Fonterra Australia has stepped up its price for Australian suppliers while its milk collection in Australia continues to fall.
The step up on November 29 is the first since a new agreement that no longer guarantees a benchmark price for Fonterra's Australian suppliers was signed with its farmer supplier representative group in August.
The step up of 5 cents per kilogram of butterfat and 10c/kg protein takes its average farmgate milk price to $6.95/kg of milk solids.
The company announced an opening price of $6.60/kg MS in May and stepped up in June to $6.80/kg MS to match other company's opening prices.
The latest step up brings its pricing into line with Saputo, which lifted its price in October.
The Australian supplier representative group was restructured in November.
The restructure saw the last vestiges of the Bonlac Co-operative, which Fonterra took over in 2003, removed with the Bonlac Supply Company voting at its annual general meeting in November to merge BSC with Fonterra's Supplier Forum to form a new Fonterra Australia Suppliers' Council.
The BSC chair John Dalton became the chair of the new suppliers' council.
Mr Dalton said the previous milk supply agency agreement, which had contained the benchmark price clause, had been due to finish this month but a new agreement was signed in August.
"We have been working on that for a couple of years for a suitable replacement between us and Fonterra," he said.
The suppliers council was now using an independent consultant, Fresh Agenda, to independently validate the price.
"When we looked for a suitable alternative to ensure we are being treated and getting a fair price, we have settled on what we call external validation," Mr Dalton said.
Fresh Agenda provided a report looking at Australian and international milk markets and milk trends to allow the council to check the price being offered by Fonterra.
Mr Dalton said new merged council would give farmers a closer working relationship with Fonterra that would help rebuild trust.
"It will take time for trust to return," he said.
The new council will have a stronger regional structure.
There will be four regional councillors in each of the four regions (western, northern and eastern Victoria and Tasmania).
The currently elected Bonlac Supply Company regional directors - Stuart Griffin, Westbury, Vic; Paul Weller, Lockington, Vic; Alan Davenport, Derby, Tas; and Bruce Knowles, Tyrendarra, Vic, - will lead their region and sit on the executive, alongside one independent, Greg Bourke, and the chair.
Mr Dalton said farmers would notice a more region focus, which would give them greater access to their four representatives.
These representatives would link more closely with Fonterra's Farm Source team to identify problems earlier and to get a faster resolution.
"There was one last week," Mr Dalton said.
"A supplier in a region became aware of an issue, he then sent it to his region leader and it came to me and then I took it to Fonterra ... and it was resolved within two days," he said.
Mr Dalton said the new structure has received overwhelming support from farmers he had spoken with about it.
"I have been surprised at the overwhelming support - it's, to be honest, blown me away," he said.
Milk collection falls
Fonterra continues to face declining milk collections in Australia.
In its latest Global Dairy Update, the company reported milk collections for October were down 13 per cent on the previous year, while year-to-date collections were down 18.9pc.
It said high on-farm input costs, decreased cow numbers, combined with intense competition for milk, would continue to impact its milk supply this season.
Fonterra's collections continue to trail the overall Australian milk production decline.
Australia's overall milk production was down 5.5pc for October compared with October 2018, while year-to-date production was down 5.8pc.
Victorian production overall was down 5.5pc in October but this masked major regional differences with Gippsland production up 2.3pc, while western Victoria was down 10.2pc and northern Victoria was down 9.1pc.
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But the company said it was "addressing the significant challenges" in its Australian business.
In a business update released on Thursday, Fonterra chief executive officer Miles Hurrell said the Australian ingredients team "has continued to tackle their new norm of drought conditions and related increased competition for milk supply, by manufacturing and selling a more profitable product mix and reducing operating expenses".
"Their hard work is helping balance out Australia's lower milk volumes," he said.
"The Australia Consumer business has delivered record market share in the chilled spreads category, and we are starting to see early signs of a turnaround in our New Zealand Consumer business."
NZ farmgate milk price lifted
On Thursday, Fonterra increased its forecast NZ mid-point farmgate milk price by NZ$0.25 to $NZ7.30/kg MS.
"The higher price reflects a global dairy market that is tipped slightly in favour of demand," Fonterra chairman John Monaghan said.
"Our New Zealand milk production is forecast to be up 0.5pc on last year.
"Annual milk production in the other key global supply regions of the US and EU are both growing at less than 1pc.
"On the demand side, Global Dairy Trade prices have increased by about 6pc since our previous forecast."
The price would be the fourth highest milk price in Fonterra's history.
The forecast range is now $NZ7-$NZ7.60/kg MS.
Mr Hurrell said the co-operative had made good progress moving to its new strategy and had had a strong first quarter.
The underlying financial performance of the business had improved, delivering a gross margin of $NZ740 million, up from $NZ646 million.
This was on the back of cutting operating expenditure by $NZ104 million and managing capital expenditure.
Mr Hurrell said normalised Earnings Before Interest and Tax (EBIT) was $NZ171 million, up $NZ145 million and reported EBIT was $NZ259 million, up $NZ233 million.
Free cash flow (cash generated from the business and available to reduce debt and pay interest and dividends) improved by $NZ595 million compared with last year.
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