The trust that existed between dairy farmers and Australia’s dairy processing giants has been shattered by the recent price drop, according to the manager of a dairy farm near Warrnambool in Victoria’s south west.
Dairy processor Fonterra Australia reduced its farmgate milk price for the 2015/16 season from $5.60 per kg of milk solids (MS) to $5.00 per kgMS earlier this month, while Murray Goulburn (MG) says it expects to pay between $4.75 and $5 per kilogram, a drop of around 10 per cent and backdated to the start of the season (July 1, 2015)
While Fonterra and MG say the price change reflects the reality of the supply and demand imbalance that is affecting global dairy commodity prices, and the strength of the Australian dollar, dairy farmers are not happy — particularly with the backdating element.
The Terang dairy farmer who TradeFarmMachinery.com.au spoke to — on condition of anonymity — has worked on the family’s 142-hecatare family farm, milking a herd of about 270 cows, for the last 25 years.
He supplies milk to MG and says even the most financially responsible dairy farm managers have been caught off guard by the announcement, and that such a large drop in the price paid for milk solids is likely to cause severe financial problems for many in his community.
“It’s the farms with high levels of existing debt that are going to struggle,” he says.
“Ours is a family business and we only use subcontractors here and there, but those who hire a lot of workers will have to cut their labour costs too.”
While he anticipates the price drop won’t affect his farm as much as others, it does mean they will have to scrutinise every cost including their livestock count.
“Everyone will lose money,” he says. “We’ll probably cull more cows that aren’t pulling their weight, if they’re not producing enough milk, or have health problems.”
While he didn’t expect the price to be upgraded to $6, as he alleges MG predicted as recently as February this year, he didn’t expect it to drop so far below $5 and certainly not for this lower price to be backdated by a full season.
“The biggest problem I have is them retrospectively reducing the price,” he says. “They opened at $5.60, but estimated it to go up to just over $6, then changed their tune to $5.60 in February, roughly.
“So even good mangers that budgeted on the $5.60 — not $6 — were caught out with absolutely no warning.”
He and others in the industry were completely taken by surprise, despite thinking 2017 might be a tough year.
“I could see next year being a real hiding and the opening price for next year to be quite low,” he says. “It wasn’t a big surprise they didn’t get up to $6, to be honest.
“But this took everyone totally unaware, and I’m sure they (MG) knew tough decisions were going to have to be made as the year progressed.”
The issue had been a hot topic of conversation in his community since MG and Fonterra made the announcement earlier this month.
“How it affects you will really depend on your situation,” he says. “I know one or two who say they won’t survive, because they have high debt as it is.
“Some people will tough it out and wait for the price to improve and for some … their finances will decide for them.”
He says the sad reality is that this will make a number of small-scale dairy farms with high levels of debt unsustainable.
“I’m sure there are a lot who will go out of business, but it’s a big decision to sell your farm. “Also who’s going to pay good money for a dairy farm at the moment?”
He would like to see MG management held accountable for the lack of communication, and he is confident they must have saw the writing on the wall in the months leading up to this announcement.
“The MG managers need to be 100 percent honest with the farmers,” he says. “But the CEO doesn’t seem to really accept how big the breaking of the trust is, more so than the dollars.”
The offer by milk processors to lend farmers the difference in the interim will only add to unsustainable debt levels he says too many farmers already have.
Fonterra Australia’s Support Loan offers up to 60c per kgMS that is repayable from 2018/19 onwards.
This is intended to provide suppliers with options to help them deal with the price drop, and gives them the ability to receive an equivalent of $5.60 per kgMS for the current season.
MG shares have fallen dramatically from $2.10 in late April to 86 cents in mid-June this year.
Some shareholders have filed legal action against MG with allegations it mislead investors, despite fact that the milk processors have been affected by unfavourable market factors that are beyond their control.
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