Australian dairy farmers were thrust into the spotlight this week when the nation’s largest producers once again slashed their farm gate milk prices.
Russian President Vladimir Putin’s government responded to sanctions by banning dairy imports. Photo: AP
Farmers say they are being paid less for their milk than it costs them to produce it, driving many to the wall.
And while it’s popular to blame the supermarkets and their cheap home brand milk, the current crisis actually has more to do with Russia’s territorial ambitions, the shooting down of Malaysian Airlines flight MH17 and the behaviour of our milk giants. Here’s what you need to know.
Why have producers cut prices?
Australia’s biggest milk producers – who buy milk from farmers – are also massive dairy exporters.
The two largest, Murray Goulburn and Fonterra, export about half their produce every year.
So the global dairy price influences how much they can pay Australian farmers. And the global dairy price has crashed.
Why has the global price crashed?
It sounds strange, but Vladimir Putin actually has a lot to answer for when it comes to dairy prices.
In early 2014, Russia intervened in the conflict raging in eastern Ukraine and later annexed the Crimea region.
Russia hit back by banning imports of EU agricultural products, including dairy, and even started theatrically steamrolling EU-made cheese.
The EU is the world’s biggest dairy exporter and Russia was its biggest customer.
Meanwhile, the EU was lifting production caps and experiencing ideal weather for dairy farmers, creating huge production growth just as its biggest market shut it out.
All that extra milk flooded onto the global market, creating a massive oversupply. Prices have crashed about 60 per cent.
But doesn’t China want to buy everything we make?
At the same time things were heating up in the Ukraine, things were cooling off in the Chinese economy.
Demand for imported dairy dropped and imports were slashed by almost half, according to some in the industry.
So farmers can’t make money when the global price is so low?
Not necessarily. This isn’t the cheapest milk has ever been, globally or at Australian farm gates.
But it comes after a couple of dry seasons, when the cost of producing milk has jumped because farmers are growing less grass and paying more for irrigation.
“A lot of farmers are getting squeezed due to that combination,” Dairy Australia analyst John Droppert told Fairfax Media.
So all dairy farmers are in trouble?
Everyone’s prices have dropped, but farmers who supply Murray Goulburn and Fonterra have been hit the hardest, because they export more than other producers.
Dairy producers put out forecasts for how much they expect to pay for milk solids (that’s how milk is sold) for the financial year ahead.
Knowing how much they will be paid means farmers can plan their businesses and borrow money to invest in their operations accordingly.
Last year, Murray Goulburn promised $5.80 per kilogram and was speculating in April it could rise to $6. But a week later, it drastically cut the price to between $4.75 and $5.
The New Zealand-owned Fonterra followed suit, slashing from $5.60 to $5.
So farmers just got paid less for a few months?
They wish. Instead, the price cuts were retrospective and were applied to the whole year.
That meant Murray Goulburn farmers had to pay back about a dollar for every kilogram of milk they sold over the previous nine months.
Mum-and-dad operations were straddled with debts averaging around $120,000, with some producers owing more than $400,000.
They are now paying the debt back through deductions from this season’s price, starting July 1.
Murray Goulburn opened the new season at $4.31 a kilogram and Fonterra has opened at $4.75.
But if the problem is the global price, why are people so angry at producers?
Critics say Murray Goulburn started the year with an unrealistically high price and should have seen the crash coming and warned farmers earlier.
When MG partially floated on the stock market in July 2015, investors were promised dividend payouts tied to a high farm gate price.
Some in the industry have speculated that this gave MG an incentive to project an unrealistically high farm gate price, because that would make the float more attractive to investors.
That’s something the corporate watchdog is likely looking at as part of its investigation into the company.
Shares, many of which were bought by MG farmers, crashed 42 per cent in April.
MG has said it was “surprised” by how inaccurate its price forecasts were, but a Fairfax Media investigation revealed senior managers had information showing that its projections were way off.
There’s also been suggestions that spending was running wild at MG headquarters and questions around its deal to supply Coles with home brand milk.
Ah-ha! So $1 milk is the problem
Farmers don’t like cheap milk, but it’s still not the major cause of their recent woes, according to industry experts.
MG supplies Coles with home brand milk in Victoria and NSW, which Australian Dairy Farmers says has cut how much farmers make per litre.
“The domestic market has reduced and it [$1 milk] has removed some of the premium out of that part of the business,” ADF director David Basham said.
“But the majority of the effect is the world price.”
Cheap home brand milk has a bigger effect in Queensland and Western Australia, he said.
What is being done to help the farmers?
The Federal Government has made $555 million in discount loans available to affected farmers and the Victorian government announced a $11.4 million support package.
There have also been social media lead campaigns encouraging people to consume more brand-label dairy.
That was welcomed by farmers, but it’s unclear how effective that is when international ructions and alleged corporate mismanagement – not domestic consumption – are the major issues.
Some have also called for a levy on milk, and others say farmers should be allowed to collectively bargain, which is what chicken farmers do.
Murray Goulburn and its board is being sued by investors in a class action for allegedly misleading them. The Australian Securities and Investments Commission is looking at the company and the Australian Competition and Consumer Commission is investigating it and Fonterra for misleading and unconscionable conduct.
About 2600 farms supply Murray Goulburn and about 1100 supply Fonterra, mostly in the southern states.
Source: TheAge
