-Advocates for continual growth of agriculture in New Zealand. -E.g. Andy West; double current milk solids(MS) production and $3 Billion more lamb production. -THEO SPEIRINGS 30 th of OCTOBER “ He believes NZ dairying can continue to expand over the next decade,with 60 %of expansion based on conversions and more animals and 40% on more productivity.He said the country had NOT reached the point of having too many cows. He disagreed with the Environment Commissioner‘s comments that more dairying means a drop in water quality. NZ dairying could easily grow for the next 10 years by 2-3% per year ”he said. -However, this will require approximately 22 billion kilograms of extra dry matter fed + create extra effluent and nutrient problems -Will not provide additional revenue to cover the additional costs (MR<MC). Biological systems have natural limits: -These limits include: energy, capacity and resource availability.

Biological systems have natural limits: -How do we define limits? -Physical limits can be distorted short term by such innovations as cow barns, robotic milking, sophisticated feeding systems and improved biological efficiencies. -Economic limits, however, are more difficult to distort. (Currently this distortion is achieved through the use of averaging, selective data use and inadequate comparative analysis.) -The use of production economics establishes these economic limits.

Economic Limits – Resource use. Average response “line” Diminishing Returns Curve

- Average response: same additional output for every additional input. -Diminishing returns: defines the point where the next additional input results in a decreasing output. -This is termed “Marginal Analysis” and identifies the point where the marginal cost is greater than the marginal return ($MC>$MR). -Most computer models rely on averaged figures and ratios. -These models cannot accurately identify where to cease inputs. -Without this ability, feed input costs ($MC) invariably exceed the value of additional product from the feed ($MR). -With the overuse of feeds comes higher nutrient loads and increased environmental damage.

750 cows. 350 kg MS /cow 262,935 kg MS Buy and Feed 648,500 kg DM; 865 kg DM /cow Profit $740,235 N leach 18 kg N/ha/year. Base Farm (Run 1)

BASE FARM 750 cowsBuy & feed 648,500kg DM (865kgDM/cow) 262,935kg MS (350kg/cow) N N leach 18 kg/ha/year 740,235

MARGINAL ANALYSIS 618 cows Buy & feed 23,000kgDM (37kg/cow) 216,775 kg MS N 15kg/ha/ year 784, cows Buy & feed 625,500kgDM (4740kg/cow) -44,607 N 3kg/ha/ year 47,160 kg MS (750 cows; 262,935 kgMS; $740,235; N leach 18)

From LP optimisation & production per cow at 380 MS/cow 557 cows Buy & feed ??? 213,970 kg MS (380kg/cow) N N leach 13 kg/ha/year 28% reduction vs base farm 877, % increase vs base farm

“Roadtesting” the GSL Resource Allocation LP Model. Example: Lincoln University Dairy Farm. In “Top 5%” for NZ dairy farms. LUDF cows 246,460kgMS 369 kgMS/cow LUDF 2011/ cows 297,720kgMS 471 kgMS/cow LUDF 2012/ cows 300,484kgMS 477 kgMS/cow GSL used to set up LUDFReduce herd numberYoung stock weights Model performance standards established Monitor performanceTarget reduced N use. Decreased N leach Management implementation plan set. Ensure 2 herds and required intakes Pasture quality and increased grazing intake.

SMART NEW FARMS IN THE SWEET ZONE WILL NEED MEANINGFUL, STRATEGIC BUSINESS PLANS Optimised for PROFIT WHILE MEETING LIMITS Consistent measure for profit between land uses.(ROC) Ethical(fair) resource use that is efficient. (e.g: LUC + kg protein/megalitre water or profit/ML water) Resilient to volatility (price, weather, resource clawbacks) 10

True profit + true environmental costs? InvestmentAverage return on capital (ROC%) Top 10%N loss Term Deposit4.5 (no work) Dairy ($6.10 payout) Sheep + Beef Manuka4.3 (no work)9 (beekeeping)

HOW DO WE GET THERE….. Legitimate + Meaningful Business Plans showing limits will be achieved over time. Smart Resource Allocation to Best Users + Innovators ( Water goes to most efficient use and expansion is only on soils with greatest attenuation capability) Not voluntary nor self regulation (FEPs with no time bound targets). True Economic Assessment of Externalities + Clean Up (Public will not keep paying $400,000 per tonne of N leaving root zone (20 years – Lake Taupo) 12

Tomorrows Farms Today 25 farms Upper Waikato – 3 years. Naked Business Discussion Group – “Bare All” What Farms were most resilient? (consistently good ROC)  30% change in milk price  Dry years  Notional nitrogen limit (40% below average) 13

TOMORROWS FARMS TODAY MORE MILK MORE STOCK MORE N use, MORE pasture harvested DID NOT correlate with higher profits in “ farmers don’t know what they don’t know” Kirsten Watson – vet + sharemilker & TFT participant. 14

Some Top Performers in the Study

SOME FARMS PRODUCE A LOT MORE MILK + MONEY WITH A LOT LESS POLLUTION 16

Mc Knight & Robinson: 8-9% ROC kg/N Leached (2012) Central Plateau Average: 4.5% ROC + 39kg/N Leached DOUBLE THE PROFIT WITH HALF THE POLLUTION

AND DOUBLE THE PRODUCTION WITH HALF THE POLLUTION Kg Milksolids per kg N lost…… 18 McKnight + Robinsons

THE STORY OF LAKE FARM A TALE OF “TWO HERDS” 530 cows – baseline Marginal profit and high risk. Drop to 430 and ROC improves and (economic)risk drops N loss reduced by 30% Review system after 4 years (2014) Drop further 100 cows to 350 cows, Risk drops, ROC improves and environmental footprint is 50% below baseline. What is this telling us? A TALE OF TWO HERDS (40% drop in SR improves business resilience, and halves the footprint) 19

A Smooth Journey to our end point If we want more – from less Encourage business literacy + resilience + development with fewer externalities Facilitate the most resource efficient use NOT BY REWARDING POLLUTERS + POOR RESOURCE USE COUNT THE COST OF EXTERNALITIES & PUBLIC BURDEN OF CLEANUP Educate businesses to think…… PROFIT, PLANET & PEOPLE NOT - Productionist + Resource Hungry DUMB & DIRTY GROWTH 20

21 INTENSIFYING THE Upper Selwyn Catchment where L & XL soils have high rates of nutrient loss relative to productivity (M-H soils most resource efficient)

22 The Treadmill of Marginal Returns More Growth – Less Productive

MORE IS NOT ALWAYS BETTER MARGINAL GROWTH and PRODUCTION = ↑RISK HIGH SOCIAL COST WITH LOW SOCIAL BENEFIT 23

The Sweet Zone Business Indicators 24 Risk Sweet Zone Profit (ROC) Cow Liveweight per Hectare Production

The Sweet Zone Physical Indicators 25 Sweet Zone Profit (ROC) Cost to Fix Effects Environmental Effects Production

Marginal Cost of reducing Nitrogen leaching. The System 3 dairy farm produces at an N leach of 18 and profit of about $600,000. Becoming more efficient in terms of economic resource allocation will also improve profit for such System 3 farmers and reduce their N leach to that of a more optimal farmer at about 14.But from there on, the diminishing returns curve dips down at an increasing rate, meaning that any reduction in N leach for the efficient farmers will immediately reduce profits. “Grand parenting” therefore results in the most efficient farmers (e.g. LUDF) immediately losing profit whereas the least efficient farmers may reduce N leach by up to 50% and be no worse off. This policy unfairly targets efficient farmers but inadvertently benefits inefficient farmers. (“Inefficient” refers here to integrated economics and N leach. The higher input farms may however claim to be more biologically efficient if the high inputs result in higher production per cow.)

AVERAGING DESTROYS DETAIL. - DETAIL IS REQUIRED FOR MARGINAL ANALYSIS. - MARGINAL ANALYSIS ESTABLISHES EFFICIENT RESOURCE USE. - EFFICIENT RESOURCE USE IMPROVES PROFITS, LOWERS RISK AND MINIMISES ENVIRONMENTAL DAMAGE. - THE DAIRY INDUSTRY USES AVERAGES AND WILL NOT ACKNOWLEDGE A PROFIT/LEACH “WIN / WIN”. - POLICY MAKERS FOLLOW THIS LEAD AND ESTABLISH RULES LIKELY TO RESULT IN “LOSE / LOSE”. - THIS BELIES THE FACT THAT FARMERS ARE ACHIEVING “WIN/WIN”. - APPLICATION OF PRODUCTION ECONOMICS SHOULD BE ENCOURAGED AT ALL LEVELS OF THE AGRIBUSINESS INDUSTRY TO ENSURE THIS “WIN/WIN”. SUMMARY: