Bonlac on keeping Fonterra honest

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Aubrey Pellett, deputy chairman, Bonlac Supply Company

Fonterra’s announcement on Wednesday had at least one enthusiastic endorsement. In a press release, the Bonlac Supply Company chairman, Tony Marwood, declared the announcement a “good news story”.

The Bonlac statement was significant because BSC is the organisation charged with representing the interests of farmers who supply Fonterra and ensuring that the Bonlac agreement is observed by the global processor.

The positivity of the BSC board towards an announcement that drew outrage from farmers left Milk Maid Marian wanting to know more about Bonlac’s rationale for its support.

A big thank you to BSC deputy chairman Aubrey Pellet for answering these questions on behalf of the board.

MMM: What does BSC do for farmer members?
AP: BSC undertakes a number of representative activities for Fonterra suppliers as well as the wider dairy industry, not limited to the following;
· Negotiate with Fonterra Australia, on behalf of our suppliers, on conditions of milk supply
· Develop the next generation of dairy industry leaders through the BSC Leadership Program and Nuffield scholarship funding
· Oversee the operation of BSC Fonterra Australia Supplier Forum which provides direct farmer feedback to BSC Board and Fonterra Australia
· Represent supplier’s interests with Fonterra Australia and work with Fonterra to develop initiatives to support farmers
· Actively participate in supplier meetings, field days, industry conferences, industry forums etc.
· Actively lobby to support Dairy Farmers – such as our formal submissions and representations made on the ACCC inquiry into the Australian Dairy Industry and the Senate inquiry into the Murray Darling Basin Plan.

MMM: How does the BSC consult with farmer members and how many supplier forums have been held following the May price cut?

AP: The BSC Board (the majority of who are Dairy Farmers) consults with suppliers (both as a collective Board and as individuals), and has many discussions both formal and informal held on a regular basis.

With regards to formal scheduled meetings, there are the supplier forums (chaired by BSC and usually 3 per year) and cluster meetings (chaired by Fonterra but attended by BSC Board members) where suppliers are consulted and able to voice their views.

MMM: Why are farmers who supply milk under the Bonlac Agreement not able to read the document? If it is “Commercial in Confidence”, why is that so and how can farmers be expected to be party to a document they cannot see?

AP:The Bonlac Supply Agreement is a confidential agreement that sets out the basis on which Fonterra Milk has appointed Bonlac as its agent for the purpose of acquiring and/or arranging for the collection of milk.

It is a key commercial agreement for Bonlac that governs a significant portion of commercial activities of Bonlac and the suppliers it represents. This kind of information / agreement is not ordinarily in the public domain, nor made available for public / competitor scrutiny.

MMM: The Fonterra supplier handbook says the Bonlac agreement means that suppliers can expect Fonterra to match or better MG’s price. How has that obligation been met for suppliers impacted by the 40 cent shortfall in 15/16 who have since begun to supply a different processor?

AP:

o The opportunity is there for those suppliers who have left since May 2015 to return to supply Fonterra – and they are welcome back.
o There are always significant differences between the final average milk price received by different farmers in different regions with different calving profiles. The cash (not milk price) received by farmers from MG in 2015/16 was $5.53 as noted in MG’s annual report. The final Fonterra Milk Price for the same season was $5.13.
o The Milk Price obligation under the MSAA is at a total supply level – not at an individual supplier level – and along with Fonterra, we do acknowledge that a small minority of farmers will be dissatisfied by the approach that has been taken here.
o We worked through many different scenarios in arriving at this decision – it was not practical nor possible to have an individual scenario for every supplier.
o At an overall level Fonterra has agreed to do the right thing and make up this 40c difference.
o BSC will monitor these payments, ensuring that at the end of 2017/18 a minimum of 40c has been paid out as an additional milk price to eligible suppliers

MMM: Does the Bonlac Agreement state the terms of repayment for any shortfalls?

AP: The scenarios that have played out over the last 12 months have been unprecedented in the dairy industry, so there is no formal process that must be followed in the Milk Supply Agency Agreement that governs the components of any repayment ‘shortfall’.

MMM: How will the BSC ensure that Fonterra pays a market price for milk next year (excluding the 40 cent payment)?

AP: BSC does not have a role in determining the final price that will be paid by Fonterra – that price will be determined by Fonterra Management and a large number of market and other factors. Please also see comments in question 9.

MMM: Did the BSC seek independent legal advice regarding Fonterra’s announcement?
AP: BSC has sought and referred to legal advice throughout the events of the last 12 months.

MMM: Would you please clarify whether independent legal opinion has been received on Fonterra’s most recent announcement?

AP: The response on legal advice in last 12 months includes the current announcement.

MMM: The Bonlac Agreement does not expire until 2019. Does BSC support its continuation?

AP: The continuation of the agreement will be assessed closer to that date.
It must be acknowledged that the agreement covers a large range of milk collection related topics, and much more than a benchmark to MG.

Whilst BSC does support the agreement continuing, that does not mean that BSC supports all the components of the current agreement, and BSC will actively consult and look to put forward amendments as appropriate at that time.

MMM: BSC wrote last year that a new pricing model would be announced early this year. When will farmers be informed of the changes and when will they be implemented?

AP: I believe this reference is in relation to Fonterra providing more timely and appropriate pricing indicators to suppliers and the wider market.

This process is still underway and is well progressed with Fonterra.

It must be noted that the early announcement by Fonterra of the indicative price range for next season is part of this new model of operation – with the early announcement designed to give additional time for suppliers to adjust and respond to the Milk Price being offered.

MMM NOTE OF CLARIFICATION: The final question referred to this statement below from Bonlac’s 2016 annual report, which refers to a new benchmark rather than a new pricing model.

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Fonterra answers 11 difficult questions about the BSC and that 40 cents

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All eyes turned to Fonterra Australia after Murray Goulburn (MG) scrapped its clawback just a couple of weeks ago. Fonterra has a legal agreement with supplier group, Bonlac, to match or better the dominant player’s price and MG’s “forgiveness” of the debt effectively raised the 15/16 payment to farmers.

It’s fair to say Fonterra’s response on Wednesday (see supplier email above) sparked outrage in many quarters and raised a host of fresh questions. I put some of those questions to Fonterra Australia’s milk supply manager, Matt Watt, and appreciate his answers below. Thank you, Matt.

MMM: Considering MG’s forgiveness of debt, what’s the 15/16 benchmark return?

MW: The benchmark price for 15/16 remains $4.80. The MSSP didn’t form part of that season’s milk price as it was a pre-payment on future year’s milk price. In other words MG was taking milk payments from future years to fund the gap of their step down. While MG has forgiven the clawback the debt now sits on MG’s balance sheet.

Unlike MG’s debt package, our support loan was optional and like a bank loan. Around 40 per cent of our suppliers took out the loan, and there was significant variation in the amount borrowed among the 40 per cent. To only forgive the loan would be inequitable for our total supply base.

MMM: What role did the Bonlac agreement play in Fonterra’s announcement of an extra 40 cents/kgMS?
MW: The spirit of the agreement played a role. However, the actual benchmark milk price was $4.80 and we delivered above that at $5.13.

MMM: Why are payments being made next season rather than now?
MW: Current suppliers have the option to take the 40c payment as an advance this season.  Nevertheless, the actual payments are calculated using next season’s production to ensure suppliers can get the full advantage of this additional payment and are not limited it to this season’s production (which may have been affected by the 15/16 price reduction).

MMM: Doesn’t the Bonlac agreement mean that suppliers can expect Fonterra to match or better MG’s price? Why has Fonterra not met that obligation for all suppliers impacted by the 40 cent shortfall in 15/16 and how many affected farmers are being excluded?

MW: The Bonlac Agreement only relates to the benchmark price and, as explained earlier, the MSSP payment does not relate to the benchmark price. In the 2015/2016 season, Fonterra’s final farmgate milk price was $5.13 vs MG’s final farmgate milk price of $4.80. Also, this current season Fonterra is paying $5.20 v MG’s $4.95.

Although not legally obliged, we are making the additional 40c payment to our suppliers as it’s the right thing to do.

All Fonterra farmers affected by the 15/16 price drop are being offered the opportunity to receive this additional payment, including existing, retired and returning farmers. We’re in the process of contacting all the farmers that have left us.

MMM: Under the proposed voluntary “Code of Conduct “, the 40 cents/kgMS payment that is designed to compensate farmers for the 15/16 season shortfall could be considered a breach. Will Fonterra sign and observe the terms of the Code?

MW: I don’t want to comment on the code implications of our announcement as it is in draft.  However, in our view, there would be no breach as this payment relates to the 17/18 season, not the 15/16 season.

MMM: Why will farmers who were not suppliers during 15/16 receive the 40 cent payment?
MW: Our additional payment is on next season milk. Our first priority is existing and returning farmers. With improved farm margins on the back of this announcement, we are hopeful that the vast majority of our milk needs will be covered by growth from our existing suppliers and returning farmers. Once we understand our milk for next year, we will then consider new supply where it will add value to our whole milk pool and contribute to our ability to pay a better milk price.

MMM: If eligible farmers apply for the “advance”, will they be free to spend that money as they see fit? If not, why not?
MW: Suppliers who do not have a support loan are free to spend the money as they see fit. Suppliers can manage their cashflow by electing to take the additional payment as a monthly payment.

MMM: Under the Bonlac agreement, how soon must Fonterra make up any shortfall and who is eligible?
MW: Although not legally obliged, we are making this additional payment as we think it’s the right thing to do and we have worked with BSC in relation to this proposal. We’re obliged to meet the price at the end of each season, and have done so since the agreement has been in place. For five of the last seven seasons, we’ve paid a farmgate milk price exceeding MG’s.

MMM: Will Fonterra commit to matching the market price in 17/18?
MW: Fonterra will be market competitive in 2017/18 – our asset footprint, product mix and the current global market means we can be confident of our ability to be market competitive.

MMM: Why is the Bonlac agreement not open to scrutiny by farmers who supply Fonterra under its terms?
MW: It is a commercial in confidence agreement; however a general description of the BSC Agreement is set out in our Milk Supply Handbook.

MMM: Apart from monetary incentives, what will Fonterra do to rebuild trust and confidence – not just for its suppliers but the wider Australian dairy industry?

MW: We are absolutely committed to rebuild trust and confidence. This starts with providing clear and timely price signals, as we did in our announcement yesterday. We are working on a number of other initiatives in that respect. On top of that, we will work with our farmers and industry on the finalisation of the code, on supporting farmers and the communities around them through our grass roots program and on innovation in helping to leverage technology to enable more informed and quick decisions on farm.

The MG fallout for Fonterra

Murray Goulburn has shocked the share market today by announcing it will close three factories and “forgive” the MSSP. The news may be just as important for Fonterra suppliers as its own.

While Fonterra deliberates on how it will respond, I thought I’d repost this Q&A from November, which makes very interesting reading in light of today’s announcement.

The Milk Maid Marian

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The trump card held by Fonterra milk recruiters has long been a promise to match or better the price offered by Victoria’s biggest processor. What could possibly go wrong?

Indeed, the so-called “Bonlac Milk Supply Agency Agreement” has worked well for a long time. But it all unraveled last season when the biggest processor, Murray Goulburn Co-operative, started to behave at odds with the deteriorating global price.

Aunty MG, which had always worn a demure twin set and behaved with utter decorum, pawned the family silver, took off in a turbo-charged red convertible driven at break-neck speed by the sweet-talking new boy in town while tossing money at admirers like confetti. Fonterra was dragged along, screaming for Aunty to slow the hell down but nonetheless tethered to the rear bumper.

The wreckage of the crash has been messy for all involved. The Bonlac Supply Company chairman, Tony Marwood, writes in…

View original post 485 more words

Explainer: What the ACCC means by…

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After the ACCC announced today that it was taking MG and two of its former big bananas – MD, Gary Helou, and CFO, Brad Hingle – to court, Milk Maid Marian asked the competition watchdog to explain a few things. I’m very grateful to the ACCC for responding so swiftly. 

MMM: The ACCC is seeking orders against Murray Goulburn that include declarations, compliance program orders, corrective notices and costs. What do all these terms mean and can you offer any examples of what the declarations, orders and notices might look like or the form they could take?

ACCC: A declaration is an order from the Court stating that the conduct breaches the law, in this case -the Australian Consumer Law (ACL). This provides guidance to the ACCC and to businesses about what future conduct may be found in breach of the law.

Compliance programs can include requiring company directors to undergo training in the requirements of the CCA and the Australian Consumer Law.

Corrective notices can include notices printed online or in local newspapers alerting affected parties as to the Court’s findings of a breach of the law.

The Court can order that one party pay costs, or split costs, (such as the fees and other expenses a solicitor charges for providing of legal services, such as court fees.), if the court considers that party to be at fault.

The ACCC is also seeking disqualification orders against Mr Helou and Mr Hingle. A disqualification order can prevent a person from managing corporations for a period the court considers appropriate

MMM: Why is MG’s board of directors not included in the ACCC’s action?

The ACCC has taken action against former managing director Gary Helou and former chief financial officer Bradley Hingle, as it considers that they were knowingly concerned in Murray Goulburn’s conduct.

MMM: How long do these proceedings of this kind usually take?

Court proceedings can become lengthy, and matters can run in excess of 12 months. The ACCC cannot speculate how long this proceeding take to conclude.

MMM: What does the ACCC consider would be the magnitude of an appropriate pecuniary penalty for Helou and Hingle?

The ACL allows for pecuniary penalties for individuals of up to $220,000 per contravention. It is up to the court to determine the penalty to be imposed on the parties.

MMM: The ACCC is not seeking pecuniary penalties against MG but what is the likely scale of the costs it might face if the ACCC is successful?

The ACCC cannot speculate. It is determined, in part, by the length of the case.

MMM: Trade practices lawyer Michael Terceiro tweeted today that “ACCC sues Murray Goulburn – looks risky trying to dress-up a misleading & deceptive case as unconscionable conduct”. What is the difference between the two and why is the ACCC opting for unconscionable conduct rather than misleading and deceptive conduct?

It is noted that the ACCC is alleging Murray Goulburn engaged in unconscionable and misleading or deceptive conduct, and made false representations.

The ACL prohibits misleading or deceptive conduct, and making false or misleading claims.

The ACL also prohibits unconscionable conduct such as particularly harsh or oppressive behaviour that goes against conscience as judged against business and social norms and standards.

There are a number of factors a court will consider when assessing whether is unconscionable.

These include:

  • the relative bargaining strength of the parties
  • whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party
  • whether the weaker party could understand the documentation used
  • the use of undue influence, pressure or unfair tactics by the stronger party
  • the requirements of applicable industry codes
  • the willingness of the stronger party to negotiate
  • the extent to which the parties acted in good faith.

This is not an exhaustive list and it should be noted that the court may also consider any other factor it thinks relevant.

MMM: Fonterra Australia will not be pursued by the ACCC because it signalled the possibility of price falls early. Did it consider the retrospective nature of the drop, the lack of notice and the levying of interest on farmers who did not opt to take loans?

The ACCC considered all issues raised during its investigation.  After assessing all of the information provided, the ACCC considers Fonterra Australia was more transparent about the risks and potential for a reduction in the farmgate milk price from quite early in the season.

Thanks again to the ACCC for this explainer.

ACCC takes Helou, Hingle and MG to court but lets Fonterra off the hook

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Pic credit: The Solution News at TSNnews.com

Today, the ACCC announced that it is taking Murray Goulburn to the Federal Court for unconscionable conduct. It will also pursue MG’s former MD, Gary Helou, and CFO, Brad Hingle.

That’s a bit of a relief after Gary Helou told the Senate Inquiry in February that he had not been questioned by investigators. If there’s a villain in the whole dairy disaster we can all agree on, it is Gary Helou. I, for one, am glad he will have his day in court.

I am also relieved the ACCC has shown the wisdom of Job when dealing with MG. As the ACCC said in its statement:

“The ACCC has decided not to seek a pecuniary penalty against Murray Goulburn because, as a co-operative, any penalty imposed could directly impact on the affected farmers.”

On the other hand, many farmers will be disappointed the ACCC has chosen not to take any action against Fonterra. The watchdog explained that decision in a quote from ACCC chairman, Rod Sims:

“A major consideration for the ACCC in deciding not to take action was that Fonterra was more transparent about the risks and potential for a reduction in the farmgate milk price from quite early in the season,” Mr Sims said.

Rod Sims is right. Fonterra did say, more than once and from early on in the season, that the milk price was unsustainably high. Why, I was one of the farmers upset with Fonterra big banana, Theo Spierings, for broadcasting this via the newspapers eight months before the price collapse. That much, I do understand and, with the benefit of hindsight, Fonterra was doing the right thing.

Theo

Fonterra was in an impossible position. While, technically, Fonterra could have cut its price earlier and, therefore, less savagely, the reality was that it had little choice. It would have haemorrhaged supply to MG and, if the co-op had delivered on its promises, the Bonlac Supply Agreement would have forced Fonterra to match MG’s price – no matter how unrealistic – anyway.

What it does not excuse, however, is the way Fonterra responded once MG announced its price cut.

At first, Fonterra sat on its hands, apparently caught by surprise like the rest of us. Then announced a slashing of the milk price from $5.60 to $1.91kg MS – the equivalent to 14 or 15 cents per litre. It gave no notice – actually, it revised the price for May and June on May 5. There was no time for farmers to plan and we were all faced with a frenzy of late-night nightmarish decision making.

On top of that, the Fonterra response failed to consider the devastating effect it would have on farmers with autumn-calving herds. Fonterra moved the goalposts a week later to spread the pain more evenly across its farmer suppliers but, for those who’d been most responsive, it was too late. Cows had been culled and the decision to send milkers to market is absolutely final.

Even now, farmers who chose not to accept the low-interest loans Fonterra offered to partially fill the void are still paying a mandatory levy to fund the scheme.

The weeks of insanity in May and the pain it continues to wreak on farmers cost Fonterra Australia loyalty that took it decades to build, as Australian GM of Milk Supply, Matt Watt acknowledged in this excerpt of an email to suppliers just minutes ago:

  • “You will have seen today that the ACCC released its findings into their investigation into MG and Fonterra over last season’s step down. The ACCC advised that they have decided not to take action against Fonterra.”

  • “I know the last 12 months have been incredibly challenging for you and your families, your communities and our industry.

  • “We’ve listened to you, and we’ve learned a lot over the past year. What you’ve told us has informed the steps we’re taking to ensure a stronger dairy industry.

  • “As you know, we’re working with BSC Board on greater transparency on price and as mentioned earlier I look forward to sharing more on that at the upcoming cluster meetings. We’re also fully engaged in the Dairy Industry Code of Conduct.

  • “We understand it will take time to rebuild confidence, and this is something we are firmly committed to.”

Neither of the two big Australian processors covered themselves in glory a year ago.  At least we now have some prospect of justice, if not recompense, for all the farmers affected by the reckless behaviour of the man at MG’s helm that sent so many to the rocks.

It’s a sign – a good sign – that the dairy community will chart a better course and keep a closer watch in the years to come.

Milk maid says thank you to her heroes: you!

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A heartfelt thank you from our family to yours

There may have been a few villains in the dairy disaster but a year on from the day Murray Goulburn made its infamous announcement, there are many more heroes.

Millions of them.

I remember my first trip to Melbourne after the story of our plight reached the city. A business acquaintance greeted me with: “Getting tricky buying a litre of milk these days, Marian.”. Lee had been to three shops before he could find branded milk.

Three shops. For a bottle of milk.

I remember my neighbours calling in to see if I really was alright after The Project went to air while I welled up with tears beside my husband. The tears spoke of the sense of despair, shock and downright frustration that being helpless in the face of careless callousness.

But not any more.

The sense of helplessness has passed, thanks to people like Lee and those, like Waleed Aly, who made our stories heard. Ordinary people took the extraordinary step of doing something Coles and Woolies never thought they would. They showed they cared with their wallets.

And that clear, genuine care drove action.

We farmers have been gifted something precious, a once in a lifetime chance to change things for the better. Thanks to all the ordinary people making an extraordinary statement with the simple, everyday purchase of milk, we have the attention of the nation’s watchdogs and the ear of its leaders. If we are clever enough, we can make sure this never happens again.

Now that’s something worth remembering on a day we’d otherwise rather forget. Thank you.

 

No light at the end of the tunnel: MG

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Okay, so here’s the thing: Milk Maid Marian readers are asking whether I have invited MG to write a guest post following on from the Light at the End of the Tunnel pieces contributed by ADF and Fonterra.

The answer is “Of course!”. I try to make Milk Maid Marian as balanced as possible, so invited ADF, MG and Fonterra each to contribute an (unedited and complete, as usual) guest blog that would give farmers some hope.

Unfortunately, after much discussion, an MG spokesperson said the co-op couldn’t offer anything at this time or say when it might be able.

I know the co-op is going through a really rough time at the moment and dearly hope the MG board and management soon do find light at the end of the tunnel.

And when they do, there’s always an open invitation for the co-op to discuss the future of Australian dairy here.

Tired, stupid, almost dead farmer

FireRadishI was knackered. It’d been a long few days of really physical work and I’d just finished burning a paddock of dead weeds. I was tired, hot, stinky and pushing through a three-day-old crushing headache.

It was almost 8pm and I just wanted to go home. I only needed to ride the quad around the darkened paddock to make sure the fire really was out and safe to leave.

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Squinting into the smoke, I darted west across the charred flats. And then, suddenly, a single strand of electric fence wire appeared where no wire had ever been. Until the day before, at least.

Yes, I had rolled out, strained and rammed in the posts for that very same wire just 26 hours earlier. But in my stupor, in autopilot, energy-saving mode, it didn’t exist.

I slammed on the brakes instinctively trying to lean back while hanging onto the handlebars. In slow motion, the wire lifted over the handlebars, twanging savagely against my forearms.

I was 30 or 40 cms – a fraction of a second – from being garotted.

Stunned at my own stupidity, I backed away from the wire and tried feebly to jam the steel post that I’d sent flying a couple of metres back into the ground.

It’s a salutary lesson. Once, I would’ve had contractors in to build that fence instead of wearing myself so thin. Today, the budget simply doesn’t allow for such luxuries. The ripple effect of the dairy crisis shouldn’t be underestimated.

Light at the end of the tunnel: ADF’s Terry Richardson

If there’s one word dairy farming feels like at the moment, it’s exhausting. Sometimes – often – I wonder why we keep on slogging away. So, I asked dairy peak body, the Australian Dairy Farmers, to write a guest post titled simply “The Light at the End of the Tunnel”. It’s not an easy piece to write and I am incredibly grateful to ADF president, Terry Richardson, for taking up the challenge.

ADF president, Terry Richardso

ADF president, Terry Richardson

Last year was tough. It was tougher than tough for a lot of dairy farmers.

So, is there light at the end of the tunnel? I think as a farmer you just get used to riding a bike up and down those hills. To keep their heads above water, farmers must keep peddling their bike.

I could start talking about the global market showing a slight upward trend, or I could talk about the things that we have been working on to make sure last year never happens again.

There isn’t a quick fix and there is no silver bullet.

While we are an industry that has been under intense pressure, we are also an industry that has the know-how and resilience to overcome adversity and thrive in the long term.

ADF, together with the state dairy organisations have fought hard for farmers and continue to do so. Even though we won’t be able to solve all the issues farmers are facing, we have been working behind the scenes to relieve some of the pressures. We want to ensure that an unfair share of the risk in the value chain is not taken by the farmer and that events last year don’t ever happen again.

Our first aim is to show you that there is a tunnel. To us, this is the ongoing prosperity of dairy farmers’ and our clear intent is to ensure no dairy farmer is ever made to feel vulnerable over processor decisions. This is the reason we are working on a code of practice for contractual agreements between farmers and their processors.

Next, we need to show you that there is a light. The Effects Test is a tool regulators can use to judge whether a company is acting to unfairly reduce competition. With the potential for use in examining the business practices of the large supermarkets in Australia, and their strategies around $1 per litre milk, and $6 kg cheese.

Lastly, the Commodity Milk Price Index will be a tool farmers can use to better understand and plan for market volatility throughout the Australian dairy supply chain. This is the bike.

We need practical and viable solutions to increase transparency in the way the milk pricing system works, and to simplify milk contracts to ensure the volatility of the market is better balanced. Improving equity and transparency through the supply chain is one of the matters ADF is driving with the Australian Competition and Consumer Commission and the Federal Government.

We can’t do this alone, collaboration is the key to get us where we need to be. Our industry relies on all the elements to operate effectively. Farmers need processors and processors need customers big and small – so the solutions require all of us to work together to ensure a positive future.

While we can show farmers the tunnel, offer them a light and hand them the bike by working on the solutions for a long, sustainable future, it is still important that we continue to develop and improve these tools so farmers can keep peddling.

Farmers can help achieve this by grabbing every opportunity that comes their way, getting involved, joining a policy discussion through their state organisation and by showing the community that dairy farmers – regardless of the challenges they face are good business people, who care for their cows and work to enhance the well-being of the Australian people.

NFU explains the British milk price system

A couple of posts earlier, Andrew Hoggard explained the Kiwi milk pricing system and now, I’m delighted to thank Siân Davies, chief dairy advisor of the NFU for this explanation of the way UK dairy farmers are paid.

As the big processors review the way Australian farmers are paid, it’s an important discussion we can’t afford to ignore. Thank you, Siân, for being so generous!

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The Brits just hate simplicity!

Nothing’s ever simple in the dairy world is it? Explaining milk pricing in the UK in a blog is going to be tough but I’ll give it a go.

The UK dairy market is pretty unique in that half the milk produced on farm every year is processed into fresh liquid milk – we have a huge population and around 98% of them drink milk. A quarter of the milk produced is processed into cheese, mainly cheddar with the remaining quarter used for other dairy products – butter, yoghurt, powder and cream etc.

We’re also not self-sufficient in dairy products and our dairy trade deficit is abysmal – last year we exported €1.1billion worth of dairy products but imported more than €3billion. This mainly comes from the EU (especially Ireland) as cheese or milk powder.

These are just some facts to try to explain our milk pricing models which are pretty unique to us.

Over 100 UK milk buyers dominated by Arla and Muller
All dairy farmers have a milk contract to supply a milk buyer, of which there are probably over a 100 – these being a mix of co-ops, plcs and privately-owned companies.

The main ones are Arla Foods co-operative with just over 3,000 members here in the UK (of their 15,000 EU owners) and Muller UK with around 2000 suppliers. Both these buyers produce a variety of dairy products but their main focus is supplying liquid milk and branded products to UK retailers and food service.

How the milk price is set
Arla has a common EU milk price – with all their conventional milk suppliers receiving the same milk price regardless of which EU country they are in. Of late the £:€ exchange rate has meant the UK milk price has suffered and not risen as fast as its € counterpart. Arla’s pricing model is pretty simple:

Monthly sales – staff costs – reinvestment (agreed at outset by the Arla board) = milk price.

The price is announced monthly a few days before the start of the month.

Most other UK milk buyers practice buyers discretion which means they set the milk price according to where they see the market. There is no discussion or negotiation with supplying farmers. Muller has historically kept its suppliers happy by paying a little more than Arla.

Another practice commonly used by milk buyers is that of basket pricing – where processors base their farmgate milk price on an average of a basket of other milk buyers’ milk prices. This is now normally based on Muller and Arla, and moves a month after the two main buyers. It can have no resemblance to the market in which the actual milk buyer functions.

A more recent addition to the milk price portfolio is that of cost of production+. This is pretty unique to the UK and came into being when milk volumes were short and retailers wanted to guarantee a steady supply of fresh liquid milk.

A number of our most “caring” retailers started paying a milk price guaranteed to be over the cost of production for farmers who supplied them with fresh liquid milk. Just over a 1000 farmers are now on this type of model (it doesn’t fit into the Arla co-op model so Arla shares the increased price amongst all its EU members) but these farmers would also be required to jump through additional hoops, for example, on animal welfare, carbon footprinting and engagement with the retailer.

Last year, with the market crash and after the removal of quotas a number of milk buyers brought in A and B pricing, where farmers were paid a milk price (A price) for their core volume (set by the milk buyer) and then a B price for anything above that A volume.

When milk was plentiful, the B price was well below the A price and reflected spot milk price or below as milk buyers tried to encourage farmers to reduce production. It follows that as milk became short that the B price would race upwards, overtaking the A price. Our most calculating milk buyers removed the A and B pricing policy when this occurred.

UK dairy deregulation
Dairy farmers in the UK has historically no need to worry about better understanding their milk buyer or market dynamics as we had a Milk Marketing Board that collected every litre of milk produced and paid every farmer the same price.This stifled innovation and competition although many farmers wish it was still in place.

The MMB was a producer-run product marketing board established by statute in 1933 to control milk production and distribution in the United Kingdom. It functioned as buyer of last resort in the British milk market, thereby guaranteeing a minimum price for milk producers. The British milk market was deregulated in 1994 following the Agriculture Act 1993.

Many milk contracts haven’t changed much since 1994, with farmers having to exclusively sell milk to one buyer on an evergreen (everlasting) contract with long notice periods. The contracts also include an annex which is the pricing schedule laying out payments (bonuses and penalties) for % butterfat, % protein, somatic cell counts, bactoscan and more recently thermodurics.

Most dairy farmers also have to be members of our farm assurance scheme, Red Tractor, and are inspected independently once every 18 months to check compliance with the RT standards for animal welfare, environmental care and milk quality.

Price risk management
A more recent addition to the milk price stable here in the UK is fixed price, fixed term, fixed volume options. Milk buyers allow farmers to lock in a certain volume of milk at a set price to help manage price volatility. The milk buyer has normally backed up the volume on a fixed deal with a customer or sold the product forward on futures markets.

Transparency missing
One thing that is missing in the UK is price transparency within the dairy supply chain. Farmers know what price they are offered by their milk buyer and we all know what price milk is priced at on the retail shelf (too low!) but what happens in between?

Our farmer levy body provides a great deal of market intelligence on dairy including market indicators such as AMPE (actual milk price equivalent) and MCVE (milk for cheese price equivalent) and more recently a futures milk price indicator, FMPE. This information is available for anyone free of charge but we all do follow the GDT auction religiously to see what the market sentiment is.

Haves and have-nots of UK dairy
The variance in milk prices paid in the UK over the last two years has been as large as anyone can remember. At one time farmers producing milk for cheddar were receiving 14ppl whilst at the same time a farmer supplying a retailer with liquid milk was receiving 32ppl.

Prices have come closer of late as the global dairy market improved and farm inputs reduced in price but this led to a complete divide within the UK dairy farming fraternity between the “haves” and the “have-nots”, simply those on a supermarket contract and those who weren’t.

Looking forward
We accept that milk pricing will become more volatile in future, what with Trump in the US and Brexit looming for us. Our farmers are calling out for new milk pricing options that help manage risk for the whole supply chain and we are at last seeing some movement from buyers.  We believe the dairy market can work better for all the players within it – from farmer, to processor, to retailer and ultimately the consumer.