Milk pricing systems set for shake up

Southern Australia milk pricing systems set for change


Australian Dairyfarmer News
SUPPLY QUESTIONS: The processor panel at the Australian Dairy Conference featured a wide-ranging discussion about issues, including milk supply and pricing systems.

SUPPLY QUESTIONS: The processor panel at the Australian Dairy Conference featured a wide-ranging discussion about issues, including milk supply and pricing systems.

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Australia's three largest dairy processors are looking at their milk pricing systems as they seek to halt the slide in milk supply.

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Milk pricing systems look set for a shake up as southern Australia processors grapple with falling supply.

The heads of Australia’s three largest processors - Saputo, Fonterra and Bega Cheese - in a wide-ranging discussion at the Australian Dairy Conference in Canberra in February identified pricing systems as one of the issues that needed to be sorted.

But there appears to be a split about how that will be approached - with Saputo and Bega indicating simplified contracts as the solution and Fonterra talking about offering a range of price “portfolios” to farmers.

The introduction of a mandatory code is also driving the change, with the draft code proposing a requirement for all processors to release a standard form agreement and minimum prices at the same time.

The standard form agreement would include a base offer farmers could accept or use to negotiate with processors. But each processor would have its own standard form agreement and farmers could negotiate terms with processors.

Lino Saputo Jr: there will be no special deals for corporate farms.

Lino Saputo Jr: there will be no special deals for corporate farms.

Saputo chairman and chief executive officer Lino Saputo Jr told the Australian Dairyfarmer Saputo would be offering farmers the choice of five or six programs next year and there would be no special deals for select suppliers.

“I will say this categorically there will be no special deals beyond those programs,” he said.

“So any of those large corporate farms that want to have a sideline deal, they should not do it with Saputo Dairy Australia because we are not going to be doing those things.

“We tell our suppliers on an ongoing basis we have one class of farm whether you are producing a hundred million litres or you are producing a billion litres of milk, we have one class of farmers.”

Mr Saputo said from July the former Murray Goulburn and Warrnambool Cheese and Butter programs would merge with 5-6 simpler programs offered.

“Everyone tries to outdo everyone else by offering these very complicated bonuses and structures,” he said.

“We need to simplify that.”

Paul van Heerwaarden: Milk pricing systems need to better suit the whole supply chain.

Paul van Heerwaarden: Milk pricing systems need to better suit the whole supply chain.

Bega Cheese chief executive officer Paul van Heerwaarden also identified simpler pricing systems as a way to lift farmer returns.

“One of the things we are looking at is what will we do with our milk-pricing systems, which over the last 20 years have become quite complex and, dare I say, have provided an incentive for farmers to produce milk perhaps at a time of the year or in certain practices that may not be best for the farm,” he said.

Mr van Heerwaarden said he looked at their company’s recent investment in the Koroit, Vic, factory as an example of how Bega could take a different approach to help farmers.

“We can handle a lot of seasonal milk, we’ve got a lot of capacity, and so, for example, there we are not looking to incentivise farms to produce milk in February/March when it’s very expensive,” he said.

“So investing in assets that are going to fit the farm profile in those regions is how we’ve got to think about our investments and they are 10 to 20 years out.”

Milk pricing systems needed to better suit the whole supply chain.

“As an industry, historically we have been one of the lowest cost most competitive dairy industries in the world, but we are not there today,” he said.

Farms had become more dependent on inputs that now represented 40 per cent of costs compared with 15-20pc 20 years.

“We need more control back on farm, where they can make decisions that are better for their farms,” Mr van Heerwaarden said.

“Do we move to pasture-based systems in regions that are suitable for pasture-based systems and take cost structures down and importantly take risk down?”

He acknowledged that approach would mean more seasonal milk for processors.

“But I think that’s our responsibility to work out how we turn that into value and that’s the key,” he said.

René Dedoncker: Fonterra operates in a network of different communities.

René Dedoncker: Fonterra operates in a network of different communities.

Fonterra Australia managing director René Dedoncker flagged a different approach.

In February, Fonterra offered northern Victorian farmers who were willing to commit to a minimum volume of milk a higher price.

The company said the special price for farmers who produced a flatter milk curve was in response to seasonal conditions and heightened competition in the market and was no different to the premium offered for fresh milk and ones it planned to pay for organic and A2 milk.

Mr Dedoncker hinted at the conference that the company was looking at offering more of these types of premiums.

“Farmers are all different: different age profile, different risk profile, different propensity to be able to farm flat or through a curve,” he said.

“Is it feasible we are in a world now where we say there is a portfolio and you get to choose, you get a choice?

“We are testing that.”

Mr Dedoncker also hinted that Fonterra could consider different pricing for suppliers to different factories.

“Fonterra has a network of different communities where we are,” he said.

“What if I don’t call it one Fonterra?

“What if we had the Western State Butter Company, Stanhope Cheese Northern Dairy Company and Tasmania Inc or the Darnum Nutritional Company?

“What if they were separate businesses, how would they price their milk?”

All three chief executives acknowledged milk supply was an issue.

Mr Dedoncker said Fonterra was looking to activate contingency plans to meet its contracts.

The rebuilt Stanhope, Vic, factory was now producing three times as much cheese as it had before it was destroyed by fire in 2014 but Fonterra was struggling with milk supply to it.

The worst-case scenario could be moving milk from the west to the north.

“We don’t regret the investment, it is state of the art and we take a 10-year view,” he said.

“But what we don’t do is go back and panic about that.

“We have a scenario planned around that and we have to be smart.

“Yes we are under pressure, there is no doubt about that, and we have to take a long-term view.”

Mr Saputo acknowledged that the company had not grown supply above 1.6 billion litres since taking over Murray Goulburn last year.

The company has set itself a target to get up to 2.1 billion litres of milk in three years.

“We are confident that we are going to get there in terms of processed milk,” he said.

“Out of the gate, we haven’t grown our milk base from the 1.6, only because we are sort of changing how milk prices are communicated.”

Mr Saputo said it was rebuilding trust with suppliers that the opening price was the guaranteed minimum price they would receive for the year.

“(Last year) we came out with an opening price that we believed was reflective of the dairy markets and we came out first,” he said.

“And we did it to inform our suppliers that they shouldn’t be overly focused on opening price, rather they should be more concerned with closing price.

“We made a guarantee we would be paying a leading price for dairy at the close of the year.

“Now, of course, it was very easy for some of our competitors to have a higher opening price than what we had.

“And some of the suppliers criticised us - there was a great opportunity for Saputo to collect more milk had they had a higher opening price.

“And I reminded them that’s not responsible on our part.”

Mr Saputo said the opening price was the number on which farmers could build their budgets for the year.

“We are not going to be taking a step down; we are not going to be doing a clawback,” he said.

Mr Saputo said he was optimistic that once the company convinced suppliers it was “honourable and ethical” it would collect more milk

“But it takes a fair bit of time to build the confidence,” he said.

Mr Saputo said the company had taken the same approach after it took over Warrnambool Cheese and Butter in 2014 and had grown milk intake by 25pc in the following four years.

“I am still optimistic that within the three-year period we will get to 2.1 billion litres of milk processed in our facilities,” he said.

“And why is that number important because that gets us to a capacity utilisation somewhere around 95pc, which makes facilities that much more efficient and effective.”

Mr van Heerwaarden said companies need to look at investments in light of what worked best to drive growth and profitability.

Growth was critical for the industry to be successful.

“And in the last 20 years in this country we haven’t had growth, we’ve been in decline or we’ve stagnated,” he said.

“I know that when I’ve worked in industries that are in a growth mode, life is a whole lot easier.

“The size of the pie is increasing, there’s value that you can create, you can work together on opportunities that are making you more money, creating jobs, creating futures and certainly encouraging investment.”

Mr van Heerwaarden said growth would not be brought about by processors investing in more stainless steel.

“Unless we have more milk, we don’t have growth and that’s where it has got to start,” he said.

►This article first appeared on the Australian Dairyfarmer website.♣

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