Why the system is broken

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.

 

17 thoughts on “Why the system is broken

  1. You are correct in that the interaction between processors and dairy farmers looks bizarre to outsiders, but it is also easy to see that your dairy farmers are at a disadvantage, and you have explained it well. From the general viewpoint of a lowly consumer of goods and services, I see similar problems on my end. As more local and regional businesses are bought out by larger national and international players, my money buys less and less. I can only vote so far with my dollar when there are fewer, sometimes only one, source for that good or service.

  2. The problem has been that while the Australian farmers have enjoyed the processors compete for their milk, which kept milk prices up, or at least gave you the choise to walk, the industry was getting wound down due to lack of investment, any spare cash was going to farmers. United co-ops are the answer, the competition is the rest of the world, not the neighboring factory. If Bonlac and MG would get together now, you would have something formidable.

    • It’s tricky, Gusis12. If you only have one big co-op, there’s a risk it will get lazy and arrogant. There’s also the risk that when it makes a mis-step, it can bring the whole industry tumbling with it.

  3. Good explanation for the simple amongst us.

    At face value it appears one of the downsides of a co-op style structure is the need to return surplus funds to the dairy farmer and this is sometimes done to the detriment of capital works for any processing plant. The flip side being having too much capital spent on a processing plant for the wrong product mix can destroy any value and deny farmers a return.

    Any suggestions as to the answer?

    I tend to agree with Gusis12 with his comment as to who our competitors are but then that is something that Canberra doesn’t appear to hold the same view on. The deregulation approach pushed through in 1999 doesn’t appear to have been too successful as a sustainable approach for the Australian dairy sector.

    • Not just for the simple among us, CSD! It’s worth remembering that the Australian milk price system is based on the structures of the past and it’s not the only system available.

  4. Hello Marian, lots of people are asking me (like I would know because I work in fruit &veg!!!) if buying branded milk helps the farmers & how this works. Now it has always been my contention that this is the case but I’m hard pressed to explan why. Also, does the current MG issue have any direct relationship to the $1 milk issue? Thanks Rachel (from Growcom in Qld)

    • Hi Rachel,
      Yes, buying branded milk does help, simply because as you raise the total amount of money in the system, you raise the ability of processors to pass it back to farmers. You also send the signal back to supermarkets that milk has value and so do farmers. It’s a huge political statement you’re making every time you put a carton in your trolley!

      The current MG issue has lots of causes because MG has lots of products in lots of different markets. At the time, the plain label milk was heralded by MG as its means of entry back onto Coles’ shelves for its more profitable Devondale butter, spreads and cheese.

  5. Marian
    It just seems that the entire system encourages boom/bust. I really feel for farmers like you who do everything right but end up being screwed.

    These ideas might be crap or wont work in dairy but I thought I would list them anyway:
    – milk or whole milk powder is an internationally traded commodity I think. Why are their no brokers or markets that allow farmers to lock-in forward contracts for delivery, say 1, 2 or 3 years in advance? Such contracts would provide a degree of security for cash flow that does not seem to exist at the moment.
    – Is there a derivatives market for milk solid in Australia that dairy farmers can use? If not, why not?
    – Physical delivery seem to be a major problem, along with what appears from the outside to be monopolistic behaviour by processors. Legally, if there are limited options for farmers in an area, the law needs to be changed so that processors cannot take advantage of a natural monopoly. They must take milk from all farmers, even if they are not customers.This is not a new concept and exists in other markets where there are natural monopolies.

    So, if you were able to deliver your milk to the nearest processor, without having to be a customer/owner and you were able to lock in a 3 year price contract (no crazy ups and downs during the year) and you were able to use options to take advantage of short term price spikes…would that go part of the way to solve the problem?

    • Hi IanA,
      Thanks for the ideas and please keep them coming!
      I don’t know the answer to number 1. Will check it out.
      The answer to number 2 is “no” but it’s something that’s currently being discussed and these have recently been launched in NZ. Watch this space.
      Number 3 – great idea to put to government!
      Your point about being able to lock in is a good one. A handful of processors (none here) offer long-term contracts like that and I would sign one in a flash!
      Thanks again for the wonderful suggestions.

  6. Should we be questioning Aussie food processors where they buy their milk solids from in all of this too? I mean, if this is in fact a global oversupply of milk solids that has caused this current crisis, wouldn’t us city folk be better off filling our trolleys with processed food that contain milk solids and ease the local market oversupply?

    • Great question, Louise! Yes, it’s certainly not just milk. I know it can be hard to work out what a label that says: “made from local and imported ingredients” but we will all be better off in the long run if we buy Aussie made as much as possible.

      • Very interesting. Yes the labelling does make it hard to decipher and hopefully with the new labelling laws this should help to make this a little easier to identify where ingredients originate. Maybe we need Waleed to get everyone to bombard the Aussie food producers too and find out where they source milk solids from!

  7. I purchased MG shares out of some naive idea that I want to support Australian owned and made. Investing in shares can support a companies growth and prosperity, taking the risks into account, the dividends are neither here nor there really, the cost of a litre of milk every 3 months and a wish to get my original investment back down the track, with a bit extra if I am lucky. I am not happy with what is going on. I am more than willing to forgo dividends, for what it is worth, to support Australian farmers. And what happens to this country if we end up having to start importing milk products because our industry is gone? How do we get these companies and politicians to listen? Helping our farmers as many countries do, is not a waste of taxpayer money, food security and independence will be the reward that is reaped.

  8. Thanks!
    I was wondering if we were doing the right thing to help and after furious googling and facebooking I feel I have my mix sorted to enable me to feel that I am doing the best for dairy farmers (one in particular, my best friend). However, I will be sticking around to read how you progress.

    As a wool farmer speaking to you, the dairy farmer, chin up! Which ever decision you make or which ever direction you choose, it will be the right one.

    A

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