Roly Tavernor

Successful business replication with reference to the low cost New Zealand grazing system

A Trehane Trust Award

Background

Over the past 5 years I have changed my dairy farming system from a high input, high cow yield, all year round calving system to a low input, low cow output, spring block calving grazing system. During this change I have learned and implemented many new ideas some successful and some not. There was a steep learning curve but the result was positive.

The effects of changing my farming system are:

+ More profit and more cash.

+ Simpler system of farming.

+ Less stress.

+ More time off.

+ Less machinery. I hate driving tractors!

About two years ago, I read about the exploits of Rex Patterson who in 40 years ending in the 1970s grew to 4000 cows in 42 herds . The question kept coming to me, could this New Zealand grazing system I had implemented, be repeated again and again in other locations? This inspired me to find out more.

Objectives

My objectives were to examine how dairy farmers and other enterprise owners had successfully replicated their business as a means of expansion. My definition of replication is ‘growing the business by repeating the same enterprise model on different sites’.

The specific aim was to see if the New Zealand grazing model and the methods of replicating this model could be transferred to and implemented by UK dairy farmers.

I was interested to find out how non farming businesses grew by replication and franchising and examine whether these examples could be implemented in dairy farming.

I wanted to compare the climate of Southland, New Zealand with that of the UK and see how the Southland dairy farmers coped with the winters.

The study tour

I travelled the length and breadth of New Zealand on both North and South Islands. I looked at small and large scale examples of dairy farming replication. The average herd size in New Zealand is 251 cows and increasing, 7% of herds are over 500 cows and the definition of a large herd has recently changed from 500 to 700 cows. Replication is very common all over New Zealand. There are still huge areas suitable for conversion to dairying. The milk price here is around 10p/litre.

In Southland I found climatic information giving average seasonal temperatures and rainfall similar to Cork in Southern Ireland. Average annual grass production in Southland is 13t dry matter/ha and this figure is achievable in my area of Shropshire. The winters in Southland can equally be as cold as our own. The southerly wind from the Antarctic can be extremely severe. The dry cows are mainly sent away from the milking platform to graze turnips or kale, supplemented with silage.

In Australia they had similar milk price to New Zealand. Higher yields and heavy grain feeding were the main parts of the system. Overall returns from dairying were generally poor even though there was a small number making very good returns. I heard talk of replication in the future, but little evidence of this in practice. Western Victoria had cheap land and moderate grass growth and was being viewed as a potential growth area.

I also visited Ireland which has a few very experienced practitioners of the New Zealand grazing system. Some have replicated with success. Opportunities are limited to renting and these are few. Apart from high land prices, quota is also a problem in taking on other units. This also could be the case in the UK.

Method of replication

Basically I found that there are two elements to successfully replicate a business.

+ Developing a superb business model.

+ Going out and repeating it elsewhere.

Developing a superb business model

In order to replicate successfully the ‘model’ must be able to produce enough free cash to help fund the next opportunity. The key targets to achieve this are:-

+ Low capital establishment costs.

+ High net profit margins.

+ Low need for capital reinvestment.

+ Scale.

+ Simplicity.

There are many examples of replicated business models which we all come across in day to day life: McDonald’s, KFC, Sock Shop, Tie Rack, JJB Sports, etc. My interest is with the New Zealand grazing model.

Historically, New Zealand dairy farmers are experts at growing grass and clover. They do this achieving high yields, cheaply and efficiently and then utilize as much of this as possible. They make good profits from turning this cheaply produced feed into milk.

The grazing system is characterized by a long grazing season and high stocking rates. Farm infrastructure is crucial including tracks, electric fenced paddocks and water supply and also a fast cheap parlour. Management is made easier by a compact calving block whether in the spring or autumn.

Going out and replicating

Most farmers already had great capability in the technical operation of the business. However most lacked business and people management skills. Also planning was not thought to be a big issue. In the early stages these skill deficits can cause the business owner great stress and work. These problems need to be dealt with effectively.

There are three important points for successful business replication.

+ Planning

Generally I found that planning was forced upon the farmer as he grew his business as a means to resolve a problem. As the business grew, more time was allocated to the planning process. Planning is the vision to see clear goals and then work out how to get there.

+ Capability

Staff selection is a skill that needs to be improved, the more units, the more staff. Most owners select on attitude and enthusiasm. Skill levels can be trained for. The common sense approach of ‘if you think you will enjoy working with the person, then employ them’ was evident. If the wrong selection is made then the sooner it is dealt with the better.

Staff retention: once good staff have been selected keeping them is a priority. One New Zealand farmer aimed to have staff turnover at 10% and looked to promote motivated people within his business. Various methods for motivation are used, but to be treated with respect and to be rewarded well were both important factors in retaining staff.

Long term staff retention and motivation was thought to occur after staff have ‘bought in’ psychologically to what they were doing.

In New Zealand I saw instances of a genuine desire to help the development of young individuals or couples with ambition to grow their own share milking business. Although this would not ultimately retain staff, employers took the view that these ambitious people would almost certainly move on anyway. By helping them this would then enhance their own employer profile. These owners rarely had to advertise for staff.

Non farming businesses often use performance reviews which are a means of formal communication between different levels of staff.

+ Capital

This is the least important of the three for if the planning and appropriate capabilities are in place the financing should be relatively easy. However a good relationship with a bank manager can help. Overall I felt that New Zealand farmers were more business-like than are farmers in the UK.

Replication in New Zealand

New Zealand dairy farm land values are linked to the milk solids production of that land. The higher the production, the higher the land value. Marginal land at low cost often provides the greatest potential for positive increases in equity. Assessing farms for suitability and potential is a skill. Some farmers have skills of converting different soil types back into a high grass production.

Capable young people are able to borrow money against limited equity to buy cows and enter into a share milking agreement. Returns can be high and expansion soon follows as high numbers of replacements enter the herd. Soon another share milking farm is required and workers are needed to run that unit for the sharemilker. This can be done for as many times as the share milker can comfortably manage his managers.

The other method of replication is ownership and generally follows sharemilking. The goal of most young dairy farmers is to own a dairy farm. This obviously involves much more money, but if done well, growth in scale and wealth can be stunning. As mentioned above, by buying low cost farms with potential, needing small amounts of capital for big production improvements, can show big equity gains. By making improvements immediately, production gains happen straight away, generating real profits immediately.

All stock are put to dairy bulls so that in no time surplus cows are generated, just waiting for another farm. Cash which is generated from the dairy business goes to improve the soil and infrastructure and the increase in capital value of the land plus the surplus cows can provide leverage to buy the next farm. This process of growing productivity, cash, equity, cows and debt creates its own momentum.

The franchising phenomenon and share farming

When franchising is raised most people think of McDonald’s as the prime example. They also think that franchising is concerned only with the right to sell branded goods locally, such as McDonald’s hamburgers. However franchising is also a unique and entire way of doing things. This is called a ‘business format franchise’ which is what I am interested in. It is possible when the franchiser has developed over time a nearly foolproof, predictable, systems driven and not people dependent business that can work under almost all conditions and without the franchise owner being there. The franchiser provides all the training and backup. The incomes are then shared at an agreed percentage.

Share milking in New Zealand works on similar lines to business format franchising. The owner supplies the land and parlour and the share milker owns the cows, machinery and plant, other than the parlour, needed to farm the property. The owner is responsible for the repair of the property.

There are two share milking agreements 50/50 and variable order. The latter is for share milkers with low capital and little experience. The owner takes on more management and more herd ownership and bears more costs. The amount of work, responsibility and the share of the income is determined by individual agreement.

With the 50/50 agreement the sharemilker owns the herd and any plant (other than milking equipment) needed to farm the property. He is usually responsible for milking expenses, all stock related expenses and general farm work and maintenance. The owner is usually responsible for property maintenance expenses. The sharemilker receives usually 50% of the milk income and 100% of stock sales.

The franchise system and the sharemilker system have similarities and differences. Both are businesses working within businesses. Both parties gain from increased profitability, creating a win-win situation. Both systems give high returns on initial capital. A McDonald’s franchise averages 20% return on capital and the New Zealand sharemilker average return was 20.7% in 2001. Sharemilking has one of the highest returns of all businesses in New Zealand. Both sharemilker and hamburger seller are involved in simple systems that work well.

Conclusions

+ New Zealand has been successfully replicating dairy farms for some time on a simple low cost efficient grazing system.

+ Southland in New Zealand has a similar climate to Southern Ireland and grows a similar amount of grass to most of the UK. Cows are kept outside all year around in Southland.

+ Attitude is more ‘go ahead in New Zealand. Anybody capable, with a small amount of capital, can enter farming as a sharemilker and grow their business and wealth and become farm owners within 15 years.

+ Absence of milk quota reduces the amount of capital required to start up and also provides the potential for increasing milk production.

+ Absence of subsidies keeps land prices down. New Zealanders are able to buy marginal land cheaply and improve it for dairying by irrigation and by conversion from sheep grazing.

+ Australia, in the state of Victoria, has many low cost dairy units, but has experienced very little replication. This is possibly because the system is made more complicated by the feeding of grains and lack of growth during certain dry periods of the year.

Recommendations

+ ‘KISSES’ - KEEP IT SIMPLE STUPID and EXPANSION SUCCEED. Simple systems work and work for longer than complex ones.

+ Know yourself and set out clear goals of where you want to be in the future. By taking on extra farms on other locations your role will change from ‘hands on’ farmer to being a manager of people and businessman searching out opportunities. Be willing to learn these new skills.

+ ‘Failing to plan is planning to fail’. Successful business growth comes from 80% planning and 20% operational performance. I cannot over emphasize this point sufficiently.

+ The New Zealand sharemilking system would offer opportunities to farmers and young new entrants wanting to expand or start off in dairying at low initial capital cost. In the UK the nearest structure to sharemilking would be contract farming. It would also benefit those farmers wishing to retire or get away from the working of the farm but still wanting to be involved in the farming business. This is a potentially a win-win situation bringing in new blood and creating career opportunities for the young to progress.

+ Business format franchising offers a unique way of doing business and has been successfully incorporated into many non-farming businesses that have expanded on different sites. I feel this can be applied to the grazing system.

+ More innovative cheap and welfare friendly ways of feeding dry cows over the winter months need to be explored. The reliance on buildings and machinery is an expensive road to take. On a broader scale innovation is the life blood of business improvement and success.

The main message I gained from my study was to know where you are going. Plan the route to take; obtain skills where you are lacking and when the conditions are right GO FOR IT! If that is replication of your dairy system, I wish you all the best.