NFU explains the British milk price system

A couple of posts earlier, Andrew Hoggard explained the Kiwi milk pricing system and now, I’m delighted to thank Siân Davies, chief dairy advisor of the NFU for this explanation of the way UK dairy farmers are paid.

As the big processors review the way Australian farmers are paid, it’s an important discussion we can’t afford to ignore. Thank you, Siân, for being so generous!

sian-davies

The Brits just hate simplicity!

Nothing’s ever simple in the dairy world is it? Explaining milk pricing in the UK in a blog is going to be tough but I’ll give it a go.

The UK dairy market is pretty unique in that half the milk produced on farm every year is processed into fresh liquid milk – we have a huge population and around 98% of them drink milk. A quarter of the milk produced is processed into cheese, mainly cheddar with the remaining quarter used for other dairy products – butter, yoghurt, powder and cream etc.

We’re also not self-sufficient in dairy products and our dairy trade deficit is abysmal – last year we exported €1.1billion worth of dairy products but imported more than €3billion. This mainly comes from the EU (especially Ireland) as cheese or milk powder.

These are just some facts to try to explain our milk pricing models which are pretty unique to us.

Over 100 UK milk buyers dominated by Arla and Muller
All dairy farmers have a milk contract to supply a milk buyer, of which there are probably over a 100 – these being a mix of co-ops, plcs and privately-owned companies.

The main ones are Arla Foods co-operative with just over 3,000 members here in the UK (of their 15,000 EU owners) and Muller UK with around 2000 suppliers. Both these buyers produce a variety of dairy products but their main focus is supplying liquid milk and branded products to UK retailers and food service.

How the milk price is set
Arla has a common EU milk price – with all their conventional milk suppliers receiving the same milk price regardless of which EU country they are in. Of late the £:€ exchange rate has meant the UK milk price has suffered and not risen as fast as its € counterpart. Arla’s pricing model is pretty simple:

Monthly sales – staff costs – reinvestment (agreed at outset by the Arla board) = milk price.

The price is announced monthly a few days before the start of the month.

Most other UK milk buyers practice buyers discretion which means they set the milk price according to where they see the market. There is no discussion or negotiation with supplying farmers. Muller has historically kept its suppliers happy by paying a little more than Arla.

Another practice commonly used by milk buyers is that of basket pricing – where processors base their farmgate milk price on an average of a basket of other milk buyers’ milk prices. This is now normally based on Muller and Arla, and moves a month after the two main buyers. It can have no resemblance to the market in which the actual milk buyer functions.

A more recent addition to the milk price portfolio is that of cost of production+. This is pretty unique to the UK and came into being when milk volumes were short and retailers wanted to guarantee a steady supply of fresh liquid milk.

A number of our most “caring” retailers started paying a milk price guaranteed to be over the cost of production for farmers who supplied them with fresh liquid milk. Just over a 1000 farmers are now on this type of model (it doesn’t fit into the Arla co-op model so Arla shares the increased price amongst all its EU members) but these farmers would also be required to jump through additional hoops, for example, on animal welfare, carbon footprinting and engagement with the retailer.

Last year, with the market crash and after the removal of quotas a number of milk buyers brought in A and B pricing, where farmers were paid a milk price (A price) for their core volume (set by the milk buyer) and then a B price for anything above that A volume.

When milk was plentiful, the B price was well below the A price and reflected spot milk price or below as milk buyers tried to encourage farmers to reduce production. It follows that as milk became short that the B price would race upwards, overtaking the A price. Our most calculating milk buyers removed the A and B pricing policy when this occurred.

UK dairy deregulation
Dairy farmers in the UK has historically no need to worry about better understanding their milk buyer or market dynamics as we had a Milk Marketing Board that collected every litre of milk produced and paid every farmer the same price.This stifled innovation and competition although many farmers wish it was still in place.

The MMB was a producer-run product marketing board established by statute in 1933 to control milk production and distribution in the United Kingdom. It functioned as buyer of last resort in the British milk market, thereby guaranteeing a minimum price for milk producers. The British milk market was deregulated in 1994 following the Agriculture Act 1993.

Many milk contracts haven’t changed much since 1994, with farmers having to exclusively sell milk to one buyer on an evergreen (everlasting) contract with long notice periods. The contracts also include an annex which is the pricing schedule laying out payments (bonuses and penalties) for % butterfat, % protein, somatic cell counts, bactoscan and more recently thermodurics.

Most dairy farmers also have to be members of our farm assurance scheme, Red Tractor, and are inspected independently once every 18 months to check compliance with the RT standards for animal welfare, environmental care and milk quality.

Price risk management
A more recent addition to the milk price stable here in the UK is fixed price, fixed term, fixed volume options. Milk buyers allow farmers to lock in a certain volume of milk at a set price to help manage price volatility. The milk buyer has normally backed up the volume on a fixed deal with a customer or sold the product forward on futures markets.

Transparency missing
One thing that is missing in the UK is price transparency within the dairy supply chain. Farmers know what price they are offered by their milk buyer and we all know what price milk is priced at on the retail shelf (too low!) but what happens in between?

Our farmer levy body provides a great deal of market intelligence on dairy including market indicators such as AMPE (actual milk price equivalent) and MCVE (milk for cheese price equivalent) and more recently a futures milk price indicator, FMPE. This information is available for anyone free of charge but we all do follow the GDT auction religiously to see what the market sentiment is.

Haves and have-nots of UK dairy
The variance in milk prices paid in the UK over the last two years has been as large as anyone can remember. At one time farmers producing milk for cheddar were receiving 14ppl whilst at the same time a farmer supplying a retailer with liquid milk was receiving 32ppl.

Prices have come closer of late as the global dairy market improved and farm inputs reduced in price but this led to a complete divide within the UK dairy farming fraternity between the “haves” and the “have-nots”, simply those on a supermarket contract and those who weren’t.

Looking forward
We accept that milk pricing will become more volatile in future, what with Trump in the US and Brexit looming for us. Our farmers are calling out for new milk pricing options that help manage risk for the whole supply chain and we are at last seeing some movement from buyers.  We believe the dairy market can work better for all the players within it – from farmer, to processor, to retailer and ultimately the consumer.

4 Comments

Filed under Farm, milk price

Imagine if dairy farmers were paid like Qld cane growers

QSL

Most Australian dairy farmers have just one customer for our milk – the processor. It is the processor who adds value to the raw milk, who markets it and, importantly, it is the processor who decides how much the farmer will be paid.

I don’t need to tell you how vulnerable this leaves us.

If the processor makes a mistake or suffers any form of economic headwind – whether it be increased gas prices or decreased whole milk powder prices – it is free to simply pass that problem on to the farmer.

We accept this state of affairs because we feel there is little choice. We can’t store milk on the farm for more than two days and it’s illegal to sell unprocessed milk directly.

Cane growers have a lot in common with dairy farmers

Cane growers are in much the same boat. Like us, they cannot store their produce for long (it needs to be processed within eight hours of being harvested) and can’t sell it directly. But rather than having a handful of processors nearby – as most (though certainly not all) dairy farmers do – many are only in a workable distance from just one miller.

Cane growers use millers as service providers, not just customers

Unlike us, though, Queensland cane growers are determined to row their own boat.

As Queensland Sugar Limited’s Cathy Kelly told Milk Maid Marian, how much Queensland cane growers are paid for their crop is based on the sugar produced from their cane, rather than the cane itself.

“This payment arrangement is detailed in the Cane Supply Agreements growers hold with their local sugar mill, with the miller generally taking one-third of the sugar produced from each grower’s cane as a processing fee, leaving the grower to make the pricing decisions for, and receive payment on, the other two-thirds of the sugar,” Cathy says.

“So, while the growers may not own the sugar produced by their local mill, they are deemed to have an ‘economic interest’ in it.  It is this – the Grower’s Economic Interest in sugar (GEI Sugar) – that is at the heart of the recent sugar marketing issue.”

Cane growers can market sugar collectively
While the sugar is processed by private millers, the two-thirds of the refined sugar in which growers have an economic interest isn’t necessarily marketed by the millers.

After numerous government investigations at a state and federal level (sound familiar?), the Queensland Parliament introduced Marketing Choice legislation in December 2015, forcing Queensland sugar millers to provide their growers with a choice of marketer. It’s been a success, despite the best efforts of the biggest miller of Australian sugar cane, Singaporean-based Wilmar, to stymie arrangements as recently as last week.

Growers have access to their own not-for-profit public company, Queensland Sugar Limited (QSL), which is owned by Queensland growers and millers and started life back in 1923 as the Sugar Board, selling sugar from Queensland farmers under a single desk arrangement.

Today QSL, Cathy Kelly explains, provides four major areas of service:

Pricing: QSL is a member of the global raw sugar marketplace, the #ICE 11 exchange, based in New York. QSL uses its membership to conduct pricing on behalf of Queensland growers and millers, covering margin calls and associated fees so that its members can lock in sugar prices up to three years in advance.  QSL also operates a sophisticated pooling system, where growers can elect to have QSL manage and price GEI sugar on their behalf.

Financing: QSL uses its access to low-cost finance to provide year-round cash flow to members through a monthly proportional payment system called Advances. Under this system, QSL borrows approximately $150m each year to start paying members as soon as they start delivering sugar to the state’s terminals, even though that sugar may not be sold until up to a year later – hence the term Advance payment. As QSL is a not-for-profit, it also returns any net corporate profits to its members at the end of the financial year via the Advances system.

Marketing: QSL coordinates the physical sale of sugar, aiming to maximise returns to its members by optimising sales timing and customer premiums. They are highly regarded by their long-term clients in the Asian market, who pay strong premiums for Queensland’s reliable, high-quality sugar, last year coordinating the successful receipt of $1.9 billion in customer payments.

Logistics: QSL operates Queensland’s six Bulk Sugar Terminals on a cost-recovery basis, (i.e QSL doesn’t charge a margin), providing safe and efficient storage, handling and shipping of raw sugar as well as overseeing a strong quality management program. QSL’s delivery record is world-class, with over 98% of shipments delivered on time and in full last financial year.

While our circumstances might be a little different and it’s not been without its challenges, the sugar marketing model shows that there are other alternatives to the status quo for dairy.

2 Comments

Filed under Farm, milk price

Following the money – where your DA dollars go

da-levies

The fabulous UDV infographic in the last post got me thinking about how the biggest chunk of farmer levy funds are spent – with Dairy Australia.

Just how much does an average farm pay for DA? I did some sums based on figures from the 2016 Australian Dairy In Focus report and, for the average Australian dairy farm producing 1,563,258 litres of milk, the annual DA levy came to $5,523.

Are we getting good value? I asked Dairy Australia some basic questions about what it does and where our money goes. After discussing it amongst themselves for a few weeks, the DA staff were most forthcoming. This is one of the longest posts ever likely to appear on Milk Maid Marian but it’s very useful. Thank you, DA!

1. What are the sources of DA’s funding?

For 2016/17:

Payments from levy payers:                                                               $32.0 million
Matching Federal Government funding for R&D projects:      $20.4 million
Other (Interest on reserves, royalties on IP)                                  $0.7 million

Total                                                                                                   $53.1 million

DA project expenditure is also able to leverage additional State & Federal Government funding by investing jointly in projects, this adds approximately $10 million a year.

2. What percentages of DA’s budget are accounted for by admin, R&D, extension, promotion, and reputation protection? (I’m imagining a pie chart here)

da-funding-sources

3. How does DA set its priorities?

DA follows a process each year to refresh its strategic priorities as part of its rolling three-year plan.

Each year, the starting point is to review the performance of existing/current projects and whether they are achieving what they set out to do. An environmental scan of the operating environment helps to identify any new risks or challenges the industry will need to address.

Once these two steps have been completed, then comes the key measure to the whole process – extensive consultation with representative bodies, Regional Development Programs (RDPs) and farmers. This provides a focus of effort and expenditure on those matters that are not only seen as important, but necessary for a profitable and sustainable sector. Out of this DA is able to clearly define its key investment priorities.

From here, budgets are set and project expenditures are revised to help complete the new plan. Once finalised the plan is presented to industry and Federal Government for ratification.

The underlying, big industry challenge is to profitably grow farm production to fully take advantage of regional potential over the next decade. The current plan retains its focus on building the foundations to support resilience and growth.

Our core priorities are clear and concise: making farm businesses more profitable and competitive; growing people skills and capability; and protecting and promoting our industry.

4. Can you offer a list of the main projects delivered over the last 3 years and those slated for 2017 in R&D, extension, promotion and reputation protection?

The main projects delivered over the last three years are as follows – many of which are ongoing:

  • Regional Development Programs – extension activities to fill the gap left by state governments, discussion groups (now 107 groups up from 80, nationally) and focus farms (a total of 12 nationally).
  • Herd Improvement – Good Bulls Guide, ABV’s, Breeding Indices
  • Dairy Bioscience, Forages – DairyBio (formerly Dairy Futures CRC), hybrid breeding, endophytes
  • Dairy Bioscience, Animal Improvement – DairyBio, tracking genetic progress, Feeding the genes
  • Integrated Feedbase R,D&E – Feeding Pastures for Profit
  • Animal Nutrition & Feed Systems – Feed planning and budgeting, cow nutrition manual, purchasing grain resources, feed additives resources
  • Forage Improvement – Fert$mart, perennial ryegrass management, TopFodder silage management, quality pasture silage booklet
  • Industry Education – NCDE, Young Dairy Network, Picasso Cows, Discover Dairy, Cows Create Careers
  • Attracting & Retaining People – the People in Dairy website and resources like the Employee Starter Kits (ESKi), Stepping Stones, Stepping Up/Stepping Back, Farm Safety Starter Kit
  • Marketing – Foods that Do Good (promoting dairy alongside fruit and vegetables to health professionals), Australian Grand Dairy Awards, Legendairy Capital

Projects underway for this financial year, some of which are ongoing from last year, include:

On-farm

  • Animal health and fertility – Raising awareness and adoption of new Cattle welfare standards (Animal Health & Welfare), improving herd fertility and supporting farmers to phase out calving induction (InCalf), improving mastitis management through new Milk Quality adviser training and better practices at drying off (Countdown), publishing a new edition of the calf rearing manual (Rearing Healthy Calves), improving dairy hygiene to reduce milk price penalties due to bacterial counts (Better Hygiene Better Milk)
  • Genetics and herd improvement – Data Gene (including a centralised data repository), DairyBio
  • Feedbase and animal nutrition – Forage Value Index, DairyBio
  • Farm business management – Dairy Base training, Taking Stock, Standard Chart of Accounts
  • Farm systems and modelling – Precision dairy, virtual fencing
  • Land, water and carbon – Fert$mart, More Profit from Nitrogen (cross sector), Waste to Revenue (cross sector), Phosphorous efficient pastures (cross sector), Stocktake of the Nutrient Loss to Water Risk for the Australian Dairy Industry, feed additives to reduce methane emissions (led by Canadian research institutions), Sustainable Pasture Systems under climate extremes, Profitable Dairying in a Carbon Constrained Future program (Australian Government funded), Cool Cows heat alert service and Cool Cows workshops, Smarter Irrigation for Profit (cross sector) and technical support for industry contributions to the design and implementation of the Murray Darling Basin Plan

Post-farmgate

  • International market support – China, Japan and South East Asia scholarship programs and in market programs across China, Japan, South East Asia and the Middle East
  • Manufacturing innovation and sustainability – Technology Transfer Scheme, Transfer Dairy Fund, Small Dairy Network, Dairy Manufacturers Sustainability Council, Dairy Industry Sustainability Framework
  • Marketing – Legendairy Capital, Foods That Do Good (for health professionals)

5. DA has explained that some programs have been trimmed or cut to meet the expected downturn in income this financial year. What are they?

 Internally, DA has reduced its workforce by about 10% and reduced overhead costs by ~15%. Efforts have been made to preserve core internal programs (RD&E) but most programs have experienced some cuts.

The larger changes have been:

  • Post-farm-gate R&D and educational initiative expenditure has been cut by $3 million per annum.
  • Mass market advertising (TV based advertising) has been cut by $2.5 million per annum.

6. How much has DA spent on post-farmgate R&D over the last three years? Why are farmers’ funds on post-farmgate R&D? How will this change?

Post Farm Gate R&D – Manufacturing Budget

2014/15 – $3,157,500 (DIAL)

2015/16 – $1,293,800 (DIAL)

2016/17 – $414,000 (Supporting Manufacturing Innovation & Sustainability)

Up until the past year, our main investment in post farmgate R&D was core funding for DIAL to produce cultures for cheese companies and also undertake post farm pre-competitive R&D to help companies move up the value chain and improve the return for farmers via milk price.

DIAL was established in 2008 and since that time we were contributing about $3 million/year and most of the processors (MG, Bega, Lion, Parmalat, WCB) were contributing proportional amounts, as were commercial investors so that DIAL had an annual budget of about $7-10m/ year. DIAL also undertook a number of projects to help companies improve operating efficiencies in their factories.

Over the past 2-3 years DA has been scaling back its investment due to a number of factors. 1) with the reduction of co-ops over time, being able to demonstrate to farmers the value of levy dollars into DIAL became more difficult 2) a number of the processing companies had developed strategic alliances and partnerships with overseas R and D organisations or global dairy companies who had very large R and D capability. So the value proposition for DIAL came into question.

After a thorough review it was decided to wind up DIAL. The cultures business was sold to a commercial company already producing cultures and all the remaining IP from DIAL has now been shifted to DA and we will continue to assist processing companies adopt the existing IP.

Following the decision to wind-up DIAL, the strategic direction of the investment as well as the level of investment has changed dramatically. DA’s strategy in this area is now a more targeted post farm gate investment approach focused on technologies ready for adoption rather than idea inception.

We are looking to take commercially mature technologies or practices and see them through to implementation in an Australian context so that our processors and farmers see the value sooner rather than later.

Ultimately it will aim to increase the profitability of the Australian dairy industry by ensuring that our supply chain is keeping pace with global developments in dairy production innovation.

Key focus points of the current Supporting Manufacturing Innovation & Sustainability program:

·         Accelerating technology uptake into the Australian dairy processing sector by supporting commercially-relevant technology assessment and assisting processors to access larger buckets of available government funding sources

·         Enhancing the sustainability of the dairy processing sector by supporting the processors to both track and make progress against industry targets to reduce GHG emissions intensity, consumptive water intensity and waste to landfill. Each of these environmental targets are coupled with clear commercial drivers in that energy, water and waste disposal costs are increasing at a rate which requires rapid industry respond in order to maintain any sort of international advantage in terms of cost of production.

·         Ensuring that the value of current and previous DA research is realized for the benefit of Australian dairy farmers

As part of this new program, Dairy Australia has already completed three pilot-scale technology transfer projects that investigate the economic feasibility of innovative technologies designed to:

a) provide a non-thermal, low energy process to extend the shelf-life of dairy products as well as improve pathways for value addition to whey;

b) enhance the recovery of clean-in-place chemicals and reduce environmental discharge; and

c) optimise spray dryer control and reduce energy use.

Post Farm Gate R&D – Health and Nutrition Research and Science Budget

The Budget has progressively been rolled back in the last few years but is now dominated by the Fractures Trial Commitments.  This funding will continue to contract over the forward estimates as the fractures trial comes to completion.

2014/15 – $584,000

2015/16 – $430,000

2016/17 – $495,000

DA invests in Human Health and Nutrition Research to ensure that dairy nutrition science is strong enough to support industry communication activities designed to improve consumers’, key influencers’ and policy makers’ confidence in dairy foods while highlighting evidence of the benefits of dairy. 

This research has been vital in helping industry to counter the anti-dairy sentiment and fad diets (eg: Paleo) using the most up to date science.  This research also provides real opportunities to enhance the health and nutrition benefits of dairy in the diet with a view to increasing consumer demand for dairy (eg: Fractures Trial working to provide strong scientific evidence that dairy foods help to reduce the risk of fractures in adults).

7. What are the alternatives for farmers to provide DA with feedback?

Aside from contacting DA by phone and email, many of our staff, board directors and RDP extension people are often out in the regions on farm or at various industry events and forums so there are plenty of informal opportunities to approach us face to face.

Farmers are able to provide us with feedback via our stakeholder tracking survey which contacts about 600 farmers twice a year. Farmers are asked directly about their satisfaction with levy investment, what’s working and not working and ideas/advice on how to meet the needs and expectations of farmers.

Also, every three to five years, the Federal Government requires an independent performance review of DA. This process collects feedback from stakeholders about DA’s effectiveness, efficiency, and achieved value for money and return on investment to the industry. Workshops are held in all dairy regions for all levy payers to attend or farmers can email a submission to the agency conducting the review.

Farmers can contact their RDP directly or attend organised events, workshops and local discussion groups. Farmers are also encouraged to join local or industry boards and committees (such as their local RDP).

Or there is also the Australian Dairy Farmers (ADF) and the state dairy farmer organisations which farmers can contact or join to provide feedback which will then be given to DA.

***Agri-political activities or lobbying on behalf of dairy farmers is led by the state dairy farmer organisations – UDV, TFGA, SADA, Dairy Connect, NSW Farmers, QDO and WA Farmers, who are members of the national body, the ADF.

2 Comments

Filed under Farm, Research

Following the money – where farmer levies go

payments1

Every farmer knows that each time we sell a litre of milk or send a cow to market, we pay some sort of compulsory levy or fee. But where does that money go and what does it do for us?

Well, the UDV has created a very lovely infographic to follow the money as it trickles down to a plethora of bodies. The biggie is Dairy Australia but there are plenty of others less familiar to the average milk maid.

The infographic is so chock-a-block full of useful information that it simply doesn’t fit on the page but I have lopped the right hand side off so you can get the gist of it. To see the whole thing, click on the link below.

dairyfarmer-representation-and-dairy-farm-statutory-payments-2016

The front follows the money and the second page explains our convoluted system of representation.

Bon appétit! For the next course, Milk Maid Marian will serve a short but sweet distillation of how DA spends our precious funds.

2 Comments

Filed under Farm

Kiwi dairy leader on pricing system

As part of its farm gate pricing system review, Murray Goulburn is studying the way farmers are paid overseas, including in New Zealand. So, how are Kiwi dairy farmers paid for their milk and what are the pluses and minuses of the NZ system?

I’m very grateful to Andrew Hoggard, the National Dairy Chair of NZ’s peak farmer body, the Federated Farmers, for writing this explainer post for us.

andrew-hoggard

In New Zealand there is no “one” way that the milk price is calculated, we have many different companies.

Fonterra is obviously the largest at around 78% of milk supply, but you also have two other Co-ops, and then several private processors, the largest of which is Open Country Dairies.

Generally, in most countries the unwritten rule is that the largest Co-op in the market sets the milk price.

In New Zealand’s case that is Fonterra, while the other Co-ops will return all profits they make (after any retentions) back to the farmers as milk price, so they sit outside that rule to a degree.

The private companies will pay a price based on the Fonterra price, so it might be a few cents more to attract supply, or a few cents less to retain supply.

Often the way these companies have attracted supply is through the fact that farmers can leave Fonterra, sell their Fonterra shares which for most farmers is a tidy sum, and then get a similar milk price supplying someone else and use that capital for something different.

So, in a practical sense, the Fonterra milk price is often viewed as the New Zealand Milk Price. Fonterra was created as a result of the two largest Co-ops merging with the NZ Dairy Board back in 2001.

The Government passed special legislation to bypass the Commerce Commission (our version of ACCC). This legislation, the Dairy Industry Restructuring Act (DIRA), set many rules that Fonterra had to follow to allow for domestic competition and transparency.

This led to the development of the milk price manual. In the early days the manual was slightly different to how it works now, with the Global Dairy Trade are a key component of it these days.

That said during the Dairy Board days, we have always had a system of forecast payout, advance rates, retro payments, and final payout.

This system continues today with most companies in New Zealand following the milk price manual and that methodology for calculating the payout (for Fonterra).

How does it work for Fonterra farmers?
At the start of each season (June) Fonterra will advise stakeholders what the forecast payout for the season will be.

This is essentially a speculative assessment as to where the market is heading. In announcing the forecast payout, they also reveal the advance rate and payment schedule (see link to schedule below).

advance-payment-rates-single-season-181120161

Something also unique to New Zealand, which the rest of the world perhaps does not follow, is all bills are expected to be settled on the 20th of the month, for the preceding month.

Today, I’m writing this on February 20, so I’m being paid for all the milk I produced in January.

The Advance rate is the amount I will be paid in the first months of the season; this is usually 60-70% of the forecast payout.

The schedule then shows how that advance rate lifts throughout the season. For example, today I am being paid $4.20 as the advance rate for all the milk that was produced in January, is worth $4.20.

Now the previous month the advance rate was $4.15, that was all the milked produced to the end of December. Thus this month I also get a retro payment of five cents on every kg of milk solids produced up to the end of December.

Next month the advance rate lifts to $4.30, so every kg produced in February will be paid at $4.30, and then I will get 10 cents on every kg produced up until the end of January.

So basically, every time that the advance rate lifts then I get a retrospective payment for all the milk produced up to that point to ensure that everything produced until that point in time has been paid at the advance rate.

If the Board of Fonterra however, at any time during the season feel that the forecast needs to be altered, they will do so and amend the schedule.

Should the payout have to be revised down then they may well scrap several lifts in the advance rate. Very rarely as this occurred in New Zealand where a company has had to claw back payments from a farmer.

That’s why we have a lower advance rate than the projected payout, so that if the market turns, you don’t end up taking money back off farmers. Kiwi farmers don’t get upset by much, but claw backs would have us reaching for our pitchforks!

When the season ends on May 31, the full payout is still outstanding at that stage, with retro payments due in June, July, August and September, with final payment in October.

This provides a good cashflow over the dry period. It also helps the company in making all the final sales and collecting payments for that season’s products.

Calculating payout
The milk price manual sets the benchmark. Basically, it takes the prices from the Global Dairy Trade, for a basket of commodity goods, heavily weighted for WMP.

The manual determines what a hypothetical, efficient competitor to Fonterra, might be able to pay for raw milk and still make a dollar, using a mixture of Fonterra’s actual data around transport and manufacturing costs along with some assumed costs. That’s effectively your milk price.

Any margin that Fonterra makes above that then goes into a Dividend, which because it is a Co-op then goes back to the farmers.

This way the farmer gets to see what the base value of their milk is worth, and can be responsive on-farm to changes in the world milk price. The Dividend otherwise shows me how good my Co-op is at adding value to my milk.

If these two streams were bundled together, you would have to assign a hard-core forensic accountant to pick through the annual report to work out how well the Co-op is doing.
For example, if it was bundled together and we had a milk price of $7.50, we might think cool, everything is sweet, but that could just be that the raw milk is worth $7.45, and the Co-op is only adding five cents.

Whereas unbundled, you would see that straight away and start asking some hard questions. Likewise, if we got a milk price of $4, but a dividend of $3.50, some may blame the Co-op for the milk price.

But in actual reality they should be doing high fives for the excellent dividend, and for not pushing any milk production because it’s not worth it.

Ideally every Kiwi dairy farmer should be trying to base their system on being profitable on the milk price alone. Because the dividend isn’t a financial reward from how well you look after your cows, it’s from investing your co-op.

One other key point in New Zealand, no one can jump ship mid-season. At around this time of the year you advise your company if you are staying with them for next season, though some of the private companies have three to five year contracts.

What you do find here is that we don’t have much in the way of chopping and changing between milk companies, compared to Australia.

Alternative Payout Models
Two independent New Zealand co-ops differ from Fonterra through combining the milk price with a dividend. Synlait and Miraka offer premiums for farmers who operate their farms on best environmental practice. But they still use the schedule like Fonterra.

The only real point of difference exists with Open Country, who have three payment periods, and the prices vary over those periods, with usually the final period at the back end of the season having a higher price.

In terms of managing risk, we have recently had the launch of milk price futures here in NZ, it is still in its infancy, and farmers will need to be very carefully in using these tools.

Some companies have also offered a guaranteed milk price, where they match a customer wanting a certain amount of product at a certain price over a time period, and farmers willing to take that price.

However, probably the best way to manage risk is to be aware of what’s happening. That’s why so many Kiwi farmers pay attention to the fortnightly GDT auction, because that trend we know will show up in our milk price.

Other things to watch are the world markets, will President Trump’s proposed ‘Border Wall’ hurt American milk production, increasing demand from Mexico for other suppliers.

Generally, we are at the mercy of geopolitics when it comes to milk prices, while domestically the politics involve on-farm rules and regulations, which also impact on the milk price. Being aware of something before it hits should enable you prepare better for it.

One obvious thing in Australia to watch will be the New Zealand milk price, because of our greater exposure to world markets we will respond to big shifts in supply and demand quite quickly in terms of milk price.

Australia ultimately does follow, as your domestic market will only insulate you for a short period of time. Anyone that claims different probably studied trade theory at Trump University.

New Zealand has long standing Free Trade Agreements with Australia, thus there will come a point if either of our domestic milk prices get too far removed from one another, the reality is that dairy products will move across the Tasman, and even out prices.

There are plenty of economic theories that back up that assertion. If you view the New Zealand milk price as clear de-facto for the world price, then simply applying the NZ/AUS exchange rate to that will tell you the value of the milk in your vat is worth on the world market.

The Aussie price might not exactly match that but it will follow it. I think the key thing to remember, no one owes you a living just because you’re a farmer. You are a businessperson, you need to recognise your own risks and have plans for dealing with them.

Thanks very much to Andrew Hoggard, National Dairy Chair, Federated Farmers, for explaining the NZ farm gate milk price system so thoroughly. Milk Maid Marian appreciates your generosity!

2 Comments

Filed under Farm, milk price

What it will take to get this farmer growing

Confidence.jpg

The last two years – a drought and the infamous dairy debacle – have taken their toll and not just on my hip pocket. Unless there’s change, my cheque book is likely to grow cobwebs for up to a decade. Sounds melodramatic? Not really.

My reasoning is this: first, we need to recover the equity lost over the last two years.

Second, we need to catch up on the maintenance we couldn’t afford to do over the last two years.

Third, I want at least another $100,000 in equity as extra protection. Interest rates won’t always be this low and, when they rise, another shock of this magnitude could be devastating rather than debilitating.

It all adds up to roughly $300,000 in profit to make up before I have an appetite to invest in any project that takes more than a year to break even. And that will take me years and years to accomplish.

If other farmers have the same attitude, we will continue to see Australian milk production stagnate.

The problem with this is that the processors have been investing in hundreds of millions of dollars worth of new stainless steel that requires enough milk flow to make it efficient. Time and time again, they have said growth is the only way to return the maximum price to farmers.

Do we have the start of a vicious circle? I hope not to hear the processors blaming a low farm gate price on inadequate utilisation of bloated stainless steel created by a low farm gate milk price.

Making me even more risk averse is the lack of definitive action to prevent this happening all over again.

Both the big processors, MG and Fonterra, have pledged to be more transparent and that’s a good first shuffle. I say “first shuffle” because to call it a good first step would be overstating its importance. We need a game-changer.

MG has commissioned a price review that will consider farm gate price models from around the world. At the same time, the Bonlac Supply Company, which represents farmers supplying Fonterra, also announced it would present alternatives early this year. Will these be the game changers we need?

I suspect not. The game changer we need is one where risk is shared along the supply chain rather than simply shifted onto farmers.

After all, while the current system is a legacy of an industry dominated by strong co-operatives, it’s also a marvellous “magic pudding” business model for corporate processors.

Consider this recent ACCC submission by Warrnambool Cheese & Butter‘s new owners, Saputo:

In February, Saputo announced a quarterly profit of C$197.4 million. I’m not sure why it feels it is appropriate to make Australian farmers responsible for its inability to negotiate a better energy contract. But it does because it can.

It serves as a timely reminder that the push for farmer prosperity has to come from farmers.

7 Comments

Filed under Farm, Fonterra, milk price, Murray Goulburn, Warrnambool Cheese and Butter

Calves teach farmer a lesson in stakeholder engagement

movingthecalves

Every milk maid has to be part kelpie. We spend so much of our time herding cows from place to place every day, it’s almost instinctive. Without thinking, I move just far enough into the cow’s field of vision to urge her left or right without worry or fuss (most of the time!).

But, when it comes to moving young calves, it all goes out the window.

A new group was ready to graduate from the hay-shed paddock out into the rising one-year-old area. It’s about a 500 metre walk past half-a-dozen paddocks. My first challenge: to get them out of the paddock.

Walking around behind the poddies, I try the conventional arm waving to get them moving towards the wide-open gates. Nope. Find myself surrounded with curious muzzles at every quarter.

Next attempt is to whistle a merry tune and hope they’ll follow the Pied Piper. A handful do. The rest, meh. Apparently not that curious.

I have a brainwave. The calfeteria is undergoing repairs at the moment but what about the trailer? Hook it up, partially fill with calf bait (aka pellets) and arrive full of fresh hope. A handful follow. The rest, meh. Apparently not that hungry.

The phone rings. I slump on the Bobcat seat and leave the little blighters to their own devices. One tip-toes out the gates with all the quivering daintiness of Bambi. Oblivious to the talk about whitepapers and indices, out struts another with the confidence of a young and innocent Simba.

While I struggle to comprehend the basics of futures and options, out come Mowgli, Nutsy and Cottontail. Before I know it, the whole cast is wandering off up the laneway.

True, Alex and I later have to rescue some who strayed a little too far. But maybe this was the way it should have been all along. Stakeholder engagement on the farm is often something that has to happen strictly on someone else’s terms.

4 Comments

Filed under Calves, Farm