Unprecedented changes are hitting the dairy industry in southern Australia, with a “supply chain revolution” underway that had snapped the traditional loyalty farmers had to processors.

Rabobank senior dairy analyst Michael Harvey said in a report released on Monday that the dairy industry had faced constant change since it was deregulated almost 20 years ago but recent developments had caused significant supply chain tension and sparked “transformative change”.

These changes included the problems engulfing dairy cooperative Murray Goulburn – which was now being measured by potential buyers – a fall in national milk production, and “the reset in farmgate milk prices from mid-2016, to better align with global markets”.

Milk production in southern Australia had fallen by 800 million litres over the past two seasons, the report said.

“To have so many changes in such a short time frame is unprecedented and there is no doubt Australia’s dairy supply chain will emerge from all of this looking vastly different and almost unrecognisable,” Mr Harvey said.

 “We are also seeing a break down in loyalty between dairy farmers and processors, with farmers now more willing to move processors, which is having repercussions across the supply chain.”

Mr Harvey said the most significant drop in milk production had occurred in northern Victoria, while Murray Goulburn faced the most significant contraction in milk supply among dairy processors.

The industry has been in turmoil since about April last year after Murray Goulburn, Australia’s biggest dairy processor, announced it would slash payments to farmers, introduce highly unpopular and complicated loans for farmers – a plan that it later shelved – and suddenly lost chief executive Gary Helou.

In the period since, a large number of farmers have stopped supplying MG, the dairy processor announced plans to close three plants, and last month it reported a $370.8 million net loss after tax for fiscal 2017.

Murray Goulburn also confirmed when it released its results that it had “received a number of confidential unsolicited indicative proposals from third parties”. These ranged from proposals to buy certain assets in the Murray Goulburn portfolio, to a sale of the entire business, MG said.

The dairy processor said it would consider proposals with “regard to the overall interests of MG’s business and its suppliers, shareholders, and unitholders including” factors such as the impact on the farmgate milk prices paid to farmers, and implications for unitholders and shareholders.

A spokesman for Murray Goulburn said on Monday: “We intend to provide a further update on the progress of these important initiatives at our annual general meeting.”

Victorian dairy farmer Tyran Jones, a former president of the United Dairyfarmers of Victoria, said the Rabobank report “seems to be well balanced and paints an accurate picture of the ever-changing dairy industry”.

“If we look at the long term, the gradual decline of the dairy cooperative continues. Over the years, farmers have either elected to sell their processing businesses and take the windfall or the boards and management have put them in a forced sale position. Hopefully MG will not suffer the latter.”

Mr Jones also said: “While over capacity in the processing sector is currently a challenge, after many decades of under-investment, we should now have a more globally competitive processing sector, which is essential for long-term viability.”

 

Source: The Sydney Morning Herald