How do I know buying branded milk will mean better prices for farmers?

“I am concerned about the welfare of Dairy farmers and the ‘$2 dollar’ milk available at supermarkets. I just want to know which milk benefits the farmers the most and not overseas owned companies who are not passing on the money to farmers. I have been paying the extra buying Dairy Farmers, only to find out that they are owned by a Japanese company!…We are happy to pay extra if we know a fair proportion of the money is going to farmers.”

A fellow called Peter sent me this message in the wee hours and raised a really good point – one that was echoed by CC & Ruby’s question the other day, so I’ve decided to address this thorny issue head-on.

Almost all dairy farmers send our milk to large processing companies because Australia’s stringent dairy food safety laws make it very expensive and difficult to supply consumers directly.

Our farm supplies the Murray Goulburn Cooperative, which is owned purely by the farmers who supply it. If you buy Murray Goulburn’s Devondale dairy foods, you know 100% of the profits are being returned to dairy farmers. The wonderful thing about MG is that because it’s owned by farmers for farmers and processes around 35% of Australia’s milk, it tends to set a farmgate price benchmark for the other processors.

On the other hand, it doesn’t pick up milk from right around Australia, concentrating on the biggest milk-producing state of Victoria. If you’re a dairy farmer in northern NSW, for example, you don’t have the option of supplying the Co-op and are more likely to supply a privately-owned processor. These privately-owned processors sell dairy foods under their own brand names or package homebrand milk under contract to the supermarkets.

When Coles and Woolies embarked on their milk war, it hit the processors hard pretty much straight away because brand name milk sales fell.

The Coles spin doctors said it wouldn’t affect farmers because they deal with the processors, not the farmers. This defies common sense. If a multinational supermarket controlling a huge chunk of retail sales decides to cut its prices below a sustainable level (Coles denies this too but Woolies has gone on record saying $1 per litre is not sustainable), putting its multinational food processor supplier to in turn lower its own costs, how do you expect that processor to respond? By sourcing the raw milk more cheaply of course! And guess what? It buys from small family businesses (98% of Australian dairy farms are family owned and operated) who have the least bargaining power of all.

No, I can’t guarantee that if Peter buys Dairy Farmer branded milk rather than private label, farmers will be better off. On the other hand, it is guaranteed that if Peter buys unsustainably priced milk, someone else will have to pay. That will almost certainly be a farmer and her family in the short term. In the medium term, it will be her cows and the environment and, over the longer term, it will be milk drinkers because there’s no such thing as a free lunch.

Milk war myths

This story from the ABC News on the impact of the price war suggests exports will allow dairy farmers to make a living.

It says China and South-East Asia, particularly India, will provide “huge opportunities” for Australian dairy. True, the February Dairy 2012 Situation and Outlook shows China’s whole milk powder imports have skyrocketed (see page 10).

It’s pretty misleading of the ABC news report to suggest, however, that exports will be our salvation.

First, not all Australian milk can be exported. Queensland, for example, does not have manufacturing facilities capable of producing product for export and it looks like there won’t be enough dairy farmers left there to support a factory in any case. Almost all of their milk is sold as fresh milk on Brisbane’s retail shelves.

Second, Victorian dairy farmers have long exported around half our milk; only 9 per cent of our milk ends up in cartons on the retail shelf and the ABC News report suggests we are doing better than those who supply the domestic market. The prices farmers are paid for a litre of milk in different Australian states tell a very different story. In 2008/09, Victorian farmers were paid 39 cents per litre while Queenslanders received 57 cents. In 2009/10, it was 34 cents versus 56 cents in the Queenslanders’ favour.

I am not suggesting the Queenslanders have been living it up but these numbers paint a far less rosy picture when it comes to exports, don’t you think?

The ABC also says raw milk prices have doubled in the last five years. Maybe so, but costs seem to have pretty much kept pace and the surging Australian dollar has meant that the average Australian dairy farmer has missed out on a fat pay cheque. Most of the farmers I know are struggling.

As Julian Cribb wrote in his SMH article “Huge shift in what we eat” today:

“If cities and the resources sector continue to take water and land from farmers, and supermarkets continue to punish them economically, much of our future food may be grown in factories, rather than on farms.”

Is that what Australians want?

Big supermarkets, little farmers: the UK story

In the wake of the milk price war here in Australia, this story about the influence of supermarkets in the UK (click the underlined link) is a little unnerving. How can we prevent this happening here? Victorian farmers are less vulnerable to predatory tactics by big retailers for two reasons:

1. Much of our milk is exported; and

2. Victorian processing is dominated by a powerful 100% farmer-owned co-operative.

Having said that, we do share some concerns regarding the profitability of milk pricing.

Dairy Australia’s Australian Dairy Industry In Focus 2010 report says:

“At an average of approximately US$29 per 100kg of milk last year, Australian dairy farmers generally receive among the lowest prices compared to many major producing countries and so must operate highly cost-efficient production systems.  This is regularly borne out by international comparisons; where Australian farms consistently have costs of production in the lower cost category of all farms in such surveys. The fact that around half of Australia’s milk production has been exported over the last decade reflects this high level of competitiveness.

However, this has become increasingly difficult in recent years. Farm cost structures have increased in response to the need to adapt to drier conditions where rain fed pastures are regularly contributing a lower proportion of the total feed base available to the herd. Consequently, Australia’s share of international trade has trended lower as local milk production has contracted over the past decade.” (p. 10)

Why do farmers accept low milk prices?

During the recent publicity surrounding the milk price wars, I noticed a lot of comments following newspaper stories asking why dairy farmers continued to supply milk if it wasn’t financially rewarding. Simple question, complex answer.

Then yesterday, I went to a dairy farmer forum where respected farm consultant John Mulvany said, “A milk price of $5.00 to $5.50 per kilogram of milk solids is required for the foundation business of the industry (owner-operator farms) to receive an adequate return on the assets plus capital growth. This assumes ‘best practice’ management in the top 25 per cent.”

Also, that: “A large corporate investor will require a milk price of $5.50 to $6.00 per kilogram of milk solids to generate a return to shareholders in addition to growth.”

Then he presented a table that showed milk prices had only reached $5.00 per kilogram of milk solids twice since 1994/95.

If we accept John’s numbers, they raise two really important questions: why do dairy farmers keep going and why should family-run farms accept lower profits than corporate investors would? John’s always said that dairy farmers are optimistic by nature and I guess that’s part of the answer. But, if you can make a better return on the share market without working seven days per week, why wouldn’t you?

Every farmer will have a different answer to this question but I think it’s because we’re pretty much locked in, whether that’s emotionally or financially or a bit of both.

The financial ties that bind us are debt and the cost of exiting (and re-entering) milk production. Unlike broadacre farmers, we cannot readily shift our production focus in line with commodity price movements. We have a herd of cows that cannot be replaced overnight or “redeployed” and costly infrastructure that must be used to service debt. Nor can we readily wind back production. Cows must be well fed, no matter what, and that costs a lot of money. So when milk prices fall below profitable levels, we don’t withdraw supply immediately – instead, we draw on the buffer that equity in our land provides. Sadly, that’s just not good enough for many farmers and we are seeing a slow but constant attrition in farm and cow numbers as the decades roll on.

The emotional ties are harder to explain. After my father died, my accountant’s advice was to sell and invest the money elsewhere. “You’ve got other skills. Why work so hard when you could buy a nice little property out of town and be comfortable?” he reasoned. Sound advice but I wanted desperately to farm because, as corny as it sounds, I love the land, the animals, the life skills it will teach my children and the wind in my face. Something no corporate investor would value.