Theo was too right…

keep-calm-let-s-cut-the-cake-and-eat-it

Here’s an unpalatable truth: when Fonterra head Theo Spierings said the milk price was unsustainable back in August last year, he was right. He also said the way milk prices are set needs to change. Correct again. Then he started talking about the need for, “a good debate with farmers … about how are we going to share – how are we going to cut the cake.”.  That’s what really matters right now.

At the time, Fonterra Australia head, Judith Swales responded to Milk Maid Marian’s request to clarify what Theo had meant by “sharing the cake” and said:

“We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.”

It’s hard to disagree with that sentiment. The problem is that we’ve learnt one more lesson in the last couple of months: if you’re stranded on a desert island with a hungry gorilla and a small cake, you’re in very big trouble indeed.

This post is not intended as an attack on Fonterra. After all, things are no better at Murray Goulburn. The reality is when there are thousands of small businesses selling a highly perishable product to a handful of large corporates and multinationals, the playing field is anything but even.

Just 12 months before Theo was talking about cake, the majority owner of Warrnambool Cheese and Butter, Lino Saputo, was quoted as wondering:

“…what will it take for the dairy farmers to be optimistic about the dairy industry and investing in their farms and what kinds of programs can we put in place that will assist them.”

At the time, I summarised my answer as “reliable profitability”. I posted the charts below showing just how far dairy farmers’ terms of trade had slipped and the wild fluctuations in profitability.

DairyTermsTrade

DairyBusinessProfit

“Productivity in the Australian Dairy Sector”, ABARES, September 2014

There’s one more factor I missed: confidence.

Writing for the latest edition of The Australian Dairyfarmer magazine, Dairy Australia managing director Ian Halliday notes that :

“In 2015, confidence among dairy farmers was at 75 per cent. In February this year, confidence had fallen to 65 per cent reflecting the dry seasonal conditions and also what milk prices were looking like for 2016-17 when considering the global price outlook.”

“Following the sudden milk price cuts in late April, which affected up to 65 per cent of all dairy farmers, we conducted another survey to get an understanding of changes in farmer confidence. This sample, although smaller, indicated confidence nationally had droppedd to 45 per cent.”

I’m willing to bet that confidence has fallen to historic lows after the Murray Goulburn opening price announcement.

What’s needed now is:

  • Transparency
  • Risk management strategies to deal with volatility
  • A more level playing field that provides farmers with real choices when dealing with processors.

These are the ingredients of reliable profitability and, without it, we’ll be continually wrestling the gorillas for the crumbs of a perpetually shrinking cake.

3 Comments

Filed under Farm, Fonterra, Murray Goulburn

3 responses to “Theo was too right…

  1. Rick

    Hi MMM,

    A great article and reflection on comments by processors from 2 years ago helps to highlight why the farmers have been slamed.
    Simply there are too many “cheap” words when an industry leader says we need to get together so we all make money and discuss, if he believes it, why has it not happened? Or was it easier to say i told you so and put a payback loan on a farmer because they cant drive returns from products?

    I had a great conversation with a leading processor boss as well recently, and he asked why I didnt take a 50% 3 year deal 2 years ago? My reply, I had been on $6.28, offer was $6.14 (50%) and industry leaders were talking the industry up and growth etc. I didnt read the (maybe) market signals and was lead by the experts talking up the industry instead. These leaders have now gone or have put loan schemes on their suppliers to get their refund. The whole southern industry is paying the price.

    Those that survive this disaster will need one major tool, a more reliable independant market signal tool, not a processor driven tool. Then they need the ability to lock in a price or prices that they can afford to farm at (maybe a futures trading scheme as well) with no claw back options on a locked in price, That way some security is in place for the farm, the processor, and the banks so each has some idea whats going on.

    LDD/DFMC have gone some way down this path with pricing options, but the signals to farmers need to be clearer and well in advance from the industry, to make better judgements.

    Dare I say, the rest of the states not directly affected by this, that there time is coming, I think retail pressure on processor margins is squeezed that tight, that FG prices will move and it wont be positive. Simply the value of the product will be similar to $1 milk unless the rest of the industry from processors down unite. We have the consumers ear, are we chewing hard enough?

    Liked by 1 person

  2. Andrew

    And the trashing of trust continues when last week MG interim chief executive officer David Mallinson didn’t rule out that the loan payback could be as much as 28c/kg/MS but the total recouped would not be known.

    MG management and board just don’t get it

    Like

  3. Mike Cahill

    A great piece of analysis Marian

    Like

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