If there is a silver lining to the cloud over dairy farmers’ heads at the moment, I hope that it is change. So, with this in mind, I asked the two big processors at the heart of the storm, Murray Goulburn and Fonterra, to answer one simple question in 250 words or less:
“What needs to be done to make sure this never happens again?”
A big thank you to MG acting CEO David Mallinson and Fonterra Supply Manager, Matt Watt, for their answers below.
Murray Goulburn acting CEO, David Mallinson:
“Our co-operative structure remains fundamentally important because it enables us to act with a sole and unwavering purpose – paying the strongest farmgate milk price possible. Optimising milk intake to deliver the most profitable products rightly belongs at the heart of every decision we make.”
“In the short-to-medium term, we will remain susceptible to fluctuations in global commodity markets while our shift to value-add output continues. Rigorous planning is required to support suppliers during periods of downturn, given the intrinsic influence of commodity markets on the overall milk price.
“To ensure suppliers can sustainably manage their farm businesses, the Board is committed to providing clear farmgate milk pricing notifications across each season. We will implement a mechanism that provides regular and accurate full year forecast guidance but includes an opening price designed to absorb the sort of downturn seen in FY16.
“The Board and management is united in its drive to ensure MG has the right strategy, executes it well and provides suppliers with consistent, reliable farmgate milk price notifications.”
Fonterra Australia General Manager, Australian Milk Supply, Matt Watt
There are a number of factors that have led to this “perfect storm” for dairy, so the answer is complex.”
“First and foremost, the industry needs a transparent milk price that is reflective of market realities. Farmers can manage their businesses through low prices and volatility, but only if they have timely, clear, and accurate information about milk price based on market signals so that they can make decisions to help manage volatility. Further, having a market-based milk price will facilitate innovation in pricing and risk management practices. For example a “one size fits all” pricing system, like those that our industry has seen in the past, may not be the best fit going forward. The industry needs to identify new ways to factor market volatility into price, to manage risk and bolster confidence during a downturn.
“In addition, we need to ensure:
- A closer link between on-farm production and the realities of the market – our industry cannot continue to promote growth of the industry at a time when there is an oversupply of dairy globally. Our industry needs to listen to the market and adjust production to meet demand.
- Improved efficiencies across the industry so that everyone can benefit – we need to find newer and greater ways of doing more with less, from the farm right through to the factory.”
The Milk Maid Marian 
Hi Marian
Good to see they admit to problems but no one can move forward with confidence until they remove there claw back clause on contract’s
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Hi Stuart,
I think these answers show that we farmers need to work together on solutions for our businesses rather than leaving it to the processors to do it for us.
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Thanks Marion for posting.
An uncertain future for dairy farmers is clearly spelled out by these representatives of two major processors. We are not reading of any grand plans to change the industry, only that farmers will need to be more efficient and produce less milk until such time as the processors want more.
The processors will surely need to drop the production incentives, won’t they? What message are they giving?
The Co-Op processors need to write contracts that ensure best possible return to the farmers. That is their whole reason for being. We pay their salaries so that they can sell our milk for the best possible price. Aussie farmers are already efficient at milk production. Some say best in the world. Are our processors able to make claims about being the most efficient? What are they doing running trucking companies? That’s not core business. Are trading stores really integral to selling milk? Why sign up to supply $1/L milk? Does that return best possible price to farmers?
MG doesn’t set the benchmark for other processors to follow. They set the floor price – lowest possible price needed to pay to ensure supply. Its pathetic. The other processors must be laughing all the way to their overseas banks.
As far as the government goes – concessional loans are not the answer. The government needs to guarantee a floor price (above the cost of production). Producers can then budget accordingly and processors will compete for supply over and above that price.
Companies buying dairy ingredients should see value in using “Australian” after this as consumers are scrutinising labels more than ever before.
Message to the big two retailers – do the right thing and rip up the 10year contracts for cheap milk. Milk is not a discount item.
Yours in dairy,
Kaye and Glen at Bass
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Good post…
I came across these notes somewhere else not so long ago…
1. Have Murray Goulburn accept their own overpayment for the FGMP, not burden the dairy farmers as they are price takers and have limited choice in the matter.
2. ACCC unbundle the collusion between GDT (Global Dairy Trade – owned by Fonterra NZ), Murray Goulburn and Fonterra Australia for FGMP (farm gate milk price) setting.
3. ACCC force Coles and Woollies to forgo the $1/litre milk contracts and $0.8/litre cheese contracts and allow the processors to renegotiate on a cost recovery basis.
4. Put in place an independent trading platform for FGMP and let the processors use that for bidding for their milk supply but allows dairy farmers to hedge against price volatility. Better still with a government underwritten floor price to ensure regional economic collateral damage doesn’t occur when those upstream of farmers flood the market with processed dairy products and the ripple effect doesn’t cripple their regional electorates.
Mr. Hicks might get all excited on this one as it is about as close as one can get to a national milk pool without actually being one.
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Hi Kayeand Glen at Bass
I live in Sydney and have followed this with great interest I’m no farmer that’s for certain dairy farmers have certainly got public support but jumping on to the government teat is not the answer or expecting hand outs or regulation is not the answer mg is the cause of this mess and it’s a co op owned by farmers !!!!!!! What they have done is gamble big and lose huge I can’t believe no farmer saw this coming a big price drop I would never sign a contract that would allow a company to put you in that position but I agree with which mg and fonterra have acted is unconsuble that’s were farmer anger should be directed at mg was silly enough to chase Coles for a ten year contract and invest the stupid amount of money they did for it as for fonterra they just took advantage of the situation to benefit dairy farmers across the ditch but the government giving hand outs to every one no thanks I’m against that yes to concessional loans and access to financial planners and mental health support yes and leaning on the banks yes but hand outs and regulation no !!!!!!
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Hi Matthew,
Part of the problem is that we don’t have a lot of choice in the matter. Because there are only a handful of processors available to take our milk, we are in no position to dictate the terms of the contracts.
The two big supermarkets have much more bargaining power than the processors, who in turn have much more bargaining power than farmers. As the smallest players in the supply chain, farmers unfortunately cop the rough end of the stick every time.
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“… the industry needs a transparent milk price that is reflective of market realities”.
Transparency always a bit of a weasel word. As much as “market realities” is obfuscatory of the political, financial and economic realities that actors use to mask the nature of trading relationships. All to do with power. Understanding the deep power relationships, that are less than transparent, will enable farmers to take up control and not be solely price takers.
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Hi Marian, a little off topic but it might lighten the mood a little.
The only cow in a small town in Scotland stopped giving
milk.
The town folk found they could buy a cow in Wales quite
cheaply.They brought the cow from Wales and it was wonderful,
produced lots of milk every day and everyone was happy.
They bought a bull to mate with the cow to get more cows, so
they’d never have to worry about their milk supply again.
They put the bull in the pasture with the cow but whenever
the bull tried to mount the cow, the cow would move away.
No matter what approach the bull tried, the cow would move
away from the bull and he was never able to do the deed..
The people were very upset and decided to go the Vet, who
was very wise, tell him what was happening and ask his
advice.
“Whenever the bull tries to mount our cow, she moves away.
If he approaches from the back, she moves forward,” they said
,”When he approaches her from the front, she backs off.
If he attempts from the one side, she walks away to the
other side.”
The Vet rubbed his chin thoughtfully and pondered this
before asking,
“Did you by chance, buy this cow in Wales ?”
The people were dumbfounded, since no one had ever mentioned
that they had brought the cow over from Wales .
“You are truly a wise Vet,” they said.
“How did you know we got the cow from Wales ?
The Vet replied with a distant look in his eye,
“My wife is from Wales “
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Hi MMM,
Really enjoying your blogs at the moment and the information that you have gathered from processors and share with the wider community.
There are some good suggestions in this post in the replies that I think should be tabled at an industry roadshow forum. This is the one issue i have at the moment, that we are not hearing enough from ADF as to a plan forward. So much hype has been going around and suggestions, that they should be brought to the table and discussed as to whether feasible or not so that farmers dont get too excited on an issue that technically cant happen.
The comments from Fonterra and MG in this post are interesting but it does create a constant concern. While they talk of value add and growing domestic share they do in fact drive the domestic FG value down, With MG being between 30-40% manufacturing it means their price at FG is generally lower as a blended price, which in turn means the 100% domestic players then dont pay the full domestic value in the same markets as they only pay a “competitive price”..
We can only hope that the dairyfarmers call to buy branded and not to buy $1 milk and the consumers supporting the cause, will see a reflection in the opening prices not the processors pockets!.
Keep up the good work
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More industry BS. Maaaate trust me we’ve got your best interests at heart.
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http://www.abc.net.au/news/2016-05-26/bega-cheese-scathing-of-murraygoulburn-price-cuts/7446956
Could not agree with Barry Irvine more, good to see BEGA speak out.
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What a lot of waffle. Neither of them have any idea how to insulate Australian farmers against global fluctuations in milk production. Reality is that we are a small fish swimming in a big Ocean of sharks. Farmers, as they have done for generations, will have to continue to endure during bad times. The governments solution is pitiful. Federal are going to lend us more debt that we can’t afford and State are providing Psychological support so that we feel good about ourselves while we go broke.
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Dave, if Australian farmers produce (roughly) twice as much milk as Australia needs, then half of that milk needs to be sold offshore…how would it not be subject to international prices? Processors are fighting each other locally (because they won’t unite) and fight internationally.
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