August 1, 2016

Australian farmgate milk prices have dropped to an unprecedented low in wake of the global oversupply, forcing many dairy farmers to reduce production levels and reassess their business plans.

Leading Australian milk processor Murray Goulburn has reduced its price for the next season by more than 10 percent to A$4.31 a kilogram for milk solids (kgms), up to A$1 short of what farmers claim to be the cost of production. Competitor Fonterra dropped its price from A$5.60 to A$5.00/kgms, while Warrnambool Cheese and Butter (which is majority owned by Canadian dairy company Saputo) dropped to $4.80/kgms and Bega to $5.00/kgms. The processors plan to make ongoing changes to the prices throughout the season.

Processors are sighting a combination of global issues as the main cause of the market volatility including the two-year Russian trade ban, falling oil prices and an economic slowdown in China as well as a weaker exchange rate.

Murray Goulburn Interim Chief Executive Officer David Mallinson says he acknowledges that the 2016/17 financial year will be a challenging one for its suppliers as commodity prices remain the largest external influence on the Coop’s financial performance.

“In the face of these difficult market conditions, the forecast FY17 farmgate milk price reflects Murray Goulburn’s view that commodity prices will continue to trade around current levels for the remainder of the 2016 calendar year with only a modest recovery in price of around six percent across our major commodities during the second half of FY17,” Mr. Mallinson said.

With prices likely to remain low for the remainder of the financial year, dairy farmers are looking to make significant on-farm changes, such as reducing herd sizes, and adjusting maintenance costs and fertilizer applications. Weather patterns over the next 12 months will also play a key role in determining how farmers will recover from the reduced prices as they hold out for more favorable seasonal conditions to help with pasture growth and feed supply.

According to a Rabobank Agriculture in Focus report Oceania Dairy – Let’s Debt Serious, farmers need to take a more proactive approach to the drop in milk prices by reviewing their business structures, including their risk management plans, ­­and making their production systems more flexible to better manage market volatility.

With the Australian industry exporting more than 40% of its production to global markets, the report highlights the risks involved for the many farmers who have shifted towards higher-value products, typically bound for global markets, and therefore affected by global volatility.

The report also addresses the lack of transparency in the farmer/processor relationship and urges farmers to ensure they choose the most beneficial processor payment system for their business, one that will maximise profit and not over-expose the business-to-market price risks.

The lack of transparency is causing many suppliers to lose confidence in their processors and switch to rival processors. Murray Goulburn has been the hardest hit by this movement of milk, losing 3.6 percent of its supply in July. Some of its suppliers have switched to dairy and infant formula producer, The a2 Milk Company, which is bucking the trend by offering dairy farmers a premium price thanks to the huge demand in China for its products. Prices for The a2 Milk Company’s biggest supplier, Perich family’s Leppington Pastoral Co., are more than 30 percent higher than those paid to farmers supplying the likes of Murray Goulburn and Fonterra.

A2 Milk shares have surged by 214 percent in the past 12 months, and the company claims almost 10 percent of the fresh milk market in Australia with a product that sells for about A$2.80 a litre, almost double the regular price. Its product range includes fresh milk, infant formula, milk powder, cream, yoghurt and ice cream. Its A2 Platinum infant milk formula product provides more than half the company’s revenue, with significant demand in the domestic and China markets.

What’s the secret to The A2 Milk Company’s remarkable growth? Its clever marketing strategy has won the trust of consumers who believe the milk is better for them because it comes from cows selected to produce only a particular type of protein, known as A2 beta-casein, unlike most dairy products, which contain both A1 and A2 proteins.

With the outlook for the Australian dairy industry remaining turbulent, many farmers are looking to move their milk into higher-value products such as A2’s Platinum infant milk formula, however, not all milk can be moved into value-add channels. Farmers need to be prepared for continued price volatility by focusing on controlled on-farm changes in the short term and by being committed to longer term plans that will ensure a more sustainable, productive and resilient business.

Farmers should also seek processor and government support packages where available, including the Australian Federal Government’s Dairy Farmer Concessional Loans for Murray Goulburn and Fonterra suppliers of up to $1 Million for up to 10 years, with an interest rate from 2.71 percent.

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Melissa Lawrence, GAI News writer