Tag Archives: Fonterra

Spreadsheets for brekky, lunch and dinner again

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.

 

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Filed under Farm, Fonterra, milk price, Murray Goulburn

Bonlac on keeping Fonterra honest

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

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Explainer: What the ACCC means by…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These include:

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

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

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

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

Thanks again to the ACCC for this explainer.

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

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.

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Could this have been the wake-up call Aussie dairy needed?

bulllores

When the two biggest processors of Australia’s milk, Murray Goulburn and Fonterra, squandered the goodwill of farmers earlier this year, there was a sense they could do as they wished. They made the rules and broke them, too.

One executive told me there was no risk of supply loss following the drastic price cuts, saying, “After all, where would they (farmer suppliers) go?”.

How things have changed. Both the big processors have watched milk supply evaporate and, with the dawning realisation that something had to be done to avoid the death spiral outlined here and detailed by MG’s own advisors, Grant Samuel, both have responded.

After suspending the MSSP while reducing the forecast close by about the same amount a week earlier, MG made amends with a step-up the day before its AGM.

In his AGM address, MG chairman Phil Tracy acknowledged farmers’ pain and offered an apology of sorts.

“While as a Board, we did what we could with the information that we had at the time, we know that the outcomes of that period have been devastating for suppliers and for that we are deeply sorry.” – Phil Tracy, MG Chairman

Like MG, Fonterra Australia has announced it is reviewing the way farmers are paid for milk in order to avoid a repeat of the May debacle. Farmers whose milk production peaked in May and June were initially singled out for a thumping, causing many to sell off cows, only for Fonterra to back-track days later and spread the pain of its price cut more evenly among suppliers.

Despite poaching 200 million litres of milk from MG, Fonterra Australia’s supply remained fragile, due to the tricky season, the low milk price and the damage done in May to autumn-calving regions. Hours after MG announced its step-up, Fonterra came out with its own, much larger (and incredibly welcome), price increase.

The size of the step-up challenged the oft-held belief that Fonterra only pays the price it needs to in order to prevent supply loss to MG. With profitability restored, perhaps Fonterra has indeed extended its co-operative spirit to this side of the Tasman. On the other hand, Fonterra’s announcement provided a hint that perhaps it was essential to fill under-utilised stainless steel:

“The last six months have been challenging for all of you, and we know that spring is critical to optimise production.” – Matt Watt, Fonterra Australia

No matter what the motivation, it’s enormously heartening to see the two biggest processors act and act so positively. Maybe this is the wake-up call Australian dairy had to have. It might even help to rekindle the traditional sense of partnership between farmer and factory that had been on the wane for so long.

What’s certain is that farmers – and their supply of milk – can no longer be taken for granted. Loyalties have been stretched or broken and farmers who have now experienced how easy and rewarding it can be to shift their supply may well be tempted to do so again.

In return, expect processors to lock in a broader range of “desirable” supply with more special deals and contracts. Be careful what you sign. I’m tipping the unfair contract law that came into force quietly this weekend will be more important for dairy farmers than legislators could have imagined.

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Why I welcomed Four Corners to our dairy

I’m looking forward to watching Four Corners tonight with all the enthusiasm of a patient awaiting the lancing of a boil. Will it be fun? No. Will it be good for me? I guess so.

It’s almost four months since Murray Goulburn called a trading halt, followed by the infamous “clawbacks” of both MG and Fonterra that rocked the dairy community.

In a state of confusion and panic, farmers called out for help. Ordinary Australians did what they could, ditching cheap unbranded milk in a show of solidarity with farmers that continues to hearten.

Four months on, panic has given way to a sense of aimlessness and loss. Helou and Tracy’s vision had offered a shining path towards security and prosperity but now Gary the Great has vanished and nobody has filled the role of white knight. Leadership is lacking at the time we need it most.

We farmers have a fleeting once-in-a-lifetime chance to fix things. Politicians want to know how they can help but we don’t seem to be able to articulate a coherent answer other than to cry for something, anything, to dull the pain.

Meanwhile, there’s a puerile optimism amongst some elites, reckoning that every casualty improves the prospects of the survivors. It’s a sentiment that disgusts me and simply doesn’t stack up.

Floods of milk generated by the powerhouses of Europe, NZ and the USA sink or float the export market – not the farm next door. We’ve already lost thousands of Aussie dairy farmers since deregulation. More of the same won’t solve our problems.

The first step towards a cure is to work out exactly what ails us and, at the moment, all we’re doing is bandaiding a festering sore. If there’s anybody who can sniff out and lance a boil, it’s Four Corners.

That’s why we welcomed Deb Whitmont and her team to our farm. Sure, I’ll be cringing on the couch but Four Corners’ Milked Dry might just reveal the bitter pill we need to swallow.

 

 

 

 

 

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Theo was too right…

keep-calm-let-s-cut-the-cake-and-eat-it

Here’s an unpalatable truth: when Fonterra head Theo Spierings said the milk price was unsustainable back in August last year, he was right. He also said the way milk prices are set needs to change. Correct again. Then he started talking about the need for, “a good debate with farmers … about how are we going to share – how are we going to cut the cake.”.  That’s what really matters right now.

At the time, Fonterra Australia head, Judith Swales responded to Milk Maid Marian’s request to clarify what Theo had meant by “sharing the cake” and said:

“We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.”

It’s hard to disagree with that sentiment. The problem is that we’ve learnt one more lesson in the last couple of months: if you’re stranded on a desert island with a hungry gorilla and a small cake, you’re in very big trouble indeed.

This post is not intended as an attack on Fonterra. After all, things are no better at Murray Goulburn. The reality is when there are thousands of small businesses selling a highly perishable product to a handful of large corporates and multinationals, the playing field is anything but even.

Just 12 months before Theo was talking about cake, the majority owner of Warrnambool Cheese and Butter, Lino Saputo, was quoted as wondering:

“…what will it take for the dairy farmers to be optimistic about the dairy industry and investing in their farms and what kinds of programs can we put in place that will assist them.”

At the time, I summarised my answer as “reliable profitability”. I posted the charts below showing just how far dairy farmers’ terms of trade had slipped and the wild fluctuations in profitability.

DairyTermsTrade

DairyBusinessProfit

“Productivity in the Australian Dairy Sector”, ABARES, September 2014

There’s one more factor I missed: confidence.

Writing for the latest edition of The Australian Dairyfarmer magazine, Dairy Australia managing director Ian Halliday notes that :

“In 2015, confidence among dairy farmers was at 75 per cent. In February this year, confidence had fallen to 65 per cent reflecting the dry seasonal conditions and also what milk prices were looking like for 2016-17 when considering the global price outlook.”

“Following the sudden milk price cuts in late April, which affected up to 65 per cent of all dairy farmers, we conducted another survey to get an understanding of changes in farmer confidence. This sample, although smaller, indicated confidence nationally had droppedd to 45 per cent.”

I’m willing to bet that confidence has fallen to historic lows after the Murray Goulburn opening price announcement.

What’s needed now is:

  • Transparency
  • Risk management strategies to deal with volatility
  • A more level playing field that provides farmers with real choices when dealing with processors.

These are the ingredients of reliable profitability and, without it, we’ll be continually wrestling the gorillas for the crumbs of a perpetually shrinking cake.

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