Dairying for greater good

The vision of Waikato company Trinity Lands is to give profit back to the community. Running a business for a charitable purpose, however, puts even more emphasis on the ability to run at a profit every season. Sheryl Brown got an insight into how the company’s 21 dairy farms deliver on that profit within a volatile milk price.

 

Trinity Lands dairy general manager Andrew Archer oversees the company’s 21 dairy farms, working closely with its sharemilkers and contract milkers to maintain a profitable margin on each operation.

His role is to ensure the farms are performing profitably and sustainably so they can help to deliver the company’s vision and be in a position to continue to donate funds to charity in the future.

In a volatile dairy industry where the milk price fluctuates, Andrew has to monitor market trends and manoeuvre the farm operations in order to maintain a profit margin. One of the more recent threats to that margin has been the dip in dairy prices in the last few seasons.

Most farms are spread from Putaruru down to Tokoroa in the Waikato, including 15 Carter Holt forestry conversions. Heading into summer during the 2015/16 season the threat of a drought in South Waikato was a big risk to all farm operations.

Trinity Lands works to have a balanced portfolio to be able to still payout dividends with fluctuating milk prices. From left, Trinity Lands chairman Ian Elliott and dairy general manger Andrew Archer with sharemilkers Jaime and Mark Perrott.

It was one of the most difficult times he has faced since starting to work with the trust in 2002 as a consultant, Andrew says. He had to warn sharemilkers and contract milkers the company wouldn’t be in a position to buy extra supplements if they experienced a feed shortage during the summer months.

“We have a responsibility to our contract milkers and sharemilkers who get paid per milksolid. Their income hinges on us having that productive base and our philosophy is to provide them with the resources.

“As long as they can show us we’re going to get a return then we’ve generally provided what’s needed.”

But like all Fonterra suppliers facing a $3.90/kg MS milk price that season, the margin on bought-in feed to make up for any feed deficit wasn’t there.

“It was a difficult position that we haven’t been in before. We would have been faced with drying off cows or reducing numbers.”

If that had happened the company was looking at a potential production drop of 500,000kg MS. Thankfully South Waikato ended up having an extremely productive summer and the farms collectively averaged just a 1% drop in milk production for the 2015/16 season despite cutting more than $2.5 million from farm working expenses.

“We were blessed with a very kind summer which really saved our bacon,” Andrew says.

They lowered levels of feed going in to a degree during those two seasons, but mostly pulled costs down through what they paid per tonne.

“We tightened our belts, we’ve reduced our cost margins where we can, we’ve been careful. We’ve squeezed everything we can.

“You’ve got to keep on scrutinising your costs. You’ve got to make sure that you’ve got a margin in all that you do. In an $8 payout you can afford to pay $600/t for maize grain, at a $4 payout that will only be $200/t.”

Estimating what that profit margin will be on supplement means farmers need to monitor what the global dairy markets look like to help them make decisions during the season, Andrew says.

“Whenever you’re buying anything you need a degree of conservatism built in, but also have enough foresight to think what the future is likely to be like so you don’t climb into a hole and not come out again, or not give yourself the opportunity to rise to the occasion.”

Timing-wise it’s hard to always get it right, he says.

“I think probably in the tough times it’s easier to make money than when things are good. You want to go long on buying in inputs when you’re at bottom end of cycle coming out, and want to go skinny when you’re at the top and the end of the cycle.”

Trinity Lands has the advantage of scale with ordering supplement for its 21 dairy farms.

Advantage of scale

Being a multi-farm company, Trinity does have the advantage of scale. Since pulling the trusts together under Trinity, they’ve been able to leverage capital and have grown by 60% in dairy land area and doubled the size of production in five years.

They are also able to leverage their businesses with rural merchants. Andrew orders the majority of supplements for the 21 farms for example which gives him the option to negotiate with feed merchants and distribute it among the farms where it’s needed.

“There are definitely benefits of having that scale to negotiate,” Andrew says.

The dairy farms range from DairyNZ System 3 to System 4, depending on the type of farm, the infrastructure and the employees’ individual strengths.

Heading into the future Andrew would like the farms to become more self-sufficient with extra feed grown onfarm. But they are not afraid to spend money on supplement when there is profit to be made, he says.

“We have a structure around growing grass and using that as efficiently as possible first and foremost and adding supplements where they’re needed and that gives us an extra margin and gain.

“We still buy a chunk of feed. We bought the Carter Holt farms at early stage of development and are progressing those to grow more grass. As they get more productive, either we can remain static for production and our cost of feed will come down, or we can grow production as long as there is a margin on feed bought in.”

The farms winter all cows onfarm and the southern farms grow swedes as a winter crop, which has been an efficient way to full a big feed deficit during that period.

“It costs us 6c/kg to grow swedes, any other feed we bought in would cost way more than that.”

However the Waikato Healthy Rivers Plan Change will affect the use of winter crops and they may have to be more selective on what they do in the future, Andrew says. The farms grow between 11 tonnes drymatter (DM)/ha to 16t DM/ha of pasture and Andrew is constantly looking for the best grasses to give persistence and quality of feed and production. They have an issue of grass grub on the Carter Holt conversion farms, which has gone through about 70% of the farms and affects pasture grown.

They’ve had up to 900 grass grubs per square metre in some paddocks and Andrew is trialling numerous options to counter it.

“I’ve tried a few things that haven’t worked. We’ve put in new grass that’s rolled up as a carpet two years later. That’s a big cost when we have to plug in supplement when our pastures fall over.”

Trinity has stepped up to help pay for extra supplement when farms have been hit badly by grass grub to keep stock onfarm for the contract milkers. They have had mixed results from GrubOut U2, which has an endophyte in the roots. Getting that translation through the breeding programmes to consistently produce the endophyte in the root system was a bit hit and miss.

They’ve recently trialled mixed species grasses with chicory and plantain which seems to be standing up better to the grass grub. Diverse pastures will potentially be an important part of the farm’s environment plans going forward, he says.

“Given the information coming out about nitrogen efficiency we will definitely be doing more diverse pastures into the future. That will be one of our mitigations to reduce our N footprint.”

Sustainability – a voice of reason

With an increasing microscope on the environmental impact from the dairy industry and the new Healthy Rivers Plan set to come in, Trinity Lands has to be looking at the most sustainable and profitable options to remain afloat.

Part of Trinity Lands’ vision is to act as a 100-year plus company and, as such, they need sustainable dairy operations that can profit in the future, Trinity Lands chairman Ian Elliott says.

“We are an intergenerational long-term agricultural company – very much aligned with Maori-owned trusts.

“We want to leave a future for our next generation. We manage it for our beneficiaries so there is a long-term window that comes into our thinking.”

The environmental focus in the industry has already changed their thinking and practices, Ian says. The trusts spent years developing land and putting every last bit into pasture for dairy, but now they look at the land and consider what should be retired. They have retired 800ha of land on the dairy farms, fenced hundreds of kilometres of waterways and spent thousands on riparian plantings.

Trinity has 700ha of forestry production, which could potentially be increased by another 300ha into forestry or possibly manuka. Having that scale and land area does make it easier for Trinity to mix and match best land use.

Andrew plays an important role in the farm’s environmental plans and in making decisions on land-use capacity.

“Andrew has his finger on the pulse all the time, he has a sharp intellect. He carries a lot of mana as a skilled supervisor, understanding soils, genetics, fertiliser and pasture,” Ian says.

As a large-scale dairy producer, Andrew wanted to give the dairy industry a voice as part of the Waikato Healthy Rivers process.

It’s important the rules and regulations being put in place reflect all aspects of the community, not just an avenue to pick on dairy farmers, Andrew says.

“Instead of rolling over we need to enter into the debate and keep some realism. We are prepared to engage in that debate and defend our right to make primary produce for the benefit of New Zealand.”

NZ has a natural climate to grow food and the rules being developed at regional council should allow farmers and growers to continue, he says.

“If we keep doing things better our environmental footprint will go down, but that’s got to be done in a balanced, sensible manner that realises there are two sides to the equation.”

One side is the economy, people’s social needs and the need to generate income from the land. The other side is the environmental factors of minimising the impact, he says. Meanwhile, dairy farmers have to progress and do things better on farms, he says. That will come through education, the industry learning how to do things better and replicating that across farms.

“In my mind the way into the future is education and getting people to incrementally do things better.

“We are on a journey and learning all the time. In 10 years time we will know a lot more than we do now and make better decisions based on that.

“Making decisions on what we don’t know is where it gets risky. But it’s not a bad thing to take stock and putting a hold on now is not a silly thing to do.”

Power of people

Andrew is the only consultant employed by Trinity to oversee the dairy farms. Employing sharemilkers and contract milkers rather than farm managers has been a big part of keeping middle management costs out of their business, Ian says.

“We can manage a bigger business with less supervising staff, who are not cheap. Having sharemilkers and contract milkers gives us flexibility and also it’s less administration for us.”

Trinity has one of the lowest overhead structures of any significant agricultural company in NZ.

“We run a lean ship, but that’s all based around having good people running our farms.

“We have land and we have cows, and the kiwifruit, but the level of production and development has been on the back of a few key good people.”

Andrew’s high skill level, along with Peter and Ian’s knowledge across the dairy and kiwifruit operations, drives economical administration, along with the support and ability of chief financial officer Ngaire Scott. Employing sharemilkers and contract milkers rather than farm managers is a way Trinity can help people in the community progress and grow their own capital, Ian says.

“We believe that people need a chance to be able to make progress.”

During the dip in dairy prices, to cope, Trinity moved a couple of their larger sharemilker positions to contract milking.

Trinity employs contract milkers on a rate of $1.10/kg MS for two years, with right to renew for another year.

“We’ve worked back from the principle that if you were a manager on a farm what is a fair and reasonable salary, then added on margin for risk,” Andrew says.

“If they do better than expected, they’re happy and we’re happy. We don’t put them in a position where they make nothing.”

Herd-owning sharemilkers are given a 50% three-year contract which then rolls over annually.

Many sharemilkers have been with Trinity Lands for a number of years and grown their own businesses. For example Paul and Rhonda Gamble have worked for the trust for 21 years, as contract milkers and sharemilkers and also own their own farm.

“We don’t want to be turning over people year on year,” Andrew says.

“We want to be taking on good people and have them for a certain time. We want people to grow and develop their skills and take the opportunities.

“Our greatest asset is our people. That’s our main focus and the driver is we need good people running each of these individual units. It makes our job a pleasure working with people who are like-minded, that want to do the job well and succeed. And we provide them with the tools, model and framework to work within.”

Trinity Lands is a great employer to work for say sharemilkers Mark and Jaime Perrott.

Polishing up on policy

Up to 100 staff work on the farms, all employed by the contract and sharemilkers, and 60 staff houses to maintain.

Trinity employs two full-time veterinarians, who have proven to be a successful asset to the trust, saving the sharemilkers and contract milkers in animal health costs, Andrew says.

“The real benefit is the vets understand what’s going on on the farm, they understand the farm businesses.”

Trinity has also employed an in-house health and safety officer and housing contractor, John Ingham, minimising their compliance and insurance risk. John does all house inspections, monitors health and safety on each farm and reports through Ian to the board.

If there is an incident or accident on a farm he deals with the investigation and paperwork. Sharemilkers and contact milkers are still responsible for health and safety policies and their staff, but they work with John to meet Trinity’s overall requirements as the land owner.

“It’s lifted our performance significantly and it’s a relief for Andrew,” Ian says.

They have initiated a drug-free housing policy and all houses are tested for methamphetamine before a new tenant moves in. If a house tests positive for methamphetamine after June 1 the responsibility goes back on to the tenants and their employer, the contract milker or sharemilker.

Trinity is insured and has the option to bill sharemilkers or contract milkers for the excess on insurance claims.

“People are told if drugs are found, they will be responsible for putting it right. For contract milkers getting paid $1.10/kg MS on a farm producing 450,000kg MS, I expect them to employ the staff and have it right. They can get John to test houses if they’re worried. The responsibility has to go back on to people.”

Methamphetamine in the houses has been a real issue that they’re still grappling with, Andrew says.

Three years ago, they were quite naive to it. They’ve had six claims since taking a stronger stance and are getting to a position where problem is diminishing.

Succession strategies

Trinity faces the same challenges of succession as other boards around the world. The company aims to engage people with the right knowledge and skills to help the business continue to be profitable, but also continue to carry the original vision of the founding trustees.

“We have to keep distributing money – that’s what we are here for, not just grow the business. That’s the privilege we’ve been charged with,” Ian says.

Trustees are a mix of people with the right business skills as well as people that are involved purely in social philanthropic work, whose role is to know where the needs are in society, where funds can be distributed.

A growing number of women are involved on Trinity boards. It’s important to have mixed gender and ages which is easier to do on larger boards, to have different perspectives around the table, Ian says.

If there is space on a board it’s a good idea to bring through new people that don’t have to be over everything while they are learning, he says, but still be there to learn the ethos and values.

“They come in and hear the vision and the purpose. If you hold fast to what the original cause and vision is as a group of people, you’re always conscious you’ve joined something that was created for a purpose.”

Ian Elliott stepped down earlier this year from his role as chief executive after 30 years and took on the role of chairman of Trinity Lands from founding chairman Stewart Bay. Zespri chairman Peter McBride, an orchardist and dairy farmer, has taken over the chief executive role. It’s a privilege to be part of a dynasty that works for causes you believe in, Ian says.

For people who like to grow a business, the experience to be part of growing something that doesn’t personally benefit you is good for the soul.

“It’s been a big part of my life. It’s a job we all enjoy doing, we love the challenge of it and it’s a privilege. We believe in the cause of generating funds to give away to society.”

“We’ve noticed it from staff, who may not be part of the church, they like working for a company doing benefit for the community.”

Future investment

The challenge is to maintain the right balance to be able to give consistent dividends to the three trusts, Ian says. For the 2015/16 financial year Trinity had to draw on its balance sheet to pay out the $2.5m in dividends, which was  not an ideal result.

To avoid that in future they are working on getting the right ratio of dairy to horticulture. The goal is to expand into other protein and horticulture business ventures, Trinity Lands chief executive Peter McBride says.

“I want to broaden our portfolio to de-risk.”

Trinity has a big exposure to dairy and kiwifruit at the moment, which both carry risks – the volatile milk price and the annual crop risk. 

The outcome of the Waikato Healthy Rivers Plan Change may also be a risk to their dairy investment and they will have to make informed decisions going forward, he says.

Trinity continues to adjust its portfolio in reaction to major industry movements, including the Psa virus hit to kiwifruit and the recent dairy payout slump.

During the Psa outbreak the company dropped from producing 840,000 to just 60,000 trays of kiwifruit. Trinity then bought the Carter Holt farms and subsequently changed from a 60% dairy, 30% kiwifruit, 10% share portfolio to 80% dairy, 16% kiwifruit, 3% shares and forestry.

The milk price dropped just as the kiwifruit orchards were recovering and Trinity has adjusted its portfolio again. It sold two dairy farms two years ago and intends selling another dairy farm later this spring and is in the process of selling its dairy investment in Australia. Trinity has acquired five more kiwifruit orchards in the last two years, a total of 40 canopy hectares, and harvested 1.5m trays of kiwifruit this autumn.

Trinity is at heart an agricultural company and will invest as such but they still have long-term confidence in the dairy industry, McBride says.

“We are looking at anything that has high consumer demand, whether that’s in horticulture or protein.”

Key facts

Average across 21 dairy farms

Average operating costs (per kg/MS):                        2015    2016

Sharemilker                                                                 $1.55   $1.31

Contract milker                                                           $ 3.06 $2.55+

Supplements: 0.25t/cow/year on a low-input farm to 2t/cow/year on high-input farm

Average supplements: 1.46t/cow/year

Supplements fed: palm kernel, maize grain, DDG, Soya Hull, maize silage, grass silage, ryegrass straw

Crops grown: All the southern farms grow 8-10% of their effective areas in winter crops, mainly swedes and some Kale for youngstock with yields from 11-20t DM/ha

Some northern farms grow 4-6% maize for silage.

Production: Average 444kg MS/cow to 460kg MS/cow per season, (ranging from 400kg/cow to 510kgs/cow), 1300 kgs MS/ha average

 

Trinity Lands key holdings:

Dairy farms: 21

Drystock farms: 2

Staff: 120 permanent staff, 7 sharemilkers, 14 contract milkers

Effective hectares: 4500

Retired hectares: 800

Cows: 13,300

Milk production: 5,800,000kg MS

Fonterra shares: 5.3 million

115ha canopy hectares (95ha Gold)

1.5m trays of kiwifruit

4.35ha avocados

Zespri shares: 2,129,300

Eastpack Investor shares: 1,725,900

Eastpack transactor shares: 452,500

 

The company employs a mixture of sharemilkers and contract milkers on its 21 dairy farms, which has been a successful business model to grow the company, while allowing the people who work for them to grow their own equity.

Trinity Lands

Trinity Lands is a Waikato agricultural company that amalgamated long-standing charitable trusts Lichfield Lands, Longview Trust and Hillview Trust under one banner in 2011.

Started in 1951 with Waikato farmer Matt Alexander’s vision to “farm for God” by establishing the Litchfield Lands forestry block; Longview Trust was similarly established in 1953 with the direct objective of funding Christian education and Hillview Trust set up in 1962. The combined Trinity Lands hold numerous agricultural landholdings and shares in dairy, kiwifruit, avocado and forestry.

Trinity Lands now owns more than 4500ha of dairy land, producing close to six million kilograms of milksolids (MS) and is one of Fonterra’s top 10 shareholders, owning shares and supply vouchers of 5.3 million kg MS and is progressively sharing up.

Trinity Lands has donated more than $25 million over the last decade through its shareholding charitable trusts. Last year it paid for a new $185,000 St Johns ambulance for the South Waikato region and a $50,000 refrigerated truck for a Bay of Plenty charity which re-distributes food to people in need.

The company employs a mixture of sharemilkers and contract milkers on its 21 dairy farms, which has been a successful business model to grow the company, while allowing the people who work for them to grow their own equity.

Sheryl Brown

sheryl.brown@nzfarmlife.co.nz

@sherylbrownnz

 

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