Risk in New Zealand dairy farming : perception and management : a thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Science in Agricultural Systems and Management at Massey University, Palmerston North, New Zealand
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Date
2005
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Massey University
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Abstract
Many changes have taken place in New Zealand during the last 20 years. These
changes have affected the dairy sector in its broadest sense, at both industry and farm
level. After economic deregulation (1984), a survey was conducted in 1992 amongst a
sample of pastoral New Zealand farmers to assess the perception of risk and the
strategies most commonly used by them to manage risk. Dairy farmers were part of
the total sample analysed. Since the 1980s agriculture, not only in New Zealand but
world wide, has changed at a rapid rate with farmers facing a challenging
environment. The identification of both sources of variation and management
strategies for them has made risk management a high priority issue. Therefore there is
a need to understand the critical aspects of the environment faced by New Zealand
dairy farmers, to update our knowledge of how they are recognizing and managing
risk. The main objective of this research was to assess farmers' risk perception and
identify the main variables affecting risk in New Zealand dairy systems. To accomplish
the objectives, the 1992 survey was replicated with another sample of dairy farmers.
Additionally a logistic regression was used to analyse the ProfitWatch Database
(Dexcel). The four most important sources of risk perceived by farmers in 2004 were
from the market side of their operations (2), Human (1) and Financial (1 ). To control
risk, farmers were mainly focused in the use of Production and Financial strategies.
The risks perceived and the use of risk management strategies have changed
significantly during the last twelve years. Now farmers perceive more risk in almost all
the sources identified in the surveys and they also make more intensive use of almost
all the strategies to cope with those sources of risk. Significant differences were also
found in the perception of some of the risk sources of the different groups of farmers
analysed (Sharemilkers vs. Owner-operators and; North Island vs. South Island dairy
farmers). Finally the database analysis showed that of the seven variables included in
the logistic regression to assess risk, measured as Return on Equity (ROE), only four of
them were found to be significant for the model. In order of importance, these were:
the Debt Servicing Capacity (DSC), the Debt to Asset Ratio (DTAR), the Asset Turnover
Ratio (ATR) and the Operating Profit Margin (OPM). The findings of this research have
confirmed that currently farmers are mainly concerned about the changes of prices,
changes in world situation, accidents or health problems and changes in interest rates;
however to control risk they are both production- and financial-orientated. With this
clear profile, it can be stated that indeed risk perception and the way farmers manage
risk has changed during the last twelve years. Additionally, farmers perceive sources
of risks and manage them differently, according to their specific situation (e.g.
Ownership structure, Geographic location). The analysis of the database showed that
increases in farm size were not associated with a decrease in risk (ROE). Also, the use
of Farm Working Expense Ratio and Economic Farm Surplus as the main variables to
evaluate cost control and profitability of dairy farms overlook more useful ratios of
ATR and OPM. Finally, high levels of debt can lead to reduction in the risk faced by a
dairy business if non-equity capital (money borrowed) is efficiently used and high
levels of efficiencies, both capital and operational, are achieved.
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Keywords
Dairy farming, New Zealand, Risk management, Farm management, Dairy farm management