The sobering reality of an 18 month global dairy price slump and recent strength in the Australian exchange rate is set to be felt for the next three years or more in the milk industry.
As the fallout from big losses revealed by Australia’s biggest dairy processor Murray Goulburn (MG) hit home this week, milk producers across much of eastern Australia were forced to re-think their budgets and anticipate flow-on cuts to farmgate prices paid by all milk companies in the season ahead.
“The reality is, prices for milk next season had to fall from where they’ve been, even without Murray Goulburn running into difficulty - global prices have dropped 30 per cent since this season’s opening prices were announced less than a year ago,” said Dairy Australia analyst, John Droppert.
“MG might have been largely responsible for stretching the potential for farmgate prices last year, but every other processor was also expecting a global price recovery this season and it hasn’t happened.
Rabobank this week forecast world dairy commodity price weakness for another six months, at least, with European milk production up 5.4pc in the past three months and stocks building rapidly to add to the world’s oversupply problems.
Global average prices for butter, milk powder and cheese had halved from around the $US5000 a tonne in early 2014 and are still trending lower.
Mr Droppert said while most southern dairy farmers considered $5.50 a kilogram for milk solids as a break-even point, the betting was for next season’s opening farmgate payments to be in the “high $4kg to low $5kg range”.
Australian Dairy Farmers (ADF) president Simone Jolliffe said MG’s profit downgrade had turned into an "emotional week” for producers.
"We’re stressing the need for farmers to prioritise their mental health and reach out for business support to help them understand exactly how the farmgate milk price downgrade will impact individual enterprise,” she said.
Market prospects had been far more bullish three years ago, particularly in Asia, when the MG co-operative – the name behind the expanding Devondale brand – was charting a course to grow its milk production base, setting top-of-the-market benchmarks and influencing farmgate prices paid by all processors.
“MG was a bit of a white knight for our industry, particularly in NSW where it changed the landscape when it entered the market here,” said NSW Farmers dairy committee chairman, Rob McIntosh.
“Farmers had really been scalded before 2014 - there was little incentive to stay in dairying, let alone plan to grow productivity or develop the market.”
Mr McIntosh, one of many to sign up with MG to supply its domestic contracts, said while he knows his 51 cents a litre farmgate price will be cut next financial year, he is proud the farmer co-op had revitalised the milk market in NSW and Queensland.
However, MG’s payment incentives, including its 2015-16 opening price of $5.60/kg in Victoria, proved too optimistic.
Unable to make enough export headway in oversupplied markets, the co-op last week slashed its profit forecast cut from $89 million to $39m, prompting a possible multi-million dollar class action by new investors who bought shares last year.
Milk payments will be cut to between $4.75kg and $5kg for the rest of the season, with a new levy to be imposed on suppliers for up to three years to repay the company’s big debt load.
ADF has urged Fonterra, which is yet to confirm this season’s prices, to "break its silence".
"We’re encouraging all processors to be in the field to support their farmers," Mrs Jolliffe said.
Dairy Australia’s Mr Droppert said the Australian dollar’s jump to around US77 this year - about US10c above expectations - had not helped.
He said the anticipated US5c depreciation in the exchange rate in the first half of 2016 would have equated to about a 30c/kg boost in milk prices, but instead the dollar started climbing.
Drought conditions in much of southern Australia and high feed and water costs have added to farm income problems, said farmer chairman of NSW Dairy Connect, Graham Forbes.