CONTRACT CULTURE IS KEY TOKIWI SUCCESS: ANDREW SWALLOW
SEVENTEEN YEARS ago New Zealand’s government removed all support for arable farming overnight, leaving its farmers to sink or swim in the world market.
Today, they are definitely swimming, spurred on by better agronomy, modest machinery costs, and prudent marketing..
That is despite being exposed to the volatility of world markets, currency fluctuations and climatic extremes, particularly drought.
At the core of their success is a culture of contract cropping. Most crops are planted with a market already agreed, if not price.
“Most of what we grow is on contract – there is enough risk in the other parts of the business,” says Methven-based grower John Wright.
He is chair of United Wheat Growers, a sub-section of New Zealand’s Federated Farmers farming union, and the body that administers a levy-based disaster relief scheme for wheat growers.
“Admittedly not everyone follows that contract principal and from time to time we grow a bit for the free market, but I would say 75% of cereals are grown on contract, possibly even more.”
That is endorsed by grain-trader Tom Patrick of merchant Pynn Gould Guinness. “It can be as high as 85-90%.” Contracts are also key in other crops, such as forage seed, and the expanding speciality vegetable seed and processing vegetable sectors.
Competition from these crops, and the expanding dairy sector, has seen New Zealand’s wheat area decline substantially to just 40,900ha (101,063 acres) in June 2004 – compared with the UK’s approx 2m ha (4.9m acres). The NZ crop has slipped 5% since 2003 and is down from 55,700ha (137,635 acres) in 1997.
“Turn the clock back five or six years and it was the cornerstone,” acknowledges Mr Patrick.
The Wrights, like most farmers in New Zealand, always have one eye on the foreign exchange market, because it is so critical to the prosperity of the industry.
Agricultural or forestry products account for 60% of exports and the sector makes up about 16% of GDP.
“At present the New Zealand dollar is at an eight-year high against the US dollar,” points out Mr Wright. “We are considering hedging some currency now for a combine which we will need to buy in US dollars in a couple of years” time.
” However, currency and futures hedges are not that common among farmers, because their mechanisms are not so simple, and can increase risk if not fully understood.
National Bank’s senior rural manager in Canterbury, Russell Wilson, challenges that. “The reality is that there has not been that much volatility in the price – wheat has been more or less NZ$280-300/t (104-112/t) for the past 10 years.”
That is partly because companies such as Pynn Gould Guinness persuade domestic buyers to buffer world market swings with contract prices, maintains the firm”s grain trader Tom Patrick.
“If the price they put to us is too low we will tell them they are wasting their time – they will not get anybody to grow at that price,” says Mr Wright. “And they are aware farmers are getting more and more options to grow crops other than wheat.”
Despite that, there can still be a contract price stand-off between growers and buyers at drilling time. “
The theory is that we make sowing decisions on the contract prices offered, but we have often started planting before we sign up,” he explains. His family business has worked hard to develop relationships with end-users, in some cases as a grower group.
“We nearly always find a home at an acceptable price and the contract approach takes a lot of the volatility out. We do not achieve the peaks, but we have avoided the troughs too
” Wheat still determines returns on most cropping farms, if only because alternative crop contracts are pitched just high enough to tempt growers away from it, rather than at the price which the end product might justify.
The boom in dairying in the region is also good news for growers, he says. “Each dairy farm just about needs an arable farm to supply it; to provide over-wintering land for cows, grazing for heifers, and to supply grain and straw.”
Investment in irrigation is behind the dairy boom, allowing farms which were only producing NZ$600/ha (223/ha) from dryland sheep and beef enterprises, to convert to milking cows with output exceeding NZ$4000/ha (1487/ha), he explains.
So why aren’t arable farmers with irrigation grassing over the paddocks and putting in a parlour?
“Because there are significant entry costs and we don’t like milking cows. Besides, recent land sales indicate that processing vegetable crop growers are now out-bidding the dairy buyers.”