Category Archives: milk price

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!

sian-davies

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.

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Imagine if dairy farmers were paid like Qld cane growers

QSL

Most Australian dairy farmers have just one customer for our milk – the processor. It is the processor who adds value to the raw milk, who markets it and, importantly, it is the processor who decides how much the farmer will be paid.

I don’t need to tell you how vulnerable this leaves us.

If the processor makes a mistake or suffers any form of economic headwind – whether it be increased gas prices or decreased whole milk powder prices – it is free to simply pass that problem on to the farmer.

We accept this state of affairs because we feel there is little choice. We can’t store milk on the farm for more than two days and it’s illegal to sell unprocessed milk directly.

Cane growers have a lot in common with dairy farmers

Cane growers are in much the same boat. Like us, they cannot store their produce for long (it needs to be processed within eight hours of being harvested) and can’t sell it directly. But rather than having a handful of processors nearby – as most (though certainly not all) dairy farmers do – many are only in a workable distance from just one miller.

Cane growers use millers as service providers, not just customers

Unlike us, though, Queensland cane growers are determined to row their own boat.

As Queensland Sugar Limited’s Cathy Kelly told Milk Maid Marian, how much Queensland cane growers are paid for their crop is based on the sugar produced from their cane, rather than the cane itself.

“This payment arrangement is detailed in the Cane Supply Agreements growers hold with their local sugar mill, with the miller generally taking one-third of the sugar produced from each grower’s cane as a processing fee, leaving the grower to make the pricing decisions for, and receive payment on, the other two-thirds of the sugar,” Cathy says.

“So, while the growers may not own the sugar produced by their local mill, they are deemed to have an ‘economic interest’ in it.  It is this – the Grower’s Economic Interest in sugar (GEI Sugar) – that is at the heart of the recent sugar marketing issue.”

Cane growers can market sugar collectively
While the sugar is processed by private millers, the two-thirds of the refined sugar in which growers have an economic interest isn’t necessarily marketed by the millers.

After numerous government investigations at a state and federal level (sound familiar?), the Queensland Parliament introduced Marketing Choice legislation in December 2015, forcing Queensland sugar millers to provide their growers with a choice of marketer. It’s been a success, despite the best efforts of the biggest miller of Australian sugar cane, Singaporean-based Wilmar, to stymie arrangements as recently as last week.

Growers have access to their own not-for-profit public company, Queensland Sugar Limited (QSL), which is owned by Queensland growers and millers and started life back in 1923 as the Sugar Board, selling sugar from Queensland farmers under a single desk arrangement.

Today QSL, Cathy Kelly explains, provides four major areas of service:

Pricing: QSL is a member of the global raw sugar marketplace, the #ICE 11 exchange, based in New York. QSL uses its membership to conduct pricing on behalf of Queensland growers and millers, covering margin calls and associated fees so that its members can lock in sugar prices up to three years in advance.  QSL also operates a sophisticated pooling system, where growers can elect to have QSL manage and price GEI sugar on their behalf.

Financing: QSL uses its access to low-cost finance to provide year-round cash flow to members through a monthly proportional payment system called Advances. Under this system, QSL borrows approximately $150m each year to start paying members as soon as they start delivering sugar to the state’s terminals, even though that sugar may not be sold until up to a year later – hence the term Advance payment. As QSL is a not-for-profit, it also returns any net corporate profits to its members at the end of the financial year via the Advances system.

Marketing: QSL coordinates the physical sale of sugar, aiming to maximise returns to its members by optimising sales timing and customer premiums. They are highly regarded by their long-term clients in the Asian market, who pay strong premiums for Queensland’s reliable, high-quality sugar, last year coordinating the successful receipt of $1.9 billion in customer payments.

Logistics: QSL operates Queensland’s six Bulk Sugar Terminals on a cost-recovery basis, (i.e QSL doesn’t charge a margin), providing safe and efficient storage, handling and shipping of raw sugar as well as overseeing a strong quality management program. QSL’s delivery record is world-class, with over 98% of shipments delivered on time and in full last financial year.

While our circumstances might be a little different and it’s not been without its challenges, the sugar marketing model shows that there are other alternatives to the status quo for dairy.

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Kiwi dairy leader on pricing system

As part of its farm gate pricing system review, Murray Goulburn is studying the way farmers are paid overseas, including in New Zealand. So, how are Kiwi dairy farmers paid for their milk and what are the pluses and minuses of the NZ system?

I’m very grateful to Andrew Hoggard, the National Dairy Chair of NZ’s peak farmer body, the Federated Farmers, for writing this explainer post for us.

andrew-hoggard

In New Zealand there is no “one” way that the milk price is calculated, we have many different companies.

Fonterra is obviously the largest at around 78% of milk supply, but you also have two other Co-ops, and then several private processors, the largest of which is Open Country Dairies.

Generally, in most countries the unwritten rule is that the largest Co-op in the market sets the milk price.

In New Zealand’s case that is Fonterra, while the other Co-ops will return all profits they make (after any retentions) back to the farmers as milk price, so they sit outside that rule to a degree.

The private companies will pay a price based on the Fonterra price, so it might be a few cents more to attract supply, or a few cents less to retain supply.

Often the way these companies have attracted supply is through the fact that farmers can leave Fonterra, sell their Fonterra shares which for most farmers is a tidy sum, and then get a similar milk price supplying someone else and use that capital for something different.

So, in a practical sense, the Fonterra milk price is often viewed as the New Zealand Milk Price. Fonterra was created as a result of the two largest Co-ops merging with the NZ Dairy Board back in 2001.

The Government passed special legislation to bypass the Commerce Commission (our version of ACCC). This legislation, the Dairy Industry Restructuring Act (DIRA), set many rules that Fonterra had to follow to allow for domestic competition and transparency.

This led to the development of the milk price manual. In the early days the manual was slightly different to how it works now, with the Global Dairy Trade are a key component of it these days.

That said during the Dairy Board days, we have always had a system of forecast payout, advance rates, retro payments, and final payout.

This system continues today with most companies in New Zealand following the milk price manual and that methodology for calculating the payout (for Fonterra).

How does it work for Fonterra farmers?
At the start of each season (June) Fonterra will advise stakeholders what the forecast payout for the season will be.

This is essentially a speculative assessment as to where the market is heading. In announcing the forecast payout, they also reveal the advance rate and payment schedule (see link to schedule below).

advance-payment-rates-single-season-181120161

Something also unique to New Zealand, which the rest of the world perhaps does not follow, is all bills are expected to be settled on the 20th of the month, for the preceding month.

Today, I’m writing this on February 20, so I’m being paid for all the milk I produced in January.

The Advance rate is the amount I will be paid in the first months of the season; this is usually 60-70% of the forecast payout.

The schedule then shows how that advance rate lifts throughout the season. For example, today I am being paid $4.20 as the advance rate for all the milk that was produced in January, is worth $4.20.

Now the previous month the advance rate was $4.15, that was all the milked produced to the end of December. Thus this month I also get a retro payment of five cents on every kg of milk solids produced up to the end of December.

Next month the advance rate lifts to $4.30, so every kg produced in February will be paid at $4.30, and then I will get 10 cents on every kg produced up until the end of January.

So basically, every time that the advance rate lifts then I get a retrospective payment for all the milk produced up to that point to ensure that everything produced until that point in time has been paid at the advance rate.

If the Board of Fonterra however, at any time during the season feel that the forecast needs to be altered, they will do so and amend the schedule.

Should the payout have to be revised down then they may well scrap several lifts in the advance rate. Very rarely as this occurred in New Zealand where a company has had to claw back payments from a farmer.

That’s why we have a lower advance rate than the projected payout, so that if the market turns, you don’t end up taking money back off farmers. Kiwi farmers don’t get upset by much, but claw backs would have us reaching for our pitchforks!

When the season ends on May 31, the full payout is still outstanding at that stage, with retro payments due in June, July, August and September, with final payment in October.

This provides a good cashflow over the dry period. It also helps the company in making all the final sales and collecting payments for that season’s products.

Calculating payout
The milk price manual sets the benchmark. Basically, it takes the prices from the Global Dairy Trade, for a basket of commodity goods, heavily weighted for WMP.

The manual determines what a hypothetical, efficient competitor to Fonterra, might be able to pay for raw milk and still make a dollar, using a mixture of Fonterra’s actual data around transport and manufacturing costs along with some assumed costs. That’s effectively your milk price.

Any margin that Fonterra makes above that then goes into a Dividend, which because it is a Co-op then goes back to the farmers.

This way the farmer gets to see what the base value of their milk is worth, and can be responsive on-farm to changes in the world milk price. The Dividend otherwise shows me how good my Co-op is at adding value to my milk.

If these two streams were bundled together, you would have to assign a hard-core forensic accountant to pick through the annual report to work out how well the Co-op is doing.
For example, if it was bundled together and we had a milk price of $7.50, we might think cool, everything is sweet, but that could just be that the raw milk is worth $7.45, and the Co-op is only adding five cents.

Whereas unbundled, you would see that straight away and start asking some hard questions. Likewise, if we got a milk price of $4, but a dividend of $3.50, some may blame the Co-op for the milk price.

But in actual reality they should be doing high fives for the excellent dividend, and for not pushing any milk production because it’s not worth it.

Ideally every Kiwi dairy farmer should be trying to base their system on being profitable on the milk price alone. Because the dividend isn’t a financial reward from how well you look after your cows, it’s from investing your co-op.

One other key point in New Zealand, no one can jump ship mid-season. At around this time of the year you advise your company if you are staying with them for next season, though some of the private companies have three to five year contracts.

What you do find here is that we don’t have much in the way of chopping and changing between milk companies, compared to Australia.

Alternative Payout Models
Two independent New Zealand co-ops differ from Fonterra through combining the milk price with a dividend. Synlait and Miraka offer premiums for farmers who operate their farms on best environmental practice. But they still use the schedule like Fonterra.

The only real point of difference exists with Open Country, who have three payment periods, and the prices vary over those periods, with usually the final period at the back end of the season having a higher price.

In terms of managing risk, we have recently had the launch of milk price futures here in NZ, it is still in its infancy, and farmers will need to be very carefully in using these tools.

Some companies have also offered a guaranteed milk price, where they match a customer wanting a certain amount of product at a certain price over a time period, and farmers willing to take that price.

However, probably the best way to manage risk is to be aware of what’s happening. That’s why so many Kiwi farmers pay attention to the fortnightly GDT auction, because that trend we know will show up in our milk price.

Other things to watch are the world markets, will President Trump’s proposed ‘Border Wall’ hurt American milk production, increasing demand from Mexico for other suppliers.

Generally, we are at the mercy of geopolitics when it comes to milk prices, while domestically the politics involve on-farm rules and regulations, which also impact on the milk price. Being aware of something before it hits should enable you prepare better for it.

One obvious thing in Australia to watch will be the New Zealand milk price, because of our greater exposure to world markets we will respond to big shifts in supply and demand quite quickly in terms of milk price.

Australia ultimately does follow, as your domestic market will only insulate you for a short period of time. Anyone that claims different probably studied trade theory at Trump University.

New Zealand has long standing Free Trade Agreements with Australia, thus there will come a point if either of our domestic milk prices get too far removed from one another, the reality is that dairy products will move across the Tasman, and even out prices.

There are plenty of economic theories that back up that assertion. If you view the New Zealand milk price as clear de-facto for the world price, then simply applying the NZ/AUS exchange rate to that will tell you the value of the milk in your vat is worth on the world market.

The Aussie price might not exactly match that but it will follow it. I think the key thing to remember, no one owes you a living just because you’re a farmer. You are a businessperson, you need to recognise your own risks and have plans for dealing with them.

Thanks very much to Andrew Hoggard, National Dairy Chair, Federated Farmers, for explaining the NZ farm gate milk price system so thoroughly. Milk Maid Marian appreciates your generosity!

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What it will take to get this farmer growing

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.

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Filed under Farm, Fonterra, milk price, Murray Goulburn, Warrnambool Cheese and Butter

Dairy love and why it’s lacking on St Valentine’s

“Imagine you decided to stay and defend your home from a bushfire, while your neighbour flees.”

“You save your home but the mental scars are deep.”

“Your neighbour’s place is burnt to the ground and sympathy floods in for the family and, in time, they move into a beautiful new home.”

This was the scenario clinical psychologist Rob Gordon put to me explaining why rifts often open in any community after a disaster. He pointed out that because everyone’s experience of a disaster is different, misunderstanding and resentment brew under the pressure of recovery.

I’ve seen it in dairy social media forums. While thousands of farmers are finding ways to support each other on forums like the Show Some Dairy Love Facebook page, there are some cranksters out there who need to kick heads.

I’ve felt the heat of that anger first-hand, ironically from a non-farmer, who says I was one of those with a secretive “special deal” shielded from the infamous claw-back, accusing me of having no morals.

The truth is that, in May 2015, I had chosen to sign up for one of Fonterra’s “risk management products” available to all suppliers. It meant the price for 70 per cent of our milk during the 15/16 financial year bobbed about in a range with upper and lower limits.

Sure, we would have missed out badly if prices did get to MG’s much-vaunted $6.05kgMS forecast close but it felt like good insurance.

When Fonterra cut its price in May 2016, the price for 70 per cent of our milk dropped to its floor. The remaining 30 per cent tumbled the whole way down.

Lots of people were much worse off than we were. Others were much better off.

That’s the thing. Just like a bushfire, the milk crisis has affected everyone differently. So many factors come into play, like:

  • the size of your farm,
  • the time of year your cows calve,
  • which processor your farm supplies,
  • whether you have/had a contract, and
  • which stage your business is at.

On top of all this, there is loyalty and trust.

Hundreds of farmers swapped processors for the first time in years or decades. For many, it was a matter of survival. Others have not been able to switch and some consider leaving the last big co-op nothing short of treacherous desertion.

Add to all this that farmers have now been battling to pay bills for 10 months (actually, a lot longer if you were in one of the drought-affected regions) and it’s not surprising that people are feeling rather cranky, to say the least.

To make matters worse, change for the better seems an aeon away. The senate, ACCC and ASIC inquiries have revealed little to date, other than that the unrepentant Helou had not been interrogated.

I’m spending St Valentine’s Day at the Gippsland ACCC farmers’ forum. I hope that out of this comes a bit of the dairy love we all need.

 

 

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Farmers finally get our chance

accc

A once in a lifetime opportunity to sort out the whole damn dairy mess we’ve all taken for granted for so long is coming to town. The ACCC wants to meet you, dear dairy farmer. Not the men in suits – you. If you can’t get to one of the forums or find the time to write an email, that’s okay because they’ll even take calls from the tractor cab on 03 9290 1997. Just do it.

Why? After last year’s debacle, we shouted from the rooftops that the system stank. For once, people listened. Average Aussies dug deeper at the supermarket to help us. And, now, the regulator is asking us exactly what the problem is and what needs to change. We can’t fall silent now. Would anyone ever take us seriously again?

We deserve a system where:

  • the risk in the supply chain is shared fairly by processors and farmers;
  • the farmer is free to sell his or her milk based purely on its virtues on an open market;
  • processors act independently of their competitors;
  • there is trust and transparency in all dealings; and
  • farms big and small are treated fairly.

This stuff is pretty basic in other industries and it’s far bigger than the behaviour of MG and Fonterra (the regulator is looking into that separately). It’s about the way the entire dairy sector ticks and how we are paid for our milk.

It may just be the closest we will get to spelling out and solving the problems that ruined lives. Don’t let others decide our futures. This time, the ACCC means business  but it needs your input.

The ACCC dairy forums will be held at:

  • Monday 6 February 2017 – Toowoomba, Qld
  • Tuesday 7 February 2017, 12pm–2pm – Club West, Taree, NSW
  • Tuesday 14 February 2017– Traralgon, Vic
  • Monday 27 February 2017 – Warrnambool, Vic
  • Tuesday 28 February 2017 – Shepparton, Vic
  • Thursday 16 March 2017 – Bunbury, WA
  • Monday 20 March 2017 – Hahndorf, SA
  • Wednesday 22 March 2017 – Burnie, Tas

Go if you can, email dairyinquiry@accc.gov.au or call 03 9290 1997 and ask for Amy Bellhouse. All the details are at the ACCC dairy inquiry website.

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The MG fallout for Fonterra

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!

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