A journalist rang me the other day with a really simple question: was I happy about Fonterra’s opening price of $5.85kgMS, the equivalent of about 45 cents per litre?
Simple question. Answering it is not so simple.
Historically, it’s a really good price
Honestly, I can’t remember an opening price this high. For those of you not familiar with the intricacies of our milk pricing system, processors announce an “opening price” at the start of each financial year, which is what they consider a conservative figure that should only increase as the year progresses.
Freshagenda’s chart of this year’s opening prices shows it’s not just Fonterra offering a good start to the year.
Compare those opening prices for 18/19 with the closing prices over the years in Freshagenda’s chart below. Pretty darn good.
But farmers need to make up lost ground
Dairy Australia’s revelation that one in five dairy farmers is planning to quit discussed in my last post helps to explain why farmers are not celebrating. We have a lot of ground to make up.
Last year’s Dairy Industry Monitor reported that the Victorian farmers in the project (generally larger and better resourced than the average farm) had a return on assets of just 2.5% in 16/17, following on from 0.6% in 15/16.
Many farmers have higher debt loadings than ever before.
And the big dry is sending the cost of feeding cows skyrocketing
Even with a great price this year, there’s a real likelihood we’re going to struggle again.
The pellets we feed the cows during milking have surged to an eye-watering $400 per tonne while the stream of B-doubles heading to drought-affected NSW is making reasonably-priced hay suitable for milkers impossible to find.
All this while (with the exception of the lucky devils on the SW coast) it’s been horribly dry on farm, with the increasing prospect of another El Nino on the way for Spring.
To top it off, expectations were high
Analysts have been rather bullish, including Freshagenda, which as recently as June 6, wrote:
“Our forecast range for the 2018/19 average southern Australia farmgate milk price has improved to $6.10 to $6.50kgMS with a significant lift in the underlying commodity milk value (CMV) since our April update, which we now see in the range of $5.60 to $6.00kgMS.”
It’s not just been farmers blindly following the opinions of analysts, either. On May 23, Fonterra increased its forecast closing price for Kiwi farmers to NZ$7.00.
Add this to the hype surrounding competition for milk supply from processors aggressively investing in stainless steel and expectations were sky-high. And the opening prices fell short.
“All I want is a market driven price, not a processor driven price,” one prominent farmer told me after Fonterra’s opening price announcement.
That’s where that second chart from Freshagenda comes in again. Are we getting a fair go? Is all that value adding reaping dividends?
So, where to from here? For the final word on all the intricacies of milk pricing, I’ll leave you with this video from the Freshagenda team.