Milk prices still leaving a sour taste

Milk prices still leaving a sour taste

Image source: CNN Money

By Lauren Thomson 

Forget dollar a litre milk.

The dairy crisis has more to do with global trade wars than it does with cheap supermarket milk.

In 2016, when milk processors Murray Goulburn and Fonterra said they had to cut farmgate milk prices by 10 per cent, it had many in the dairy industry concerned with the future of their farms.

Dairy farmers pleaded with the Australian public to boycott the supermarket giants’ dollar per litre milk—now it seems that the public has forgotten altogether and, with worsening drought conditions, has many in the industry willing to walk away from their farms.

Unbeknownst to consumers, some dairy farmers do not even get paid by the litre for the milk they supply.

In South Australia, Victoria and Tasmania dairy farmers are usually paid according to the levels of fat, protein and milk solids.

These three states alone account for nearly 80 per cent of Australia’s dairy farms.

In New South Wales, Queensland and Western Australia, dairy farmers are paid in the much simpler cents-per-litre.

But that exact rate is extremely variable, depending on the location of the farms, and production costs for both farmers and the processor.

Murray Goulburn and Fonterra have since blamed the price cut on the decrease of interest by overseas importers.

Meanwhile, companies like Lion Dairy & Drinks have been spared from this problem, as Australia’s demand for dairy has remained steady.

The reason behind the decrease in the prices from Australia’s leading processors is a far more complicated measure than simple greedy supermarkets.

In 2014, the European Union put sanctions on Russia after they invaded Ukraine, in retaliation Russia banned the importation of agriculture products from Europe.

At the time Russia was the largest importer of European dairy, so now there was too much product and not a high enough demand in the region.

In response, European producers sent their products even further afar to make up for Russia’s loss, meaning Murray Goulburn and Fonterra had more competition than predicted and were both less in-demand globally.

To make matters worse, around the same time the high demand for milk powder from China plummeted.

This was one of Australia’s largest and most exported products, and so exporters such as Murray Goulburn and Fonterra again felt the loss of such a profitable product.

Late 2016 saw the supermarket chain Harris Farm Markets stop selling dollar per litre milk and announced a deal with Norco, implying that the farmers would be better off.

This was done by CEO Tristan Harris who believed customers were happy to pay extra for the milk if they knew the money was going back to the farmers.

“We are charging $2.29 for two litres of milk. We still believe this represents great value for customers but not at the expense of farmers,” Mr Harris said.

“We understand people want good value on products they use lots of every day, however, we believe most don’t agree it should be cheap at all costs—including the costs of lives and livelihoods of Aussie farmers.”

Coles, amidst the public backlash of their dollar per litre of milk, created the Farmers Fund brand.

Farmers Fund is supported by Murray Goulburn, the same processor who supply the dollar per litre milk and has changed the consumer price to $1.25 per litre to put the revenue towards farmer incentive programs.

The consumer review group Choice even stepped in to provide information to the public when the boycott and the backlash began.

Choice’s Daniel Graham explained that boycotting the products were causing more harm than good.

“If you really want to help Australian dairy farmers, buy Australian-produced dairy products,” Mr Graham said.

“A farmer gets paid the same price for their milk, no matter where it ends up.”

Keeping demand high ensures dairy farmers’ futures; expensive private labels are not necessary because the farmer receives the same profit from different labels and different supermarkets.

Fast track to 2017 and Murray Goulburn was bought by Canadian milk company Saputo for an estimated $1.3 billion.

Chief Executive Lino Saputo put the dollar per litre milk in question during an interview with the ABC.

“We’ll have to take a look at that once we get involved in the business,” Mr Saputo said.

“The one thing I can say, though, is that when you look at other food products that are on the shelves—when you can get water at three dollars a litre and perhaps soda at five dollars a litre—for all the energy and effort that farmers are putting into producing milk, I’m not sure that it is the right value.”

Mr Saputo also guaranteed to pay “industry leading prices” for dairy.

On June 20, Fonterra Australia announced its forecast farmgate milk price between $5.50 and $6.20 per kilogram of milk solids (kgMS) from now until the end of the 2018–19 season.

Saputo’s increased payments of five cents per kilogram for butterfat and 11 cents for protein brings the average farmgate price to $5.68kgMS.

According to a Saputo spokesman, their price has gone up 8 cents per litre.

Dairy industry leaders have welcomed the opening price of $5.45kgMS, but urge caution to its own dairy farmers to watch their budgets as the price of feed has skyrocketed across Australia.

Many other agriculture industries are nervous and already expecting less than forecasted profits.

In March 2018, a group of dairy farmers banded together to stand for an even, fair deal.

United We Stand Dairy Farmers, a Facebook group, has had millions of litres of milk pledged by the suppliers who also supply Saputo, Fonterra and Australian Consolidated Milk.

An ABC interview with Victorian dairy farmer Steve Hawken brought to light why farmers have to be paid more for their milk, and to the public’s surprise, it was not about profits.

Mr Hawken said that the industry was failing to attract newcomers as the pay was too low.

“You’ve only got to look at the average age of the dairy farmer. We’re talking mid-60s,” Mr Hawken said.

“We need to rectify the problem and teach the dairy farmer we belong on the top of the food chain because without us there simply is nothing else.”

Rabobank, an agribusiness banking specialist, has forecast the pressure on the dairy industry may ease, as European imported products will soon meet consumer demands and not flood the international market.

Unfortunately in Australia, Rabobank claimed the battle for Australian dairy farmers is only beginning.

Michael Harvey, a senior dairy analyst from Rabobank, forecast domestic milk production to increase by 2.7 per cent in 2018–19 to deliver an additional 170 million litres of milk to the market.

This follows the 3.2 per cent increase (or additional 390 million litres) in 2017–18.

“A well-timed autumn break will be vital to setting up the season with increased purchased feed costs and lower cull cow prices expected to place some pressure on margins,” Mr Harvey said.

Mr Harvey also agreed that the trust between dairy farmers and the processors has been hurt, and those in the industry must work to rebuild the trust.

“Where there is a lack of trust, there will likely be a lack of loyalty and the threat of milk supply losses through supplier churn each season,” he said.

“So it is in everyone’s interests for the Australian supply chain to have a globally competitive cost base.”

Like most Australians who complain about Woolworths and Coles holding so much power in the industry, dairy farmers have little choice on who processes their product.

“It will be fascinating to see who emerges as the new price leader, but there is no doubt an improved mechanism for price discovery is needed to ensure sustainable returns throughout the sector,” Mr Harvey said.

“And this is likely to give processors renewed impetus to offer innovative tools, services and support to milk suppliers to facilitate future milk supply growth.”

David Beca has been the chief executive of both Van Diemen’s Land Company and NZ Farming Systems Uruguay Limited, the respective countries’ largest dairy farming enterprises.

In an interview with the ABC, Mr Beca said that this milk price obsession is distracting the dairy industry from its real problems.

Australian Bureau of Agricultural and Resource Economics (ABARES) has released reports, that Mr Beca agrees with, stating that the issue is not the price of the milk, but the supply of it.

According to the report, Australia produces less milk now than it did 15 years ago and productivity has crashed, while other agriculture sectors have improved.

“For a business or an industry to make progress, you want to see a 2–3 per cent improvement in production over time.”

Mr Beca further stated figures in the recent reports to show the lack of growth in the sector.

The Dairy Australia website highlights that drought has affected Australia’s milk production over the past two decades, and now Australia is having some of the worst droughts on record.

Drier seasons across Australia have also made it harder to grow on-farm feed, which means reducing natural pasture grazing and also made feed such as hay or grain more expensive to source.

Therefore, some farms across the drought-stricken parts are supplying less milk, with even higher feed costs making the whole process from milking to the supermarket incredibly unstable, cost wise.

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