Fonterra

The change has only just begun: Rabo

/ dairymilkmaid / 4 Comments

Buckle up. That’s the message threaded right through a report on Australia’s dairy supply chain by Rabobank‘s Michael Harvey released today.

While so many of us are aching for some stability, for things to just settle down a bit, the report crystallizes fears that change has only just begun.

Michael’s report cites three causes for continuing change:

  1. Down by 800 million litres in southern Australia, milk production is at its lowest in two decades
  2. Australia’s largest processor, MG, has “stumbled and remains under pressure”
  3. The lower price farmers are paid for milk has triggered a boom in stainless steel investment and aggressive recruitment

The scale of the shake up is huge

RaboProcShare

p. 2, Harvey M., (2017), The Australian Dairy Supply Chain

While Rabobank’s chart illustrates just how much milk MG has hemorrhaged, it also shows that MG continues to be a critical player in the whole industry’s fortunes. As does Fonterra, now more than ever.

Fonterra is abandoning the Bonlac Supply Agreement, which used the MG price as a guaranteed baseline, for something yet to be announced.

MG, the Rabobank report concludes, has suffered “structural damage” that will, if it can recover, take years to repair before the co-op can resume the role of price setter.

So, here is the kicker in Michael Harvey’s own words:

“The reality is that the old system of price discovery for raw milk has broken down and a new method of price discovery will need to emerge, meaning that, in the future, dairy farm operators will be operating in a more commercially oriented and flexible market for their milk.”
– p. 4, Harvey M., (2017), The Australian Dairy Supply Chain

Is it a warning? Perhaps. Change is often difficult but it brings fresh opportunities, too.

Competition will drive farmgate milk prices for a while
Rabobank notes that while milk supply has fallen by 800 million litres, enough new stainless steel is coming on line this year to process another 700 million litres, with more expansion planned. It expects competition to drive milk prices in the medium term.

Milk flowing beyond borders
According to the report, there is an increasing appetite for milk processors to spread supply risk beyond their traditional collection areas.

We’ve seen this locally, with Warrnambool Cheese & Butter, for example, recruiting milk in Gippsland.

A rethink of the current price system
Michael Harvey devotes a significant portion of the report considering the impact of the production decline on Australia’s status as a preferred supplier. “Alarm bells are ringing for international customers,” he writes.

In this context, Mr Harvey also discusses the tension between the need for flat milk supply versus the lowest cost of milk production – on one hand processors can’t manage a very “peaky” supply and, on the other, the discounting of Spring milk has forced up the cost of production for farmers, stifling growth.

Let’s just hope that out of this crisis comes a fresh start.

Planning for disaster while dodging a bullet

/ dairymilkmaid / 5 Comments

Daffodil
Today’s blossoming of the very first daffodil reminded me we’re on the cusp of Spring – our 12 weeks of make or break on the farm.

Only yesterday, a banker asked me how the outlook was on farm. Anxious is the answer.

The feed pinch
The big dry has sent grain futures soaring, signalling that we’re in for exorbitant grain prices by Christmas.

Meanwhile, it’s been very hard to grow grass and the dry subsoils provide little moisture in reserve for what the Bureau is predicting will be a drier-than-normal Spring.

While we’ve invested heavily in a small amount of irrigation infrastructure, the dam is still well below full and we have no access to the aquifer.

At the same time, high quality hay suitable for the milkers is in very short supply, so I’ve been trying to lock in feed this harvest before it becomes too tight to mention.

The money pinch
Most dairy products are either traded internationally in US dollars or sold to domestic customers at a rate linked to international commodity prices.

This means that as the Australian dollar rises against the US dollar, the value of our milk falls. And rise it has, reaching 80 cents for the first time in two years.

Green shoots bring hope
On the other side of the ledger, there’s been cause for hope this morning.

Despite the exchange rate fears, the processor we supply, Fonterra, lifted its price for milk from $5.30kgMS to $5.50kgMS (from roughly 40.5 cents per litre to about 42 cents).

Second, I found a heap of worms slithering across the track in a bid to avoid the saturated soil. Yes, saturated! For the first time this winter, we finally have soft top soils.

Better late than never. Let’s hope the rain keeps coming and we don’t need to feed the cows massive amounts of grain to get through another drought.

Worm

Playing games with our lives

/ dairymilkmaid / 3 Comments
GAMP

GAMP: Before MG in Gippsland

With just a couple of exceptions, the processors seem to have learned just one thing from the last year of chaos: loyalty is now a luxury item.

The jumble of opening prices, incentives, secret deals and long-term contracts with short-term prices shows that, by and large, we are in an era where it’s every man, woman and child for themselves.

It wasn’t always this way. Until recently, you could not buy loyalty.

Even though there were more lucrative options, most Australian dairy farmers chose to supply the last big co-op, Murray Goulburn. For generation after generation, we knew in our hearts that only a strong co-op, which put farmers first, should set the pace for the farmgate milk price.

Since the April/May debacle when farm gate milk prices crashed to disastrous levels, farmer loyalty has become gossamer thin. The main theme from Dairy Australia’s farmer survey reported in its June Situation & Outlook was that “Trust in processors has taken a knock”. Err, yes, just a little.

“In the past 12 months, 11% of respondents changed the processor they supply and a further 17% would like to change supplier – 9% are considering it and 8% would like to change but are unable to.”
“Farms with herds greater than 700 cows were most likely to have changed processor or to be considering a change.
“In general however, most farmers tend to be loyal to their processors historically and 61% have remained with one processor for the past 10 years.
“Milk price is predictably the primary reason for changing or considering changing processor, however 21% also expressed concerns with processor management and the treatment of farmers, 12% were concerned about the ‘clawback’ and 8% lack trust in their company and feel they have not been honest.”
– p. 5, Dairy Australia Situation & Outlook, June 2017

DA’s survey was conducted in February and March – well before MG opened first, very early. Everyone was watching. For years now, MG has set the benchmark milk price, pushing it as high as it could go in the spirit of a farmer-owned co-op.

This time was different.

MG’s price of $4.70 per kg of milk solids (about 36 cents per litre) was simply far, far too low. MG’s competitors needed milk and were willing to pay not just a little more but a lot more and farmers have been scrambling for the life boats in a bid to survive a third tough year in a row.

Meanwhile, other processors have been offering “loyalty” bonuses or locking farmers into long-term supply contracts without the long-term prices to match. It all flies in the face of the honour, transparency and simplicity the processors are apparently set to pledge under the Code of Conduct.

Today, MG has performed a minor miracle, lifting its opening price from the miserable $4.70 to $5.20 before the season has even begun. This 11 per cent increase puts the MG price close to breakeven for many of its suppliers.

It’s fantastic news.

Farming families across the country will breathe a little easier tonight and, for that, I am very grateful.

But, like the “forgiveness” of the MSSP, like Fonterra’s 40 cent payment, this about-face leaves me wondering why it was necessary to inflict so much pain and hardship on farmers in the first place.

Bitterness is never a becoming attribute but, with processors pulling one stunt after another seemingly without regard for the farmers stretched to their financial, physical and mental limits, it’s getting harder and harder to maintain the faith.

Spreadsheets for brekky, lunch and dinner again

/ dairymilkmaid / 2 Comments

ForkLoRes

The first opening milk price announcement for the new season has been made. And it’s spreadsheet time again for farmers and processors alike.

Why? Because Murray Goulburn has come in at $4.70 kgMS – the equivalent of about 36 cents per litre.

Farmers milked dry will lead to empty stainless
Very few Victorian dairy farmers can produce milk at that price. The most recent industry figures – during the 15/16 drought – put the average cost of production at $5.72 (see below). The 14/15 Dairy Farm Monitor report showed $5.36 and 13/14’s figure was $5.42.

So, yes, the seasons and the cost of inputs like grain affect the cost of production but this opening milk price is simply not enough and my heart goes out to every MG farmer wondering how to make ends meet.

Farmers will need to cut costs to the bone (again) to survive. How? Well, like the year we’ve just had, it’ll be every little thing possible, right down to insurance but there is one obvious variable cost to consider: stockfeed.

As you can see from the table above, “Purchased feed and agistment” amounted to a whopping 59 per cent of variable costs. Granted, prices were high that year but feed costs always are the biggest, fastest and first lever farmers pull when forced to bring the money train to an emergency stop.

At the same time, the value of cows sent to market is 29 per cent up on the five-year average.

Any farmer working on her spreadsheets will find a very powerful case to sell cows and buy as little grain and hay as she dares. In other words, make less milk.

Empty stainless is not profitable for processors
Just three years ago, the media was dubbing milk “white gold“. China’s seemingly unquenchable thirst for our milk drew breathless news reports and excited investors hot off the back of the mining boom.

Even the well established processors spent millions on stainless steel and now they have to fill it.

For example, Fonterra increased the capacity of its Stanhope cheese factory in a $120 million rebuild and will need a lot more milk from Northern Victoria, which has suffered a massive 18.4% fall in production year to date.

While the $4.70 opening price will have milk recruiters’ phones ringing hot, Fonterra and its rivals cannot assume that skimming milk from an ailing MG at a small premium will suffice. They will need to offer a sustainable milk price to assure supply over the lifetime of their investments.

Because, unlike gleaming multi-million-dollar processing machinery, cows and the farming families who tend them cannot be simply switched off and back on again.

If the co-op cannot manage a viable milk price, competition should
Traditionally, Murray Goulburn Co-op has been the pacemaker. It set the benchmark price that others had to match or better.

Now that the co-op is struggling to keep up with the pace, will the other processors take the opportunity to milk farmers dry or will competition and the need to fill expensive stainless save the day?

It’s a nervous wait.

 

Bonlac on keeping Fonterra honest

/ dairymilkmaid / 1 Comment
AubreyPellett.png

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.

BSCbenchmark

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

/ dairymilkmaid / 1 Comment
Email
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.

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

/ dairymilkmaid / 2 Comments
eleanor-roosevelt

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.

Light at the end of the tunnel: Fonterra

/ dairymilkmaid / 4 Comments

Well, as you saw in the previous post, I’m looking for light at the end of the tunnel (other than an oncoming train!) for Australian dairy farmers like me. In that post, ADF’s Terry Richardson took up the offer to present a vision. Today, Fonterra Australia’s new(ish) managing director, René Dedoncker, presents his view. My brief was pretty open: give farmers a reason for optimism without going into all the intricacies of Fonterra’s strategic direction.

I’m very grateful to René for sending Milk Maid Marian not just the written response below but a video too. Both are worth a look because they’re a bit different.

There’s no question that there have been challenges in recent seasons. What happened last season was a reminder that we operate as part of a global market – we can reap the rewards, but it also means we share in the risk. We as companies have a responsibility to tell it like it is, so that our farmers are prepared – positioned for prosperity when conditions are good and able to weather the storm when they aren’t.

However despite the challenges there are still plenty of opportunities for Australian dairy – it’s about knowing how to capitalise on those opportunities. Today, around 406 billion litres of dairy are consumed globally every year. By 2020 it will be 465 billion litres. That’s a 59 billion litre difference – around seven times the size of Australia’s current milk pool.

We know that countries that don’t have enough milk will look to the countries that have a surplus. Australia is one of those countries. But simply selling our surplus supply in the global marketplace will only ever achieve commodity returns. It will not be enough to win back confidence on the farm.

We need to be providers of premium dairy products that are aligned with specific consumer needs and life stages, and we have to make sure we produce and deliver those products as efficiently as possible.

Two years ago Fonterra embarked on a mission to change the way we operate to enable us to better capture that demand. Overseas consumers want Australian cheese. We have a reputation for quality and excellence. Across Asia demand for cheese is growing. Mozzarella demand in China is growing at around 30 per cent each year.

In China, and across Asia, pizza is a social food – they eat it with friends and with their hands rather than a knife and fork. That’s why it’s important that as a dairy company we create a cheese that enhances that social experience.

Understanding what our customers want is crucial to our long term success as an industry. The reason there is such high demand for Fonterra’s cheese is because we’ve been immersed in the Chinese market for 25 years.

We know what Chinese consumers want. For example, we know how they eat their pizza, and how they want it to taste. Chinese consumers want their food to look as good as it tastes – they want that slightly brown crust on melted mozzarella, they want those stretchy cheese strings as they pick up a slice. Now, Fonterra cheese tops around half of the pizzas in China.

As companies, we need to leverage Australia’s reputation for high-quality dairy to make the most of the opportunities before us. The way we do that at Fonterra is through innovation – innovation in farming, in manufacturing, and in product development.

It’s why we’re investing in modern and efficient manufacturing; using technology to make dairy foods that tastes and performs the way our customers want it to. We have the technical know-how to deliver what they want – products developed with the end user in mind.

When it comes to nutritionals, the fundamentals in China remain incredibly strong, despite recent dips in demand. Here are just a few figures to consider:

  • The Chinese economy has been growing for 26 consecutive years, with economic growth still relatively strong at 6.8 per cent per year.
  • Over 54 per cent of Chinese people live in cities; by 2030 it’s expected that over 1 billion people will live in Chinese cities.
  • In 2000, just four per cent of Chinese families were considered middle class. By 2020, 76 per cent will be deemed middle class
  • China’s birth rate is climbing after the relaxation of the one-child policy – in a country with only four weeks of maternity leave many Chinese mums rely on infant formula to feed their babies after they return to work.
  • The next 12 months will be tough, as authorities seek to get greater control through regulation over the supply chain. However, the reputation of Australian dairy and the quality associated with that in China is invaluable.

We take a base commodity product and leverage everything that we have – high quality farm practices, best in class manufacturing and a point of difference on country of source, and make it into a higher-value product that is highly-desired in China.

That’s why we are continuing to back and develop the nutritional partnerships that we have so that when we get to more stable settings in China, we can take the opportunity to flourish.

There is huge potential for dairy looking ahead – not just in China, or Asia, but across the developing world. If we as processors work smarter, developing products that meet the needs of our customers and fulfilling that demand, our entire industry will benefit through greater investment, more jobs, and most importantly, a higher farmgate milk price.

What it will take to get this farmer growing

/ dairymilkmaid / 7 Comments

Confidence.jpg

The last two years – a drought and the infamous dairy debacle – have taken their toll and not just on my hip pocket. Unless there’s change, my cheque book is likely to grow cobwebs for up to a decade. Sounds melodramatic? Not really.

My reasoning is this: first, we need to recover the equity lost over the last two years.

Second, we need to catch up on the maintenance we couldn’t afford to do over the last two years.

Third, I want at least another $100,000 in equity as extra protection. Interest rates won’t always be this low and, when they rise, another shock of this magnitude could be devastating rather than debilitating.

It all adds up to roughly $300,000 in profit to make up before I have an appetite to invest in any project that takes more than a year to break even. And that will take me years and years to accomplish.

If other farmers have the same attitude, we will continue to see Australian milk production stagnate.

The problem with this is that the processors have been investing in hundreds of millions of dollars worth of new stainless steel that requires enough milk flow to make it efficient. Time and time again, they have said growth is the only way to return the maximum price to farmers.

Do we have the start of a vicious circle? I hope not to hear the processors blaming a low farm gate price on inadequate utilisation of bloated stainless steel created by a low farm gate milk price.

Making me even more risk averse is the lack of definitive action to prevent this happening all over again.

Both the big processors, MG and Fonterra, have pledged to be more transparent and that’s a good first shuffle. I say “first shuffle” because to call it a good first step would be overstating its importance. We need a game-changer.

MG has commissioned a price review that will consider farm gate price models from around the world. At the same time, the Bonlac Supply Company, which represents farmers supplying Fonterra, also announced it would present alternatives early this year. Will these be the game changers we need?

I suspect not. The game changer we need is one where risk is shared along the supply chain rather than simply shifted onto farmers.

After all, while the current system is a legacy of an industry dominated by strong co-operatives, it’s also a marvellous “magic pudding” business model for corporate processors.

Consider this recent ACCC submission by Warrnambool Cheese & Butter‘s new owners, Saputo:

In February, Saputo announced a quarterly profit of C$197.4 million. I’m not sure why it feels it is appropriate to make Australian farmers responsible for its inability to negotiate a better energy contract. But it does because it can.

It serves as a timely reminder that the push for farmer prosperity has to come from farmers.

The MG fallout for Fonterra

/ dairymilkmaid / 6 Comments

msspfonterra

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 the BSC’s annual report that:

“…clearly we cannot have a benchmark mechanism in place against a processor that is under performing and also facing significant headwinds and an uncertain future.”

Ouch!

BSC and Fonterra, he wrote, are working on a new benchmark that it will reveal early next year.

In the meantime, a group of suppliers has written to Fonterra Australia, saying the processor has failed to honour its agreement to match MG’s price. The dispute revolves around the question of whether MG’s closing milk price was $5.53 or just $4.80 per kilogram of milk solids (kgMS).

Confusingly, as you might remember, MG dropped its price last April but then added money back in the form of a “Milk Supply Support Package”. This MSSP, MG stressed, was not a loan to individual suppliers but a “socialised debt” that would come off the milk price. Since then, MG has paused the MSSP in a bid to stem milk losses. In a nutshell, it means that MG announced an official closing milk price of $4.80 per kilogram of but actually paid “an average cash price in FY16 of $5.53 per kgms“with the MSSP included.

I asked Fonterra Australia’s Matthew Watt to explain his company’s position.

MMM: Excluding any loans or the $2.50 offset paid this financial year for milk supplied last financial year, what was Fonterra’s closing price?
MW: Fonterra’s average milk price for the 2016 financial year was ultimately $5.13 per kgMS, which was 33 cents higher than the benchmark price set by MG.

MMM: What was paid to Murray Goulburn suppliers last financial year?
MW: Murray Goulburn has clearly stated in its public announcements and 2016 Annual Report that its final farmgate milk price for the 2016 financial year is $4.80kgMS. The advance to suppliers under Murray Goulburn’s Milk Supply Support Package does not form part of the benchmark price, and neither does any Murray Goulburn dividend payment.

MMM: How is the term “bundled return” in section 10.1 of the Fonterra Australia Milk Supply Handbook defined?
MW: The Bundled return (following the payment of BSC shares out in 2014) is defined as the average farmgate price paid by the largest processor in Victoria

MMM: MG has suspended the repayment of the MSSP. If MG does not require suppliers to repay the MSSP, doesn’t that mean last year’s price was effectively the “cash price” of $5.53 and how will Fonterra respond if the MSSP is not recouped?
MW: Fonterra has an obligation under the BSC contract to match MG’s benchmark milk price. MG has clearly stated that its final farm gate milk price for FY2016 was $4.80. Based on MG’s announcements, the MSSP operates independently from the FY2016 milk price.  We are not in a position to speculate what MG may do in the future with regards to its MSSP repayment schedule.

Thank you very much, Matt, for answering Milk Maid Marian’s questions!