Why many farmers are unhappy about great prices

A journalist rang me the other day with a really simple question: was I happy about Fonterra’s opening price of $5.85kgMS, the equivalent of about 45 cents per litre?

Simple question. Answering it is not so simple.

Historically, it’s a really good price
Honestly, I can’t remember an opening price this high. For those of you not familiar with the intricacies of our milk pricing system, processors announce an “opening price” at the start of each financial year, which is what they consider a conservative figure that should only increase as the year progresses.

Freshagenda’s chart of this year’s opening prices shows it’s not just Fonterra offering a good start to the year.

ProcessorPrices

Source: Freshagenda

Compare those opening prices for 18/19 with the closing prices over the years in Freshagenda’s chart below. Pretty darn good.

FreshagendaCdtyFgate.jpg

Source: Freshagenda

But farmers need to make up lost ground
Dairy Australia’s revelation that one in five dairy farmers is planning to quit discussed in my last post helps to explain why farmers are not celebrating. We have a lot of ground to make up.

Last year’s Dairy Industry Monitor reported that the Victorian farmers in the project (generally larger and better resourced than the average farm) had a return on assets of just 2.5% in 16/17, following on from 0.6% in 15/16.

Many farmers have higher debt loadings than ever before.

And the big dry is sending the cost of feeding cows skyrocketing
Even with a great price this year, there’s a real likelihood we’re going to struggle again.

The pellets we feed the cows during milking have surged to an eye-watering $400 per tonne while the stream of B-doubles heading to drought-affected NSW is making reasonably-priced hay suitable for milkers impossible to find.

Raiinfall2018toJune.jpg

Bureau of Meteorology: Precipitation year to date

All this while (with the exception of the lucky devils on the SW coast) it’s been horribly dry on farm, with the increasing prospect of another El Nino on the way for Spring.

To top it off, expectations were high
Analysts have been rather bullish, including Freshagenda, which as recently as June 6, wrote:

“Our forecast range for the 2018/19 average southern Australia farmgate milk price has improved to $6.10 to $6.50kgMS with a significant lift in the underlying commodity milk value (CMV) since our April update, which we now see in the range of $5.60 to $6.00kgMS.”
Freshagenda

It’s not just been farmers blindly following the opinions of analysts, either. On May 23, Fonterra increased its forecast closing price for Kiwi farmers to NZ$7.00.

Add this to the hype surrounding competition for milk supply from processors aggressively investing in stainless steel and expectations were sky-high. And the opening prices fell short.

“All I want is a market driven price, not a processor driven price,” one prominent farmer told me after Fonterra’s opening price announcement.

That’s where that second chart from Freshagenda comes in again. Are we getting a fair go? Is all that value adding reaping dividends?

FreshagendaCdtyFgate

So, where to from here? For the final word on all the intricacies of milk pricing, I’ll leave you with this video from the Freshagenda team.

 

Bad moon rising?

NoEvil

Hear no evil Pic credit: Apartline.de

It’s no secret, the last couple of years on the farm have been bloody tough. The 2015 drought cut deep here, only to be followed by the dairy debacle of 2016. Now the historic agreement to sell Australia’s last big co-op has us in unchartered waters.

We just need a bit of a breather to recover and keep our heads above water.

During the last two years, we’ve closed down spending as much as possible. We haven’t sacrificed feeding cows or looking after our soils but, beyond that, if it could wait, it did.

It means we have some maintenance to catch up on, especially the farm laneways that the cows use to get to and from their paddocks. Maintaining tracks is expensive and we have the equivalent of a very good year’s profit to make up as well as new debts to repay. It hasn’t been a very good year yet.

So, you can imagine how it felt when I heard Freshagenda’s revised forecast for next financial year, which basically said milk prices are headed down again. Not good. Demoralised and, honestly, rather cranky.

But is there really anything to worry about?

After all, a year (or even half of one) is a long time in dairy commodity pricing. Freshagenda notes there are plenty of variables, like exchange rates, the weather in New Zealand and even the Russian ban on dairy products, that can all still make a big difference to the outcome.

This farmer’s left wondering whether it’s safe to let the moths out of the cheque book for that much needed maintenance.

If I spend too much, there might not be enough left in the kitty for another tight year. If I keep the hatches battened down, the tracks will cost a fortune to bring back to square one in another two years’ time.

While all of that is a big deal for me, others argue there’s much more at stake. There’s the psychological impact on farmers for a start.

If social media is any guide, plenty of farmers have had a gutful of industry turmoil and tight times. Some of them will curl up into a little ball, some will grin and bear it, while others will simply walk away.

I’ve heard farmers suggest it’s irresponsible to publish something like that when the industry is on a knife edge. Others worry that the processors will use commentary like this to jawbone the farmgate milk price down.

Either way, they argue, it could help to dampen milk production for another year, reducing Australia’s ability to be an efficient, reliable exporter.

With all this in mind, it’s not surprising Freshagenda has copped a bit of flack. Its founding couple, Jo Bills and Steve Spencer, shouldn’t be surprised. Dairy Australia famously stopped issuing similar forecasts after similar blowback.

Asked for comment by Milk Maid Marian, DA explained its approach this way:

“Dairy Australia exists to provide our farmer stakeholders with the most accurate and up to date information so they can make informed decisions around their business practices.”

“Our role in this space is to provide an unbiased view on current market trends and drivers, through publications like the Situation and Outlook report.

“Milk pricing varies greatly from processor to processor and farm business to farm business. Our approach is to provide the information and insights that farmers can apply to their own context, and draw much more meaningful conclusions than an industry ‘average’ price.

“DA moved away from providing an exact prediction on milk pricing for a number of reasons, these include:

–          The risk of eroding competition for milk and unduly influencing market decisions made by processors.

–          The industry is now in an environment where there is significant variation in processor prices meaning that no price will ever apply to everyone.  This has not always been the case.

–          Milk pricing is extremely complex and there are too many variables for DA to confidently predict a single/universal price.”

It provides all the ingredients for a powerful argument against the proposed $2 million milk price index that seems to have gone very quiet.

On the other hand, Freshagenda is not the only one pointing to a softening in global dairy commodity prices. A quick Googling will reveal analysts from around the world coming to the same conclusion that this cycle is already turning. The processors all know it and can point to any amount of evidence for a lower new season’s price if they want.

Freshagenda has simply put that into context for Australians.

Yes, they’ve also put a number on it, or “numbers” I should say as they’ve actually offered a fairly broad price range that comes with the expected caveats regarding changing conditions.

When the dairy debacle of 2016 unfolded, it caught farmers by surprise. Many asked why they weren’t warned. We can’t have it both ways.

The question is: would you want to know if there’s a bad moon rising? At spreadsheet-time, yes, I would.

 

 

The trouble with the MG and “Gary the Great” sideshow

Murray Goulburn’s colourful managing director, Gary Helou, is not universally loved and he’s become a bit of a target over the last year or so.

Some dairy farmers are nervous about his proposed transformation of the much-loved 100% farmer-owned co-operative into a “farmer-controlled” hybrid or are alienated by his brash, bullish style.

Some of his competitors hate him for driving up the price of raw milk (which is, of course, his mandate) and they also deeply resent this Devondale ad:

Given that Gary himself is a suit-wearing Sydney-sider who flies in weekly to MG’s Melbourne headquarters where a large corporate Mercedes Benz awaits him in the basement, he could be accused of a little hypocrisy.

So the acerbic commentary from the Financial Review directed at the so-called “Gary the Great” generates plenty of sniggers, including yesterday’s piece, which was republished outside the pay wall in The Land.

The article reveals a series of sales figures that suggest sales of MG’s Devondale branded products have tanked disastrously, followed by an observation that:

“When Helou locked Murray Goulburn into a decade of skinny margins supplying Coles with its $1 milk, his rationale was that it would lead to growth in his branded products and thus higher margins for his farmers.”

“But the growth has not transpired, which means the margins are on borrowed time – especially as Helou juggles significant debt covenants, tries to raise $500 million in new capital and wears major cost blowouts getting his new processing facilities online.”

Are the figures fair? I asked dairy industry analyst, Steve Spencer of Freshagenda, about the data quoted in the story.

“The figures are sourced from retail scan sales data reports, which are expensive and normally only purchased by some of the larger supermarket suppliers,” Steve explained.

“The figures supplied to the Financial Review are current and specific and certainly not publicly available, so the data was most likely leaked by a competitor. It’s unlikely that any of the figures were inaccurate but could have been used selectively to paint a certain picture or the columnist’s agenda.”

But if the article is fair, it’s worrying news for MG farmer shareholders. I invited MG’s Robert Poole to answer a series of questions to set the record straight:

  • Are the figures quoted in the Financial Review a fair representation of Devondale’s sales performance?
  • To quote from the Fin Review: “According to Murray Goulburn, a big upside of the Coles deal was that it would ‘drive significant growth in sales for [its] core Devondale milk and cheese brands in the years ahead’”. To what degree does the profitability of the Melbourne and Sydney plants rely on the sale of Devondale products?
  • How do actual Devondale sales figures compare to the budgets set when the plants were planned?
  • Does Murray Goulburn continue to enjoy “preferred supplier status” with Woolworths?
  • How have the Devondale sales at Woolworths compare with those at Coles?
  • Does MG plan to review its product mix or marketing strategy in light of Devondale’s sales performance?
  • How does Devondale’s sales performance compare with other areas of MG’s business?

Robert pointed me to a media release on MG’s website released later in the day. Unfortunately, it does not answer the questions. Instead, it plays the man rather than the ball, providing any genuinely concerned farmer shareholder little comfort.

Are the criticisms of Gary Helou and MG simply sour grapes or dirty competitive tactics? I hope so but it seems only time will tell. This is the tragedy of the “Gary the Great” sideshow: it all descends into an ugly bun-fight in which, ultimately, the farmer is the loser.

EDIT: I HAVE WOKEN TO AN EMAIL FROM ROBERT POOLE INDICATING THAT HE WILL BE PLEASED TO ANSWER THE QUESTIONS TODAY (20/02/2015).