The haves and have nots of Australian dairy

CowTongue

I’ve had requests from farmers, investors, the media and even politicians for an explanation of how milk prices work (or don’t). I’m going to start with the factors that affect the price a dairy farmer in Australia’s south-eastern states receives.

  1. Who buys Old Macdonald’s milk?

The opening prices of most of the processors are in:

ACM $5.30
Bega $5.00
Lion (variable option) $5.00
NDP $5.00
Warrnambool Cheese & Butter $4.80
Fonterra $4.73
Longwarry $4.60
Burra Foods $4.40 to $4.60
Murray Goulburn $4.31
ADFC To be advised

It’s a massive spread of prices, with the top almost 25 per cent higher than the bottom. And it doesn’t stop there. The pricing systems are incredibly complex, with the prices no more than weighted averages. I know of a farmer supplying MG, for instance, who will receive just $3.79kg MS for his milk. I’ll explain that later in this post.

But, why, you ask, doesn’t Old Macdonald simply choose the buyer with the highest price?

It’s easy to change factories. You just call, make an appointment, fill in some forms and voila, a new sign hangs on the gate! But the reality is that there are lots of other factors in play:

  • Not all processors collect milk in every region. ACM, for example, does not collect milk from Milk Maid Marian’s district.
  • Many farmers are tied up with debts to their current processor or incentives for flat milk supply that would see them penalised tens of thousands of dollars for leaving.
  • Some farmers are contractually bound to the processor as part of share acquisition or “Next Gen” programs.
  • Then, there’s the waiting list. Processors tell me that since the opening prices were announced, there are hundreds of millions of litres of milk on waiting lists for new homes right now. The processors will cherry-pick those that suit their ideal profiles. In fact, many processors already have too much milk and have simply closed their books.

2. The breed of cows and what they’re fed
As a rule of thumb, if you’re not familiar with this industry pricing, you can convert prices expressed in kilograms of milk solids (kg MS) into cents per litre (cpl) by dividing by 13. So, $5.30 per kg of milk solids equates to 41 cents per litre and $4.31 equates to 33 cents.

It’s a formula that works pretty well for the 80% of Australian dairy cows that are the classic black-and-white Holsteins.

But not if your cows are Jerseys. Around 11% of Australian dairy cows are Jerseys, which produce around 30% less milk than Holstein Friesians but a lot more fat for every litre. According to ADHIS statistics, HF cows’ milk contains an average 3.83% butterfat and 3.24% protein, while Jersey milk is creamier at 4.76 % fat and 3.67 % protein. This means that returns from Jerseys appear higher than those of HF in terms of cpl and lower in terms of dollars per kg MS.

3. When the cows give the most milk
Every cow produces no milk for two months until she calves, then her milk production increases steeply for a couple of months before tapering off again. We call this her “lactation curve” and when you add together all the herd members’ curves, you get a farm’s “milk supply curve”.

It makes sense to have the herd’s milk production peak when there is the most grass in the paddocks. Inevitably, that’s in Spring. Of course, if all herds peaked in Spring, it would cause big trouble for the processors. The entire Australian dairy milk supply is getting less and less seasonal over time because the processors offer more money for “off peak” milk.

Here’s an excerpt from my own farm’s income estimate to show you just how much the price changes over the year with Fonterra.

FonterraTotal

For MG suppliers, the shift can be far more dramatic if suppliers elect to provide “flat milk” but I would need to dedicate a blog post to explaining this aspect of its system.

The differences in payment systems mean that even if a farm receives the average milk price from one processor, it might not from another.

4. Compulsory charges and levies
Most processors have compulsory charges that come off the headline price. These are not trivial and amount to tens of thousands of dollars. In my farm’s case, we pay a transport levy that amounts to 35 cents for every kilogram of milk solids we sell. On top of these, there are Dairy Australia and Dairy Food Safety Victoria levies.

5. Bonuses for the big and beautiful
If you think you’re across all that, don’t forget there are productivity incentives that favour larger farms and MG still has a growth incentive for farms supplying more milk than the year before. These can be very significant. There are also quality bonuses (and/or penalties) with different processors having different benchmarks.

6. Clawbacks
As you might already know, both MG and Fonterra dramatically dropped their prices for May and June to bring back the overall price. They have both come up with “support packages” for suppliers. Farmers are now beginning to pay for those. Fonterra suppliers are on interest-only this year and principal repayments will begin in the next financial year. MG suppliers are paying off their packages in the form of an artificially-lowered milk price already.

7. Special deals
Farmers were outraged back in 2012 when it was revealed that even the co-op was offering special deals for the really big farms. Nobody can say for sure how common these are today.

The bottom line is that every farmer needs to get an individual income estimate from processors to be sure what their milk price really is and what it would be if they supplied a different factory. Not all milk is created equal.

10 Comments

Filed under Cows, Farm, Fonterra, milk price, Murray Goulburn

10 responses to “The haves and have nots of Australian dairy

  1. Keith den Houting

    Interesting Maid Marian. However there is more! Yes, remember that ad on TV? The shift of higher prices is now interstate as well, with both MG and Bega offering more to their NSW suppliers than to Vic or Tassie. It is even more complex as some companies allow a supplier to lock in a “contract” price with “portions” of their milk at contract prices and the rest at market or variable prices. Compare this to the banks with variable and fixed rates of interest and you can see how shifty (just like our banks) some of our milk processors are becoming.

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  2. James

    You missed Parmalat , from what I had been told their price is about $5.60, though again depending on your milk curve it will vary a lot .

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    • Suzy Mac

      James, Parmalat sent out this seasons pricing yesterday and yes the current contract is around the above price (last year of three year contract) but they are offering alternate new contracts of either 3 or 4 year at a substantially lower minimum price, you may ask why suppliers would even contemplate ditching the final year of their contract at about $5.60 for a price closer to $5, presumably because those suppliers who only signed a one year contract instead of opting for the 2 (which no-one chose) or 3 years on offer, were told their milk was no longer required and not offered new contracts at the end of that one year – some of those people had supplied Parmalat/Pauls for 60+ years. When the farmer field officer was queried about these new alternate contracts yesterday one farmer was told they “are a good thing, to increase the companies profitability” – by making suppliers unprofitable for 3-4 years? Interesting policy Parmalat.

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  3. This may be a silly question from an outsider who has nothing to do with dairy, but reading your posts, I find myself asking the question anyway. With all the “shiftiness” going on higher up, and the dairy farmers being squeezed and squeezed, some into bankruptcy or having to sell, who would benefit from such policies in the end when farms your size go? Who buys them up? I seem to remember one post of yours where you mentioned foreign investors and factory style dairy farms working their way into Australia. Is this the direction dairy farmers are being forced to go?

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    • Sadly, Lavinia, I really don’t know what the shape of the industry will look like in a year’s time but I think there will be investors keen to pounce on cheap farms as a result of distressed sales.

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    • Wendy Wills

      Lavinia, also an outsider, to me it looks the foreign investors will move and buy up our farms e.g. Chinese investors. They are already scouting farms, as milk is of such a high quality!

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  4. Glynis

    Since the $2 milk has been on the shelves I have remained loyal to the branded milks. The effect that it would have was obvious to all but those consumers greedily enjoying the benefit. World markets aside, there is no excuse for price gouging. I am a beef cattle producer and well remember the helpless position our industry was in not so very long ago. Similar but not the same, but I hope that there will be rewards in the near future for dairy farmers that are able to hang in there.

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  5. Thanks for excellent blog picked up via twitter. Glad focus is returning to the practical choice of processor each farmer has to make.

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  6. Confused City Dweller...

    Good article, its never easy to simplify a complex and convoluted topic but you have done well and covered all of the key points. It highlights where dairy farmers have inherited risk beyond what could be considered fair and reasonable by the average person like me.

    Is MGC and Fonterra the only two processors that use that claw back sort of arrangement in their milk supply agreements for FGMP or do they all do it?

    Like

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