There was Greens leader, Senator Richard Di Natale and others supporting dairy farmers hit by the price cuts and retrospective pricing moves of Murray Goulburn (MGC) and Fonterra (FSF), and missing an important development in the global dairy industry.
NZ Dairy giant Fonterra yesterday issued its first price forecast for the coming 2016-17 season which will be $NZ4.25 ($A3.99) for each kilogram of milk solids. That is a 35 NZ cents per kilogram lift in the payout for the current season which was confirmed at $3.90/kg of milk solids (KgMS).
This increase ends a succession of cuts in New Zealand in the past year and while the price for the 2016-17 season remains well under the $NZ5/kgMS level said to be the break-even point for many NZ dairy farmers, it is nevertheless an increase, which is what you can’t see happening in Australia.
But you have to ask why the difference between the two countries.
Helping lift the forecast was higher prices at three of the last four fortnightly GlobalDairyTrade auction (the most important worldwide pricing mechanism for dairy products). The next one is next Tuesday.
Oversupply and weak demand, especially from China, has hit dairy prices in recent years after a peak payout from Fonterra for Kiwi dairy farmers of $NZ8.40/kgMS in the 2013-14 season.
But in Australia, the current kerfuffle was caused by Fonterra and Murray Goulburn reducing their farm gate prices from $A5.60 a kilogram of dairy solids to between $A4.75 and $A5 a kg in the past month.
So the Australian prices are still marginally above the price in the world’s biggest exporter with far more efficient farmers than Australia. In other words the price Australian dairy farmers will be paid isn’t as bad as it has been across the Tasman. But their plight has been made worse by the retrospective price cuts and consequent debts many farmers have to Murray Goulburn and Fonterra.
That is an indictment of the mismanagement of the situation by Murray Goulburn (and its dud deals for milk and cheese with Coles). The Fonterra price in NZ raises questions about Fonterra’s pricing policies in Australia and why the $5.60 level remained in place for so long when the Kiwi price was being cut successively by the parent.
Why didn’t anyone at HQ in New Zealand tell the Australian arm to lift its game and lower the price earlier?
The Greens, deputy PM, Barnaby Joyce and many other critics have preferred to blame everybody, bar the two big supermarket companies for the problem, when the companies (and some farmers) have to take some responsibility (Murray Goulburn and Fonterra have to take a lot). Coles in particular makes an easy target with its aggressive price cuts, matched by Woolworths.
But if you look closer at what’s happening in NZ – where the country depends more on the health of dairying (that is not the case in Australia) – you find the situation if vastly different to Australia.
Last week Fonterra revealed it was making an early third dividend payment to its farmer shareholders (to help cashflows) and buried in the statement accompanying that news, the company revealed how it had been changing its marketing thrust away from low yield milk.
At the same time Kiwi dairy farmers have been cutting herd sizes in response to nearly three years of falling prices.
Fonterra CEO, Theo Spierings said in last week’s statement that despite lower milk collections, gross margins in its ingredients business improved to 16%:
“We have continued to optimise our product mix by adjusting volumes away from reference products, such as Whole Milk Powder, towards non-reference products, such as cheese and casein, to take advantage of the relative pricing. A strong sales performance has resulted in ingredients inventory volumes being 11 per cent lower than the same period last year.
"Our determination to convert as much milk as possible into the highest-returning products has resulted in an additional 300m litres on a liquid milk equivalent (LME) basis going to consumer and foodservice products in the past nine months. The continuing strong performance of our consumer and foodservice businesses is reflected in gross margins which have increased to 28 per cent, supported by volume growth of nine per cent and lower input costs,” he said.
There’s a big message there for the local companies. Fonterra started hacking into its costs and staffing levels last year and moved to switch milk from the bulk market to higher priced/yielding products. It encouraged shareholder owners to cut herd sizes, which they are doing, to lower milk output.
It is a message for Fonterra in Australia (so why did it take so long to do something like this here?) and Murray Goulburn, now that it has lost the man responsible for many of the problems, former CEO, Gary Helou.
And it should also be pointed out that unlike NZ, the dairy pricing stuff up and hardship for many farmers is not an economy wide issue, nor does it threaten the health of the financial system and banks (The Big four Australian banks especially which dominate NZ finance and the economy like they do in Australia).
Across the Tasman the $NZ50 billions of dollars in loans to the dairy farming sector is worrying the country’s Reserve Bank (and our Reserve Bank), government and banks, here it is just a footnote at best.
The bottom line is that the Kiwi dairy farmer and Fonterra (and its much smaller competitors) moved early to meet the impact of falling global demand and prices. In Australia we had two companies (and especially Murray Goulburn) which were slow to respond to the downturn in demand and price falls, and ignored what was happening across the Tasman.
Instead of talking about a minimum or floor price, as Senator Di Natale is doing (and ignoring the mess that made of the wool industry in the 1980’s and 1990’s via the reserve price system), or blaming Coles and Woolworths, the industry and its supporters should be looking at cutting costs and following Fonterra into non milk products (Cheese, yoghurts etc).
Too many people in Australia put too much trust in China and its apparently insatiable demand for baby milk formula, as the Kiwi industry did in the mid to late 2000’s.
The same problem is starting to emerge (be repeated?) in vitamins and food supplements, so watch the prices of companies like Bellamy and Blackmores.
