Key to increasing milk production is to move from processor focus model driving up farm input costs back tofarmer focus, low input costs model
Processing milk has seen a major structural change from farmer owned dairy co-ops to now mainly owned by international companies who have invested billions of dollars upgrading and rationalising the factories they acquired.
The dairy farming industry has also undergone a major restructure with fewer farms, increased number of cows per farm producing more milk per cow.
In theory such a comprehensive restructure of both milk processing and dairy farming should deliver an internationally competitive industry, capable of surviving adverse weather conditions and volatility of international prices. It has not happened so the question is why?
In the restructuring process the industry changed from:
Farmer focus low import costs model
• Farmer owned processing co-ops accepting all milk produced by members with the objective of returning profits back to farmers in the milk price and through share bonuses.
• Farmers sharing in the profits also accepted international market risks.
• Profits returned in the milk price are reinvested back into the farm and local community.
• Membership of a co-op meant¬ farmers often supplied without any formal supply agreements or contracts.
• Large and small co-op suppliers were paid the same or similar prices for their milk.
• Farmers were able to maximise their milk production when it was most cost effective.
To processor focus model driving up farm input costs:
• Mainly large international processing companies with the objective of maximising dividends to their overseas shareholders at the expense of the milk price to Australian farmers.
• Australian farmers and rural communities do not receive any benefit from profits/dividends sent off shore.
• Processor contracts with farmers are complex, making it difficult for farmers to compare prices and change processors.
• Contracts based on an opening price followed by step-ups maintain the market risks with farmers without the previous benefit of farmers sharing in the profits under the co-op model.
• Processors seeking production efficiencies offer farmers incentives to supply additional milk during the off-peak period when milk production is not cost effective.
• Incentives are funded by paying a lower price during the peak spring period, subsidising off-peak supply when cost of production is often much higher than the price offered.
• Seasonal suppliers also subsidise off peak suppliers.
• Paying a lower price during peak season benefits processors’ cash flow at the expense of farmers cash flow at a time when farmers need it the most.
• A widening disparity in the farmgate milk price paid between large and small suppliers with the majority of farmers not receiving processors’ average farmgate prices.
The key to growing milk production in Australia is to rebalance the focus onto farm profitability allowing farmers to maximise milk production when most cost effective.
Cost effective milk production varies by area and even within the same area depending on weather, access or lack of access to irrigation, bore water, availability of affordable supplementary feed and the amount of fodder produced on the farm.
Some farmers have conditions to cost effectively calve twice a year and prefer it for a more even monthly income.
• Introduce the real estate model of a standard contract by all processors allowing farmers to accurately compare offers.
• Fixed single price contracts:
o Increases competition between processors for higher early season prices, substantially improving farmers’ cash flow.
o Allows farmers to adjust input costs, which significantly assists them navigate towards a profit.
o Allows farmers to maximising milk production when most cost effective.
o Ends peak season prices subsidising off peak milk production.
o Moves market risks back to processors who are better positioned than farmers to forecast the impact of changes on the international market.
It is worth referring to a very relevant article by Paul Kerr then General Manager Dairy Farmers Co-operative published in the Weekly Times April 01, 2015:
Key to unlocking dairy industry potential is putting profit before prosperity
FOR more than a decade, the Australian dairy industry has not grown.
There has been much talk about catering for the rising Asian middle class and of Australia becoming a food bowl for our neighbours, but, for all the talk, we are yet to see any real growth in dairy.
Why? I believe one of the key reasons the Australian dairy industry has fallen behind is because our farmers have not always been profitable, despite high prices being paid over the last 10 years.
We know that if farmers are profitable, they invest back into their businesses and experience growth.
They will milk a few more cows, buy the farm next door, invest, or they might put in better feed systems. The point is they will increase productivity and grow milk supply if it is profitable to do so.
The problem is, we have seen a shift from the former low-cost producer model to a higher input cost model that cannot cope with the seasonal volatility in milk prices.
Whichever way you look at it, milk prices are tied to commodity prices and this means volatility will continue.
To increase the collective Australian milk pool, we need a low-cost model that enables dairy farmers to be more efficient and run productive farms.
Farmers can do a range of things to improve productivity, invest in improved milking technology, scrutinise their inputs or increase their herd, but real investment can’t occur without profit.
Profit is more than just a milk price, it’s about sending the right price signals back to the farmer.
The cost of producing flat milk versus seasonal milk needs to be better understood by the processors and the price signals must be adjusted accordingly.
History shows that from the early 1990s to the early 2000s Australian milk production nearly doubled.
And it wasn’t due to high milk prices, in fact there were some pretty poor prices during that period.
One of the reasons for the rise in production was that farmers were profitable and therefore were able to invest in and grow their businesses. This enabled them to cope with the volatility of the milk price.
Many of their farm systems were different then, too, as there was more of a focus on seasonal production.
Today, there are more farmers operating on flat-milk production with arguably higher input costs. We need to look at the pricing structures to see what is sustainable and what will allow a farmer to make money.
I’ve seen many food and dairy strategies during my time, promising to lift the industry to the next level.
There have been many plans since, but the opportunities are not new, as some may have us think. Australia has been a major exporter of dairy products for more than 50 years.
What has changed is we have lost our focus on what drives farm profitability. The industry is crying out for collaboration and to date this has not happened. Experts have come and gone with their unrealised templates for success.
We don’t need any more plans, we simply need to focus on farm profitability.
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