The interaction between processors and farmers is bizarre to outsiders. The way it works is this:
Out of a handful of processors in the district, you ask one to collect your milk, although, if you’re unlucky and live somewhere a little remote, you might not actually have a choice at all. We’ll call this processor “your” processor for convenience.
Whichever processor you choose, they tell you what they will pay for your milk on July 1 – sometimes after July 1. This “opening price” is meant to be the lowest anticipated price, the one you can budget on. The only other time the price has fallen below the opening price in the last couple of decades was during the global financial crisis and even then we had a couple of months’ notice.
The price generally goes up along the way from there, though, unless you are one of the very few farmers who gets a fixed price, nothing is actually guaranteed after that.
It all depends on the exchange rate, global commodity prices, the performance of the biggest processor in the market and the success of “your” processor’s particular product mix.
What’s the performance of the biggest processor in the market and the success of your processor’s particular product mix got to do with the amount farmers are paid, you ask? Everything.
And it’s a system that used to work brilliantly. Once upon a time – not too long ago for those sporting the odd grey hair – there were not one but two major dairy co-operatives in the southern states: Bonlac and Murray Goulburn.
Every cent of profit the two co-operatives earned was returned to their farmer-shareholders and, because their whole reason for being was to maximise profits for their farmers, they effectively set a base for the farm-gate milk price.
Neither co-op could get too lazy or arrogant because there was strong competition from the other. Then, disaster struck, as reported by The Age:
“Crucially, Bonlac is processing only 1.6 billion litres of milk. Over the past 10 years, its share of Victorian milk production has declined from about 40 per cent in 1992 to 16 per cent in 2002.”
“Bonlac’s milk plants are running at only 75 per cent of manufacturing capacity. Particularly underused are the factories at Darnum in West Gippsland and Stanhope in northern Victoria.
“Debt, the result of an ambitious expansion into value-adding branded products in the 1990s, is still crippling the company, despite asset sales creating paper profits in the last couple of years, and the repayment of $185 million of debt.”
Now, in the midst of an ambitious expansion into value-adding branded products on the back of a partial listing, MG is in turmoil. Its MD and CFO have resigned and the milk price has collapsed, triggering ASIC and ACCC investigations, at least one class action and a share price meltdown.
Bonlac is long gone and, in the eyes of many farmers, MG has lost the title of reliable pacemaker. The system is broken.
It’s no longer acceptable for dairy leaders to tell farmers to concentrate on their farm businesses and blindly follow their calls for growth. It’s time we actively forged a new era for Australian dairying.