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Organics: fat into the fire or get out of jail card.

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Executive Summary

Aoroa Farms Trust sees organics as a Get Out of Jail Card!

This report was written to enable two decisions to be made:

  1. Whether or not Aoroa Farms Trust remain a conventional dairy farm or convert
    to becoming an organic dairy farm.
  2. If the decision is to convert do they supply Fonterra Coop or Organic Dairy Ag
    Hub Coop

The people involved in this business plan and who are critical to its success are the directors of the Aoroa Farms Trust Hal Harding and Penny Smart. They fully realise that they will not fulfil their goals on their own however, they will need good advice and support. During their time farming and during their due diligence on the organic conversion they have surrounded themselves with people to fill the skills gaps that they lack. Their farm consultant Rodd Hodgson, accountant Charmaine O’Shea and bank manager Bryn Hughes have been integral in helping them with their decisions; there are no plans to change this combination. Aoroa Farms Trust also have a very skilled, steady and committed staff whom they have consulted with throughout the whole organic due diligence process and from whom they have full support. Hal and Penny along with Aoroa Farms have a strong vision, set of values and clear goals regarding the farm and how they want it to be now and in the future. Hal and Penny back themselves, work well as a team and are confident that they can make an organic system work well on their farm.

The opportunity for organics domestically and more importantly through export is growing very quickly and it would appear set to grow exponentially in the short to medium term. (The Organic Aotearoa Report March 2016). There is currently an undersupply of organic dairy and as more and more consumers want to know that the food that they are consuming is good for them and just as importantly the planet, this is set to continue. There will need to be ongoing improvement in the integrity of organic products as well as less fragmentation in the organic market place amongst suppliers, for the full potential of organics to be met and continue to progress at the current rate. (https://www.marketresearchreports.com/technavio/global-organic- dairy-products-market-2015-2019).

Aoroa Farms Trust has a high debt and in order for organics to be financially sustainable on the farm, they need to have an average $8/kgMS farm-gate milk price once fully certified. Benchmarking production, costs per kgMS and farming systems with other Northland organic dairy farms (which included on farm visits), has guided the figures and predictions used in making the organic decision. Being a ‘value add’ product the organic milk price is de-linked from the conventional global commodity milk price and so more likely to be as volatile/affected by global events as conventional milk pricing. This is one of the main attractions for the conversion as well as the ongoing benefits to the environment that occur when farming organically.

Risks that are involved and are beyond the control of the Trust are the weather, as Northland is prone to drought (affecting levels of production); the stability of the global economy, geopolitical disruption and the demand and supply equation for organics, affecting price paid.

There are two options available to Aoroa Farms Trust as to a processor to supply; Fonterra Coop and the Organic Ag Hub Coop. Fonterra (whom the Farm currently supplies with conventional milk) has recently stepped up/come back into the organic milk market. Fonterra have historically been unreliable in regard to renewing contracts in Northland for organic milk. They currently offer a transition premium linked to the conventional milk price pre full certification of .45c/kgMS with the share ownership requirement the same as conventional i.e. fully shared up at the market value which is north of $5.50/kgMS currently (May 2016). The Organic Ag Hub is a new cooperative that has a business model of matching organic milk to processors only i.e. they don’t own any processing plants themselves, they are small and intimate but as yet unproven. Their transition pricing is currently higher than Fonterra’s and shares in the Ag Hub Co-op are valued at $1per kgMS with the requirement to be fully shared up if supplying transition or organic milk.

The Trust feel that the rewards are there for the conversion both financially and environmentally which fit with their values, vision and goals.

The backstop if organics do not work out would be reconvert to conventional supply.

The decision was made on the 18th May with the approval of the bank to start the conversion to Organics and supply the Organic Dairy Ag Hub from the 1/6/16.

Organics: fat into the fire or get out of jail card? – Penny Smart