Murray Goulburn

The change has only just begun: Rabo

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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

RaboProcShare

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.

Playing games with our lives

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GAMP

GAMP: Before MG in Gippsland

With just a couple of exceptions, the processors seem to have learned just one thing from the last year of chaos: loyalty is now a luxury item.

The jumble of opening prices, incentives, secret deals and long-term contracts with short-term prices shows that, by and large, we are in an era where it’s every man, woman and child for themselves.

It wasn’t always this way. Until recently, you could not buy loyalty.

Even though there were more lucrative options, most Australian dairy farmers chose to supply the last big co-op, Murray Goulburn. For generation after generation, we knew in our hearts that only a strong co-op, which put farmers first, should set the pace for the farmgate milk price.

Since the April/May debacle when farm gate milk prices crashed to disastrous levels, farmer loyalty has become gossamer thin. The main theme from Dairy Australia’s farmer survey reported in its June Situation & Outlook was that “Trust in processors has taken a knock”. Err, yes, just a little.

“In the past 12 months, 11% of respondents changed the processor they supply and a further 17% would like to change supplier – 9% are considering it and 8% would like to change but are unable to.”
“Farms with herds greater than 700 cows were most likely to have changed processor or to be considering a change.
“In general however, most farmers tend to be loyal to their processors historically and 61% have remained with one processor for the past 10 years.
“Milk price is predictably the primary reason for changing or considering changing processor, however 21% also expressed concerns with processor management and the treatment of farmers, 12% were concerned about the ‘clawback’ and 8% lack trust in their company and feel they have not been honest.”
– p. 5, Dairy Australia Situation & Outlook, June 2017

DA’s survey was conducted in February and March – well before MG opened first, very early. Everyone was watching. For years now, MG has set the benchmark milk price, pushing it as high as it could go in the spirit of a farmer-owned co-op.

This time was different.

MG’s price of $4.70 per kg of milk solids (about 36 cents per litre) was simply far, far too low. MG’s competitors needed milk and were willing to pay not just a little more but a lot more and farmers have been scrambling for the life boats in a bid to survive a third tough year in a row.

Meanwhile, other processors have been offering “loyalty” bonuses or locking farmers into long-term supply contracts without the long-term prices to match. It all flies in the face of the honour, transparency and simplicity the processors are apparently set to pledge under the Code of Conduct.

Today, MG has performed a minor miracle, lifting its opening price from the miserable $4.70 to $5.20 before the season has even begun. This 11 per cent increase puts the MG price close to breakeven for many of its suppliers.

It’s fantastic news.

Farming families across the country will breathe a little easier tonight and, for that, I am very grateful.

But, like the “forgiveness” of the MSSP, like Fonterra’s 40 cent payment, this about-face leaves me wondering why it was necessary to inflict so much pain and hardship on farmers in the first place.

Bitterness is never a becoming attribute but, with processors pulling one stunt after another seemingly without regard for the farmers stretched to their financial, physical and mental limits, it’s getting harder and harder to maintain the faith.

Mervis mans up and makes MG a leader again

/ dairymilkmaid / 9 Comments

Apology

The new CEO of Murray Goulburn, Ari Mervis, has done something small but truly fabulous: he’s apologised for stuffing up.

On Tuesday, Mr Mervis told listeners to ABC Radio’s Country Hour program that MG’s opening price of $4.70 was “…well above the cost of production” in an interview with Warwick Long. I wasn’t sure if he was out of touch or trying to spin a pig’s ear into a silk purse. Either way, it wasn’t a good look for the head of Australia’s largest milk processor.

In this apology totally devoid of spin, Mr Mervis cuts to the chase and recognises the difficulty facing its farmer suppliers.

While MG’s opening will not make it a price leader, Mr Mervis’ letter to suppliers signals that, after a couple of years in the wilderness, the co-op is back on the path of becoming a values leader in Australian dairy.

Spreadsheets for brekky, lunch and dinner again

/ dairymilkmaid / 2 Comments

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.

 

Fonterra answers 11 difficult questions about the BSC and that 40 cents

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Email
All eyes turned to Fonterra Australia after Murray Goulburn (MG) scrapped its clawback just a couple of weeks ago. Fonterra has a legal agreement with supplier group, Bonlac, to match or better the dominant player’s price and MG’s “forgiveness” of the debt effectively raised the 15/16 payment to farmers.

It’s fair to say Fonterra’s response on Wednesday (see supplier email above) sparked outrage in many quarters and raised a host of fresh questions. I put some of those questions to Fonterra Australia’s milk supply manager, Matt Watt, and appreciate his answers below. Thank you, Matt.

MMM: Considering MG’s forgiveness of debt, what’s the 15/16 benchmark return?

MW: The benchmark price for 15/16 remains $4.80. The MSSP didn’t form part of that season’s milk price as it was a pre-payment on future year’s milk price. In other words MG was taking milk payments from future years to fund the gap of their step down. While MG has forgiven the clawback the debt now sits on MG’s balance sheet.

Unlike MG’s debt package, our support loan was optional and like a bank loan. Around 40 per cent of our suppliers took out the loan, and there was significant variation in the amount borrowed among the 40 per cent. To only forgive the loan would be inequitable for our total supply base.

MMM: What role did the Bonlac agreement play in Fonterra’s announcement of an extra 40 cents/kgMS?
MW: The spirit of the agreement played a role. However, the actual benchmark milk price was $4.80 and we delivered above that at $5.13.

MMM: Why are payments being made next season rather than now?
MW: Current suppliers have the option to take the 40c payment as an advance this season.  Nevertheless, the actual payments are calculated using next season’s production to ensure suppliers can get the full advantage of this additional payment and are not limited it to this season’s production (which may have been affected by the 15/16 price reduction).

MMM: Doesn’t the Bonlac agreement mean that suppliers can expect Fonterra to match or better MG’s price? Why has Fonterra not met that obligation for all suppliers impacted by the 40 cent shortfall in 15/16 and how many affected farmers are being excluded?

MW: The Bonlac Agreement only relates to the benchmark price and, as explained earlier, the MSSP payment does not relate to the benchmark price. In the 2015/2016 season, Fonterra’s final farmgate milk price was $5.13 vs MG’s final farmgate milk price of $4.80. Also, this current season Fonterra is paying $5.20 v MG’s $4.95.

Although not legally obliged, we are making the additional 40c payment to our suppliers as it’s the right thing to do.

All Fonterra farmers affected by the 15/16 price drop are being offered the opportunity to receive this additional payment, including existing, retired and returning farmers. We’re in the process of contacting all the farmers that have left us.

MMM: Under the proposed voluntary “Code of Conduct “, the 40 cents/kgMS payment that is designed to compensate farmers for the 15/16 season shortfall could be considered a breach. Will Fonterra sign and observe the terms of the Code?

MW: I don’t want to comment on the code implications of our announcement as it is in draft.  However, in our view, there would be no breach as this payment relates to the 17/18 season, not the 15/16 season.

MMM: Why will farmers who were not suppliers during 15/16 receive the 40 cent payment?
MW: Our additional payment is on next season milk. Our first priority is existing and returning farmers. With improved farm margins on the back of this announcement, we are hopeful that the vast majority of our milk needs will be covered by growth from our existing suppliers and returning farmers. Once we understand our milk for next year, we will then consider new supply where it will add value to our whole milk pool and contribute to our ability to pay a better milk price.

MMM: If eligible farmers apply for the “advance”, will they be free to spend that money as they see fit? If not, why not?
MW: Suppliers who do not have a support loan are free to spend the money as they see fit. Suppliers can manage their cashflow by electing to take the additional payment as a monthly payment.

MMM: Under the Bonlac agreement, how soon must Fonterra make up any shortfall and who is eligible?
MW: Although not legally obliged, we are making this additional payment as we think it’s the right thing to do and we have worked with BSC in relation to this proposal. We’re obliged to meet the price at the end of each season, and have done so since the agreement has been in place. For five of the last seven seasons, we’ve paid a farmgate milk price exceeding MG’s.

MMM: Will Fonterra commit to matching the market price in 17/18?
MW: Fonterra will be market competitive in 2017/18 – our asset footprint, product mix and the current global market means we can be confident of our ability to be market competitive.

MMM: Why is the Bonlac agreement not open to scrutiny by farmers who supply Fonterra under its terms?
MW: It is a commercial in confidence agreement; however a general description of the BSC Agreement is set out in our Milk Supply Handbook.

MMM: Apart from monetary incentives, what will Fonterra do to rebuild trust and confidence – not just for its suppliers but the wider Australian dairy industry?

MW: We are absolutely committed to rebuild trust and confidence. This starts with providing clear and timely price signals, as we did in our announcement yesterday. We are working on a number of other initiatives in that respect. On top of that, we will work with our farmers and industry on the finalisation of the code, on supporting farmers and the communities around them through our grass roots program and on innovation in helping to leverage technology to enable more informed and quick decisions on farm.

Explainer: What the ACCC means by…

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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.

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

/ dairymilkmaid / 2 Comments
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.

Helou tells the Senate he’s a hero

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While he might not have used the word “hero” exactly, former Murray Goulburn managing director Gary Helou was in complete denial when he fronted the Senate inquiry today.

Helou told senators he had the right plan, a plan that had delivered for two-and-a-half years. “The strategy was working and we were getting the right results,” he railed. Only one “unforeseeable” thing had derailed MG’s plans. That thing?

Not the global dairy commodity prices that had been falling steadily for month after month or the inattention of the board to the reportedly growing alarm of senior management. It was a Chinese regulatory change regarding cross-border trade via e-commerce. I gather this is code for selling milk powder and UHT milk on the equivalent of eBay into China.

As Gary explained it, he and the board were aware of the falling global commodity prices but selling these dairy foods – which he described as “our biggest sellers” – had been mitigating those losses.

The Chinese seemed to be tightening up on that, err, “cross-border e-commerce” and MG made two ASX announcements in response to media reports, the first on April 12, followed by this update on April 18.

mgcasxapril18

Both announcements concluded that the regulation did “not have a material impact on MG’s business”. Totally in contradiction to everything Gary Helou said today.

Just four days later, MG entered a trading halt. When it emerged from that trading halt on April 27, here’s what the announcement said about those big sellers:

asxmgcapril27

MG was still saying the Chinese announcement had no material impact on MG’s business. So, where does the truth lie?

With MG facing at least one class action, the Senate inquiry and under investigation by both the ACCC and ASIC, farmers have been hopeful of finding answers to the debacle that cost some their livelihoods.

But asked twice by senators whether he had been questioned by authorities investigating if MG had misled investors, Gary Helou said “no”. Both times he paused for several seconds before answering that one very simple question and, incredibly, each time it was an unequivocal “no”.

This is one witness to the Senate Inquiry who raised more questions than were answered.

United Dairy Farmers of Victoria president, Adam Jenkins summed up the sense of disbelief that followed perfectly. If it was possible, the ACCC farmer consultation forums that roll into town over the next couple of weeks just got that bit more important to attend.

adamjenkinsheloutweet

 

 

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

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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.

Raining on MG’s parade: the shrinking milk pool more serious than the big wet

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bigwet

Here’s something new: wet weather in parts of Victoria now means farmers must be paid less for their milk.

MG came out with another adjustment to the milk price on Thursday. In a nutshell, the MSSP (aka the “Clawback”) has been put on ice. At the same time, the best price MG expects to be able to offer farmers this season (called the “closing price”) has been revised down by a little bit more than the “clawback of the clawback” returned to farmers’ pockets.

I must admit that while I was expecting the clawback of the clawback, I wasn’t expecting MG to revise down the forecast closing price because analysts are cautiously optimistic that the global market for milk is recovering. It’s supposed to be all up from here.

The problem is MG forecasts its milk intake to be 20 per cent lower this season and, after stuffing warehouses full of surplus product last year, it now doesn’t have enough product to sell. Conceding losing 350 million litres to retirements and competitors, MG blames the remainder of the loss on wet weather. The reality is that the weather is just one part of the equation. The main reason production is down is man-made and does not rate a mention by MG: the low milk price.

Low milk prices mean less milk production
The low milk price hits production in two important ways:

  1. Cows are sold, leaving fewer in the herd producing less milk per farm
  2. Cows are fed less grain and produce less milk per cow

Fewer cows in the dairy
The grim reality is that most Victorian dairy cows are worth more at the saleyards than in the dairy this year. Farmers culled their herds during last year’s drought and, now, many struggling to pay the bills have culled hard again.

Less milk-producing feed
The cows that remain in the herd are being fed less grain than last year, simply because it’s not viable. Here in Gippsland, we are paying $310 per tonne for supplementary feed. The rule of thumb is that a kilogram of grain returns a kilogram of extra milk.

Right now, my own farm is getting 26.9 cents per litre during Spring (while most MG suppliers will be getting even less), so we lose roughly 4 cents per litre with every extra kilo of grain. We just can’t afford to produce more milk beyond what’s needed to service our overheads and keep the cows healthy.

It’s not actually that wet for MG – at least, not everywhere
The other mystifying statement about the claim that wet weather is the cause of the loss of production is that, actually, large areas of MG’s supply area aren’t experiencing record wet conditions and some areas are having a bumper season.

wetsoilmoisture

Source: Bureau of Meteorology

Yes, the south-west of the state, South Australia and parts of Tasmania are having a terribly wet season but Gippsland and the north are not, if you are to believe the Bureau of Meteorology.

Dairy Australia figures from last year show the production of each area:

Financial Year 2015/16
RDP Litres %
Dairy SA 514,039,216 5%
DairyTas 882,965,394 9%
DairyNSW 792,948,581 8%
GippsDairy 2,006,004,931 21%
Murray Dairy 2,267,951,005 24%
Sub-tropical Dairy 550,148,921 6%
Western Dairy 387,147,057 4%
WestVic 2,139,492,819 22%
Grand Total 9,540,697,924 100%

Of these, it’s only fair to remove DairyNSW, Sub-tropical Dairy and Western Dairy because these areas are either not collected by MG or have special pricing not affected by the announcement.

If you assume all of Dairy SA, DairyTas and WestVic are hit by the wet but GippsDairy and Murray Dairy are okay, the picture is not nearly so dire. In fact, the source of 55% of the litres in MG’s supply area isn’t too wet at all!

wetnotwet

So, yes, the wet is a problem – an especially big problem for farmers in the south-west who have my sympathies – but unlikely to be anywhere near as big a problem as last year’s drought, which affected pretty much the entire collection area.

If anything, the processor most affected by the weather may well be Warrnambool Cheese & Butter and it increased its milk price to $5.00 per kgMS in late September. The MG milk price (without the now suspended MSSP) is now $4.60 per kgMS and the forecast is for $4.70 by the end of the season. Ouch.

The bottom line
It all boils down to this: low milk prices lead to lower milk production – even in a reasonable season – and make it even harder for farmers to cope with difficult seasons.
What Thursday’s announcement from MG reveals is that farmers now face a vicious cycle, given the expected loss of 20 per cent of the co-op’s milk supply since last season.

wetviciouscycle

The challenge for MG’s board now is to stop another closely-related vicious cycle from spiralling out of control, as it did for its once-great competitor co-op, Bonlac. That would be a dreadful outcome for our entire industry.

mgviciouscycle