Tag Archives: farmgate milk price

Light at the end of the tunnel: Fonterra

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.

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Filed under Fonterra, milk price

What the Fonterra Friday 13 announcement means in plain English

This plain English explanation is for anyone as confused as I was on Friday following Fonterra’s second announcement.

The May and June milk price is still slashed to $1.91kgMS
The prices outlined in the original announcement still apply. Friday’s announcement concerns milk to be supplied in 2016/17 but the amount you receive hinges partly on how much milk you supply in May and June 2016. Baffled? Stay with me for a minute.

Loans are still available in the same format
Nothing has changed in terms of the loans announced on May 5.

Why the latest announcement?
Although nobody came out of the May 5 announcement a winner, if your peak milk production was in May and June, you suffered far heavier losses than farmers whose herds peak in Spring.

Fonterra’s Friday May 13 announcement is designed to even out the impact.

July and August milk now attracts extra for the volumes you supplied in May and June
Fonterra will pay $2.50 kgMS extra for July and August milk in 16/17 but only for up to the same volume of milk you supplied in May and June.

Here’s an example: if Old Macdonald supplies Fonterra 10,000 kgMS in May and 10,000 kgMS in June but 15,000 in July and 15,000 kgMS more in August, she will be paid the extra $2.50 on 20,000kgMS rather than on 30,000 kgMS.

The remaining 10,000kgMS will be paid at the normal July and August rates (that’s base price + quality + production + seasonal incentives). So, Old Macdonald would find $2.50 x 10000 = $25,000 extra in each of the milk cheques that arrive on August 15 and September 15.

If, on the other hand, Old Macdonald supplies Fonterra a total of 20,000 kgMS for May and June but only 15,000 kgMS for July and August, she will still be paid the extra $2.50 kgMS on 20,000 kgMS.

The money is coming from the rest of the year
The milk price Fonterra pays farmers is made up of four components:

  • A base price paid at the same rate every month of the year for fat and protein (fat + protein = milk solids)
  • Quality incentives
  • Production payments
  • Seasonal incentives – which are apply in the “off-season” months of January to July.

To pay for the extra money announced on Friday, Fonterra will lower the base component of the milk price by 19 cents per kgMS. In other words, you may receive extra money in your August and September milk cheques but money will also be deducted every month for the whole of 16/17.

About this post and me: Milk Maid Marian supplies milk to Fonterra and this post was checked by Fonterra Australia for accuracy.

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Filed under Farm, Fonterra

Despair, anger, disbelief.

3wisecowspsycho

Lots of dairy farmers are naturally cynical and, let’s face it, we’re never entirely happy with the weather forecast. But we are optimists at heart because things will always be better next season.

Not this season.

I have never seen my fellow dairy farmers so subdued as they were at a meeting last night. Dinner at the local pub was laid on – a rarity that normally guarantees a festive mood – but somehow it felt like more like a last supper. Nor have I seen such anger online.

Partly, I think, it comes down to being battle-weary. Around here, it’s been a disastrous season. Dry-land farmers have not been able to grow grass and the La Nina we were hoping for still hasn’t arrived. By now, we should be building a wedge of grass to get the cows through winter. Instead, paddocks are eaten to the boards while farmers wait for resown paddocks to fire up.

The conventional wisdom is to apply nitrogen now while the soil’s still warm enough to grow grass. Many farmers at last night’s meeting had not applied any urea yet despite its unusually attractive cost this year because the soil is still too dry.

We can buy in more fodder or sell more cows. Fodder is getting hard to find and expensive, too. Many of us have already culled hard. The options are narrowing. We need something to go right.

It isn’t. Farmers seem sure that the milk price for 16/17 won’t be good. Will it be devastating? We’re all wondering and worrying.

On top of all this came the Murray Goulburn announcement that it had overspent this year and will have to claw money back from farmers for the next three years. None of it makes sense. Many farmers had hailed the MG plan as visionary, something that would transform our industry to create sustainable prosperity. But the loss of so much money in so little time is incomprehensible.

It’s a blow from left field that will leave barely a Victorian dairy farmer untouched. MG is the pacemaker for the entire industry. Processing half our state’s milk and 38% of Australia’s, it sets the benchmark for the southern farmgate milk price. When it falters, we all do.

In the face of all this, the message from last night’s speaker was simple: seek help, watch out for your neighbours and don’t lose sight of the vision for your farm. Good advice.

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Filed under Farm, Murray Goulburn

What MG’s announcement means in plain English

This is a post written purely for my fellow dairy farmers in light of the MG announcement today. After speaking with the people at MG, this is what I have learnt:

Why the price must fall
MG opened at $5.60/kgMS. Its lower than expected sales, the rising Australian dollar and the fall in the value of its larger than normal (which are routinely high anyway) inventories mean it has a shortfall of between $170 and $200 million. This means the price paid to farmers must fall.

How far the price must fall
Depending on how the last two months of this financial year pan out in terms of sales and exchange rates, Murray Goulburn will finish the season between $4.75 and $5.00.

But the price can’t fall that far in two months…
To do that, it would need to pay farmers virtually nothing for milk supplied in May and June. Some rough numbers sent to me by an industry analyst puts those figures at about 4.75 cents per litre. Clearly, that would be disastrous for many suppliers. It would also cripple MG because farmers would have little choice but to leave MG and supply any other processor that would take their milk.

…so, here’s what will happen
MG will pay farmers for milk supplied in May and June as if the price was $5.47 all along. In other words, the price for May milk will be $3.38 for fat and $7.42 for protein. For June’s milk, it will be $3.45 for fat and $7.59 for protein.

If MG’s sales and the currency fall in line with the worst case scenario and MG really should have paid farmers just $4.75 for the year, it will mean there is a shortfall of 47 cents for every kilogram of fat and $1.03 for every kilogram of protein.

This money will be deducted from the price paid to farmers evenly over the next three years. It means the milk price will be lower for each of the next three years than it otherwise would have been by about 15 cents for fat and 34 cents for protein.

But it’s NOT a debt carried by individual farmers
The money to be deducted over the next three years will simply come out of the milk price. If a farmer leaves MG and moves to a different supplier during the next three years, no debt will follow that farmer. If a farmer joins MG in the next three years, that farmer will have a lower milk price than they would have received in a normal year.

MG will not apply a loan against an individual supplier and will not respectively apply terms and conditions to suppliers.

About this post and me:
I am a former MG supplier who still holds some MG shares and currently supply Fonterra Australia. This post is not designed to do anything other than clarify confusion surrounding the situation because I am fearful for the mental health of my fellow farmers. This post has been checked by MG for accuracy.

 

 

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Filed under Community, Farm, Murray Goulburn

The calm before the perfect storm for one nervous dairy farmer

A perfect storm is brewing. Collapsing global dairy markets, a fodder shortage, and a strengthening El Nino.

Milk price uncertainty

Just across the ditch, NZ dairy farmers are drowning in despair after the dominant Kiwi milk processor, Fonterra, this week cut its farmgate price forecast to $3.85 per kilogram of milk solids, down from $5.25. The announcement followed hot on the heels of yet another set of disastrous Global Dairy Trade auction figures.

The Global Dairy Trade auction results of 4 August

The Global Dairy Trade auction results of 4 August

 

Most NZ milk is sold via the Global Dairy Trade auction and an article from Stuff.co.nz neatly explains the situation for NZ dairy farmers:

DairyNZ chief executive Tim Mackle said the news was grim, but not unexpected and many farmers would now be in survival mode.

The drop in milk price would result in $2.5 billion dropping out of rural economies, Mackle said. 

“Milk price is now half what it was in 2013/14. We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses,” Mackle said. 

“For the average farmer you are looking at covering a business loss of $260,000 to 280,000 this season but for many it will be a lot more than that.”

It would have a big impact on rural servicing businesses. Drops like this had a cascading effect through rural economies, Mackle said.

DairyNZ analysis showed the average farmer now needed a milk price of $5.40 to break even.

Just a few months ago, dairy industry analysts were forecasting a return to better international commodity prices at the end of this year but opinions seem to be changing, suggesting that there will be not one but two years of pain ahead.

What does this mean for Australian dairy farmers like me? Well, the largest processor of Australian milk, Murray Goulburn, forecast a closing (or end of year) price to farmers of $6.05kg of milk solids just before its partial ASX float. It hasn’t yet revised that closing price but its biggest competitor, Fonterra Australia, says it will announce the results of its own July price review this week.

The big difference between NZ dairy and Australian dairy is this: NZ exports 95% of the milk it produces, while Australia exports just 38% of its milk.  The Australian domestic milk market is much more stable than international commodity prices, so we don’t get the dramatic highs and lows of Kiwi farmgate milk prices. At least, that’s how it’s meant to work.

I’m certainly relieved to have locked in a bottom to the price we are paid for 70% of the farm’s milk. We now supply Fonterra Australia, which accepted our bid to join “The Range” risk management program that sees our price bob about between an upper and lower pair of prices. If the milk price does collapse, we’ll go backwards at a rate of knots but will still be farming next year.

El Nino: more feed needed and less to go round

Sadly, I can’t lock in even a portion of our rainfall. With a strengthening El Nino predicted to persist into next year, the Bureau of Meteorology calculates just a 30 to 35 per cent chance of at least average rainfall for our region from August to October. That means we’re likely to have less surplus Spring grass to conserve as hay and silage. It’s a double whammy because the El Nino also suggests we’re likely to need more fodder than normal over summer and autumn.

To top it off, hay prices are already unaffordable and quality hay is scarce.

The perfect storm

In other words, we’ll need more conserved feed than normal with less than usual to make ourselves and, very likely, starved of cash flow to pay for extra loads from far flung places.

A milk maid’s survival plan

So, what do we do? We’ve already begun adapting by selling off our less productive cows to limit our demand for feed. Thankfully, cattle prices are high right now and the sale of those 13 cows will feed the rest of the herd for three weeks. I’m also spending more time hunched in front of the computer looking for any opportunities to cut costs and keeping an eagle eye on our budget.

A brainstorming and planning session with agronomist, Scott Travers, has helped us plan for extra on-farm cropping with brassicas over summer.

Cows grazing forage rape

The cows will be grazing more brassicas this summer

We’ll be planting several types of brassicas (which belong to the same family as broccoli and cabbage) that mature at different times in a bid to have leafy greens available for the cows throughout summer. The big risk, however, is that the weather will be too tough, even for summer crops.

To deal with this, we are planning another infrastructure project inside the bounds of our new kangaroo fence. Water from our freshwater dam will be mixed with effluent from the dairy yard and pumped over the crop paddocks. It will help the brassicas survive a dry sprummer and summer then help re-establish pasture during an unreliable autumn.

This modest irrigation system will cost money but it will slash the cost of spreading the effluent and should pay for itself quite quickly during a year when visits from the hay truck could spell the difference between make or break.

A perfect storm is brewing and, here on the farm, we are trimming our sails to suit.

 

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Filed under Climate, Farm