Dairy loyalty put to the test after farmgate price collapse

Last April’s farmgate milk price collapse in southern Australia has broken a strong and long running trust between milk companies and suppliers which in previous decades had helped the nation’s dairy industry weather the most turbulent of times.

But farmers and processors have also moved with surprising speed attempting to heal last year’s wounds, locking in an industry code of conduct which Mr McQueen expects to achieve important price transparency benchmarks and pay producers for their loyalty.

That national dairy code of practice is now in its penultimate draft and set to be official from July 1.

“I suspect you’ll see farmers looking for the best deal for their farm from the dairy production system from now on,” the Australian Dairy Farmers interim chief executive officer told last week’s Outlook 2017 conference.

After they were ambushed by last year’s southern Australian milk price caning, Mr McQueen said producers were now focused first on “what’s the best deal for their farm”, not the long term supply interests of their processor.

This was particularly the case with many suppliers to the big Murray Goulburn (MG) co-operative which  until 10 months ago had generally enjoyed unbending farmer loyalty in its management and directors.

While the industry was pushing itself hard to rebuild from the past year’s earnings crisis, which started when MG and New Zealand-owned Fonterra slashed farmgate milk payments from $5.60 a kilogram of milk solids to less than $5, also imposing retrospective cuts to payments already made, Mr McQueen predicted most farmers would never offer milk companies the sort of unique trust processors enjoyed until last April.

That trust had been “built up over a long time”, underpinned by the sector’s farmer co-operative foundations.

It had been strengthened in the 1970s by dairy’s determination to survive the loss of Britain as a huge export market when it joined Europe’s Common Market in January 1973.

Overnight Australia lost its primary export buyer for cheese and butter and was forced to turn to Asia to find and cultivate new markets.

The belt tightening experience was too much for almost half the nation’s dairy farmers whose ranks swiftly halved –  down from 42,000 to 22,000 in the decade to 1982.

Australian milk production fell about 2 billion litres to 5.2b in the same period.

“So, we have a bit of history in dealing with some of these unexpected situations,” Mr McQueen said.

“We’ve been through adversity before and we grew stronger again as our exports to Asia developed and thrived in the ‘80s, ‘90s and onwards.”

Asia now consumed 75 per cent of Australia’s dairy exports, with sales to China alone leaping 70pc in value in the past year as volumes rose 29pc to 178,000 tonnes.

He said the new code of conduct was set to force processors to be more open about their price setting decisions and abandon supply exclusivity commitments in milk contracts –  arrangements which had lingered throughout the industry as a legacy of its co-operative roots and the strict discipline required in the tough years after 1972.

These conditions were being replaced with loyalty reward payments, which began emerging during the past decade as processors vied to find competitive advantages to retain suppliers, particularly when milk production was down during during tough seasons but Asian demand was surging.

“Processors are thinking differently now and most of them have signed up to the code of practice,” Mr McQueen said.

“I think they will want to build longer term arrangements with suppliers and that’s why its critical that we have this code to ensure fairness happens on both sides.

“Structures will be very different in the next 10 years, and I don’t necessarily see that as a negative, but I doubt we will get back to the level of trust we had across the industry.”