

Jan says paying off debt now should help the generational transition, or at least put them in a better position to do it.

This is a big change in thinking from 2009 when they doubled their herd and put in a 50-cow rotary milking parlour while also doubling their barn space and manure storage.

Now they’re focused on investments to maintain and improve their farm, not expand. For example, they’re investigating manure separators.

They’re also closely watching their cost of production, with the goal to fill their quota as efficiently as possible. “The price of milk isn’t likely to increase going forward,” says Jan. “We have to be able to produce more for less.”

The trend in the milk price (called the P5 pool price) was generally up until mid-2014, and it was much easier to cover cost of production back then. Then it dropped steadily into the summer of 2015 before starting to claw back upward in late 2015.

Outside analysts now predict some stability. “I expect the industrial price to stay in the $70 to $75 range in 2016,” says FCC chief economist, J.P. Gervais. “The outcome of current negotiations around a national dairy ingredient strategy could obviously change all of that.”

The Bassas look to improve their forage quality and to buy less feed. Currently their farm spends $800,000 to $900,000 a year on feed. Instead of buying all their protein and grain corn, they’re going to grow more of it. They’re also using options to lock in feed costs, says Jan. “We are focusing on the details, trying to manage the tighter margins.”

For a decade after TPP comes into force, Agriculture and Agri-food Canada’s Quota Value Guarantee Program will ensure any farmer selling quota will be eligible to receive payments under the Quota Value Guarantee program; $1.5 billion has been set aside for this demand-driven program.

Jan isn’t greatly concerned about the decrease in quota values or the loss of 3.25 per cent market share negotiated away during TPP. He thinks the supply impact of these additional imports will be leveled out by improved rules and policing at the borders for products being illegally imported now. However, he’s concerned that the trend toward eroding dairy tariffs might be like a small leak in a dike. Under the Comprehensive Economic and Trade Agreement (CETA), the specialty cheese market was opened in exchange for more open beef trade.

“The 15 years isn’t my concern. It’s what’s coming,” says Jan. “Once they get a foot in the door, what’s next?”

Jan thinks their farm could compete without supply management. “There will always be farmers,” he says. “It depends on how they’re financially situated when and if supply management disappears. How much debt could they carry, how many families are they supporting? How much does their infrastructure cost? How low are their milk production costs?”

The EU got rid of dairy quotas in April 2015. In parts of Europe, such as France and the U.K., the dairy farmers are reeling right now with the reality of ending their dairy quota system after a 13-year transition.

Jan keeps in touch with a former neighbour from Holland who is about the same age and who dairy farms now without quota. That farmer has had to increase production more than 20 per cent to maintain the same income. “He says things are very tight with the lower milk prices, they’re getting about half of what they did a year ago,” says Jan. “Yet the price in the stores didn’t go down.”

Meanwhile, Jan has his own eyes on the processing and marketing sector, for a different reason.

In Western Canada, processor reinvestment is a concern, Jan says. Sitting on the provincial milk board for four years has given him additional insight and a bigger-picture perspective into the milk industry.

“There’s more pressure on the processors,” he says. “Dairy farmers have to work together with processors, so they make investments in plants, like we’ve invested in our farms.”

Australia feeling the squeeze

Economists have a term for it. They call it “power asymmetry” when others in the supply chain, including processors, supermarkets and myriad people in the middle have more influence on consumer prices than farmers.

Country Guide spoke to Bruce Muirhead, associate vice-president of external research at the University of Waterloo from Queensland, Australia where he’s interviewing farmers. Australia moved toward a free market system a couple of decades ago. Muirhead says the power asymmetry and low world milk prices are concentrating the dairy industry in Australia, squeezing it geographically. Only two main supermarkets dominate the country and most of the processors and dairy farms are in the southern state of Victoria. 1,560 dairy farmers were in Queensland in 2000 and now there are about 450.

“Two supermarkets, Coles and Woolworths, control about 70 per cent of grocery sales in the country and they have driven farmers to the brink. There is not really any intermediary between the farmer and retailers here,” says Muirhead. “Dairy farmers in Queensland are absolutely reeling. They cannot compete against the power of multinational supermarkets or in so-called free market arenas.”

This article was originally published as, “Focus on efficiency” in the March 2016 issue of Country Guide

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Senior Business Editor

Maggie Van Camp

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