A new big Aussie dairy co-op?

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Fonterra Australia’s managing director, René Dedoncker

“It’ll be months, not years,” says Fonterra Australia’s managing director, René Dedoncker when I ask him about plans to form a new big Australian dairy co-op.

Industry veterans will tell you the idea of Fonterra forming an Australian co-op is not new and seemed a real possibility after the demise of that other great milk co-op, Bonlac, in the early 2000s. So, why now?

“I think the time is right,” says René. “This is a value proposition at a time when the industry is fragile.”

“Fonterra Australia is also in a great position to reduce risk. We have learnt from our mistakes and have a stable, repeatable business model with a balanced customer and product mix. Confidence, if not trust, is running high.”

I cough a little nervously and ask René how he expects farmers would rate Fonterra in the trust stakes and whether that might be a problem.

“Trust may well be a stumbling block.” he concedes. “Farmers – even those who’ve been supplying us for many years – tell me it will take years to rebuild. Purely on trust, we could well be ranked quite low but we are working hard to regain that.”

“I can tell you that there is not a key decision made without the input of farmer voices.”

The consultation on the co-op idea will officially begin at the Bonlac Supply Company AGM next week and be discussed at farmer forums across the country.

If it gets a sufficiently warm welcome, the next stage in the process will be discussions about the form the co-op would take.

“We already have several different models in mind,” René says, “but at this stage we want to keep it simple and see whether there’s an appetite for this co-op.”

What Rene can say is that there won’t be a mandatory requirement for farmer suppliers to “share up”, matching share numbers to milk production.

“We need to make it attractive and give everyone an opportunity to participate. Farmers will also be able to supply Fonterra Australia without becoming shareholders,” he explains.

It’s also decided that the shares would be in the Australian operation only, rather than the global Fonterra organisation. The Australian co-op has the blessing of the board of directors but would not need to clear a Kiwi shareholder vote.

The plans towards forming a co-op has “paused” the progress of a replacement for the Bonlac Supply Agreement, René says. While that replacement has already been drafted, it won’t be made public until it’s clear it would suit any new co-op model.

It has done nothing, however, to dampen Fonterra’s Australian expansion plans. The processor has already committed to lifting its processing capacity by another half-a-billion litres over the next six months and will add another half-a-billion within 18 months.

While René stresses that the 3 billion litre target is in capacity rather than milk supply (allowing enough headroom for a bumper season), he says the processor is aiming for a milk supply of 2.6 to 2.7 billion litres within two years.

At the same time, Lino Saputo Jr is on record saying Warrnambool Cheese & Butter will win back the milk MG lost. And, of course, the main beneficiaries were Fonterra and WCB itself.

“What about Saputo?,” I ask.

“We’re running our own race,” says René. “We have incredible confidence in our business and they’re offering powerful competition that’s good for our industry.”

“It might be better to ask Saputo about us.”

About the loss of MG

“We are stealing from the graves of our founding fathers and the cribs of our children,” were the words of former co-op chairman Ian MacAulay after the vote in favour of MG’s partial float was passed.

History has proven him right and it’s a travesty for our industry.

I’m not going to dwell here on how it feels because I’m sure that, by now, you’ve heard from plenty of others and my story is by no means unique.

All I can offer you is a list of questions for MG to help explain what comes next and the implications of the agreement it’s signed with Saputo. I’ve been assured they will respond but, understandably, it might take a little time.

The change has only just begun: Rabo

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

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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.

What it will take to get this farmer growing

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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 ethics of profiting from animal welfare

Lino Saputo (pic: ABC)

Earlier this week, dairy processing giant Saputo announced it was getting tough on animal welfare. Well, more precisely, it was getting tough on the dairy farmers supplying it milk.

Saputo toughens stance on animal welfare @ABCRural.

The announcement was greeted by farmers on Twitter, both in Saputo’s native Canada and here in Australia where it owns Warrnambool Cheese & Butter, with a degree of skepticism.

The common theme of the discussion was that farmers were already meeting the standards trumpeted by Saputo. The exercise was simply one of a processor profiteering off the backs of dairy farmers, yet again. But it’s worth remembering that Saputo’s move followed a case of a farmer doing the wrong thing as Lino Saputo told the ABC:

Mr Saputo said an incident in Canada motivated the work behind this new policy.

“One of the farms that was supplying us milk had a recorded incident of animal abuse. Here in Canada we are buying milk from the milk marketing board, and typically we don’t know where that milk is coming from,” he said.

“As it turns out, the milk from that farm that had some abuse was being delivered to our plant. “We tried to rally with the dairy industry to have some stronger practices in place, but quite frankly we found ourselves alone in this process and we felt like we needed to take a leadership role.”

Saputo is not on its own. Fonterra has quietly begun animal welfare audits on the farms of its suppliers. Perhaps coincidentally, its own customer, Nestle, threw its considerable global weight around earlier this year, demanding a set of welfare standards from suppliers that has already seen scores of Australian dairy farms whose milk eventually reaches Nestle inspected.

I’d be willing to bet the farm that Saputo, Fonterra and Nestle are the tip of the iceberg. As farmer Shelby Anderson (@cupslinga) tweeted, “it’s society, not a foreign Co” that is demanding transparency and rigour around the way we farmers care for our cows.

The RSPCA is already considering accrediting milk for animal welfare, as it does with eggs. The idea is rejected by peak dairy body, the Australian Dairy Farmers, because it fears the RSPCA marketing will imply most dairy farming is not up to scratch. It’s a fair point that leaves me feeling conflicted because, on the other hand, it’s great to put a value on good animal care (err, beyond having healthy, productive animals and being able to sleep at night).

Just as the quality of Australian milk is taken for granted by Australian shoppers, they expect the cows to be treated well. I for one am pleased that Saputo and Fonterra have been proactive to protect that reputation for kindness.

I only hope that the way we care for animals is marketed with the same sensitivity. A ghastly adversarial marketing campaign might make a quick buck but would leave everyone a loser.

Protecting farmers from ourselves

Apparently farmers cannot be trusted with anything. Not even to want the highest farm gate milk price for ourselves.

Bega has just sold its stake in Warrnambool Cheese & Butter to Saputo, putting the Canadian billionaire on the brink of controlling WCB even though a higher price was on offer from Aussie farmer co-op, MG.

This happened because our co-op hasn’t been allowed to bid during the bidding period.

Australian farmers who want to invest in their own futures and who are willing to pay the highest price for WCB have been stymied by a government artifice in the name of protecting…you guessed it…farmers from themselves. Apparently, another processor that thrives on a low farmgate milk price is better for us farmers than having an efficient farmer-owned co-op.

This Aussie dairy farmer will never forgive Joe Hockey for sitting by and watching.

So, where to now? That, my fellow source of low-cost milk, is up to us, for although Saputo can buy WCB’s stainless steel, it cannot buy our future. Only Australia’s dairy farmers decide where our milk flows and our fortunes lie.