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Milk price madness

IF dairy farmers thought last year’s first ever June 1 milk price release under the mandatory Dairy Code of Conduct (‘the Code’) was madness, 2021 has made it look like a walk in the park in comparison!

To recap on last year, ‘Mad Milk Monday’ was the term (not affectionately) given to June 1, 2020, by the regions dairy farmers.
Under the mandatory Dairy Code of Conduct, dairy processors were required for the first time to have their minimum milk price payable for the season, published by 2pm on June 1.
In what some farmers saw as an insult, nearly all processors left it until the last hour to release their price.
Some missed the deadline all together, each interpreted the rules differently, and others released prices that were then revised in the following days.
Some processors even used the code as an excuse for changing long standing, contracted arrangements.
The dairy circus of early June could be somewhat amusing, except for the fact that it is the lively hoods of hardworking farmers on the line.
Prices last year were overshadowed by COVID-19, as what this meant for world dairy markets was fairly uncertain.

Concerns of the impact on service markets ran deep, with processors unsure if consumers would withdraw from dairy markets all together.
At Christmas time, pricing for the season looked pretty healthy, with farmers having no reason to believe opening prices for the 2020/21 season would be any less than the $7 range paid in 2019/20.
But by April, the Global Dairy Trade was feeling the pinch of COVID-19, and reality saw opening prices sitting around the $6.40 to $6.80 mark.
Prior to the failing of our co-operative system and introduction of the code, this would see processors open with a low price on July 1 and offer step ups and markets improved later in the season.
Not in the new, post-co-op, code influenced world.
Farmers were particularly keen to find out what the minimum prices for the season would be, given that many are mindful of the fact the code has inadvertently reduced competition and taken away processors incentive to offer price increases through the seasons, known as ‘step ups’.
This is because all milk supply arrangements must be in writing, and those agreements must be in place within 30 days of milk collection beginning.
Therefore, in practice just about all milk will be signed up exclusively to a processor early in the season, and farmers will not have the ability to swap processors if another offers a better price further into the season.
In reality, it is only the co-ops that will drive ‘step ups’ and only a small amount of milk is collected by co-ops after the demise of Murray Goulburn.
Locally, the only real co-op we have in place is ADFC, who collect a relatively small portion of locally produced milk.

Who is offering what this season?
KEEPING track of who is offering what milk price has never been more difficult.
Nearly every company has had more than one go at releasing a price for the season, with the equivalent of a Dutch Auction keeping farmers on their toes.
Instead of all waiting until the last minute at 2pm on June 1, this year the tactic was taken by some to open early with a low price, effectively trying to set the market pace slower from the outset.
Bulla led the way for Western Victoria in opening mid-April, with a range of $6.40 to $6.90 dependent on the level of off-peak milk produced.
Bulla has since gone back to the drawing board not once, but twice, most recently updating the prices on offer to a strong range of $6.85 to $7.35.
ADFC (Australian Dairy Farmers Cooperative) is offering their farmers a strong price of $7 for pre-Christmas milk and $7.50 for post-Christmas milk for a weighted average of $7.20; a price which has also been adjusted between June 1 and the start of the season.
The three biggest processors, Fonterra, Saputo and Bega left a lot to be desired with their opening prices.
Initially Fonterra opened well ahead of the June 1 deadline with a lowball offer of $6.55 per kilogram.
This price has since been revised, with an increase to $6.85.
Saputo opened with little more than they had to in order to top the Fonterra price, offering $6.65.
This has since also been revised up to $6.85.
Bega opened somewhat stronger with $6.80 in southern regions, prompting the lift from both Saputo and Fonterra.
Bega have since revised that up to $6.94.
Australian Consolidated Milk (ACM) made an initial offering of $6.85 but found another 10 cents in early June to offer suppliers $6.95.
Union Dairy Company (UDC) opened low also with an offering of $6.60, which has since been bumped to $6.80.
Lactalis offered their fresh milk suppliers a lacklustre $6.95 at opening, which was then increased to $7.15.
Although a higher price than some of the large processors, the extra requirements of supplying fresh milk render this price inadequate for many.
Instead, many with milk curves suiting fresh milk contracts are signing up with the likes of Coles direct, who are offering a minimum published weighted average price of $7.20, but in reality, many deals being done are for significantly more.
Fonterra Fresh is also offering a decent price of $8.10 for the portion of suppliers milk locked into the fresh milk program, however in accepting this price for a set kg of solids, suppliers are also agreeing to supply excess solids at the standard price of $6.85.

Prices - minimum, weighted average, opening and closing, exclusive, non-exclusive
ONE thing is clear from the milk madness; nothing is simple.
Farmers are not really even sure if the minimum price given at the start of June is actually the ‘opening price’ they will be paid, or if there will be another shuffling of the deck before everyone is signed up and locked in by the end of July at the latest.
The weighted average published by each company is still not based on anything other than their ‘best guess’ on what the price payable to their expected supply group might be.
There is no auditing of this process, so weighted averages are not a good comparison to draw between factories.
Each processor offers a different contract, or contracts.
Most of the companies have gone down the lines of offering farmers two options; an exclusive supply agreement and a non-exclusive.
The processors were required to have a non-exclusive option under the code.
However most have ‘gotten around this’ by having the price payable under their non-exclusive option much lower than their exclusive price.
Saputo seems the exception here, with their only published contract being non-exclusive.

So, who will get the milk?
ONE thing is clear and working in the favour of farmers; there is not enough milk to go around.
Whilst at one point the Australian milk pool peaked in excess of 12 billion litres, there will likely be less than nine billion produced in the coming season.
Strong land prices have seen many sell, with sheep and beef taking over dairying land across our region at an alarming rate.
With processors demonstrating to farmers that they will only pay the bare minimum they have to in order to secure the milk they need with no regard to the cost of producing the milk, many farmers are taking the opportunity to get out while cattle and land prices are good, instead of continuing to receive a bare minimum price.
For the time being, milk processors continue to play a game of musical chairs; loose milk, up the price, repeat.
The question is who will be left without milk once the music stops?
At this stage it seems the likes of Coles will cherry pick the fresh milk they want first, paying a premium and offering a minimum price over three years.
Fonterra are offering more farmers fresh contracts, with less fresh milk contracted each month in an attempt to gain as much supply as possible.
Then the likes of Bulla and ADFC, who are offering the next strongest prices with the clearest and fairest payment structures, will fill their contracts with the milk profiles they are seeking.
The likes of ACM will secure enough milk, and then it will be between the bottom runners as to who is left with ample supply and who is not.
Those who aren’t will be left with little choice but to run a last-minute recruiting campaign, attempting to lure those already signed elsewhere to opt out during their cooling off period.
Or alternatively they will instead seek to purchase milk throughout the season from those processors and brokers with surplus supply, for a premium price.

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