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

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

Crunch time

The pastures are still green but they’re barely growing and, now, we must make hard decisions about what to feed and to whom.

Already, we’re feeding seven rolls of silage (each weighing about 800 kg) and a very hearty meal of grain to the milkers and if I want to keep the cows milking really well, I’ll need to step that up even more in the next few weeks. Any cow who is not producing at least 10 litres of milk per day is not paying her way. If she’s in calf, we will let her take a holiday. If not, we must sell her. Fortunately, the vast majority of cows are in calf, so we should be able to keep almost every one.

The reality that farm animals are working animals rather than pets is one of the hardest lessons of life but a valuable one, I think. Farm kids learn from an early age that the circle of life is inescapable but it is in a farmer’s power, though, to make every life a good one. What an awesome privilege.