The continuing crisis in the dairy industry

February 3, 2017
The dairy industry is in crisis and dairy sustainability is under attack.

The dairy industry is in crisis and dairy sustainability is under attack.

In Victoria — where most dairy farms are — Australia’s largest processor, farmer-owned co-operative Murray Goulburn, allowed outside investors to become members, to get the funds to build more infrastructure to take advantage of export opportunities. Murray Goulburn prioritised paying returns to those investors out of their 2016 $44 million annual profit, rather than to the farmers who supply the product.

An overestimation of the global market price meant that when milk prices dropped, Murray Goulburn slashed its farm gate milk price without warning last April to $4.31 a kilo of milk solids or 33c a litre and told farmers they had to repay the higher price they had been receiving. Fonterra, the other major processor, matched the farm gate price drop.

As former chief executive Gary Helou left Murray Goulburn in May with a $10 million payout, farmers were left owing an average $120,000 “overpayment” debt, based on payments set at his promised and “achievable” $6 a kilogram milk price. A 38% rise in the board directors’ fees added insult to injury.

Poor government response

The government’s response was to offer more loans to farmers already drowning in debt and a welfare payment for farmers with no income that is in practice very difficult to access.

In a May 25 interview on ABC Radio National, Labor shadow agriculture minister Joel Fitzgibbon raised using a clause in the prospectus for Murray Goulburn that would allow the company's directors to slash the dividend returns to investors and return that money to dairy farmers in the form of a higher price for their milk. This was never again mentioned. Supporting farmers over investor profits is not on the Coalition government’s agenda.

On average, milk in Victoria costs a dairy farmer 42–45 cents a litre to produce. With these latest cuts the dairy farmer is receiving at least 9 cents a litre below cost price. Adding the $120,000 retrospective payment drops the farm gate price to 14c a litre from the processor. Add the stress of little or no rain and having to buy additional feed supplements for animals normally on pasture. As one kilogram of grain returns one kilo of extra milk, feed prices mean farmers lose about 4 cents a litre with every extra kilo of grain fed. 

All this hits milk production in two important ways. Cows are sold, leaving fewer in the herd producing less milk per farm; and dairy cows are fed less grain and produce less milk per cow.

Milk price cuts have a flow-on effect for whole communities. Gunbower supplier Brooke Brown told the Shepparton News: “The repayment of funds already received is grossly unjust and has, and will mean, the end of some dairying enterprises. It is tough times for the industry, including businesses supplying goods and services to farmers.”

Murray Goulburn made a compromise attempt it called its “Milk Supply Support Package”, which spread low farm gate prices over the next three years to reduce the impact of its $183 million “overpayment” bill. In September the co-op also axed 200 jobs in an effort to cut costs and increase returns to desperate farmers.

These job cuts will save Murray Goulburn an estimated $50-60 million a year. According to their spokesperson, these job cuts will enable a higher farm gate milk price, as well as progressively help repay the “Milk Supply Support Package”.

Farmers leave co-op

However farmers who leave Murray Goulburn cannot be legally pursued for the “debt” on milk prices they were paid in 2015–16. So, angry and desperate farmers are leaving the Murray Goulburn cooperative in droves.

More than 200 Victorian and Tasmanian farmers who supplied Murray Goulburn with milk have quit the industry or switched to rival milk companies — meaning they have no overpayment debt — forcing Murray Goulburn to cut jobs and draft plans to close processing plants once its milk supply losses drop below the 10% or 400 million litre mark. More than half the dairy farmers in the Murrabit region have abandoned Murray Goulburn, turning to supply rival Fonterra.

In early September, Murray Goulburn admitted in farmer meetings and to the Australian Stock Exchange that its “Support Package” had backfired, with 7% of its milk supply lost to date, through suppliers moving to other processors or retiring from the industry. This amounts to about 200 suppliers out of the company’s 2600 supplier base, including several of their major milk producers, and an estimated 350 million litres of milk.

Murray Goulburn chairperson Phil Tracy said: “It has become very clear that the milk supply support package is potentially proving counter-productive [to] their continuing loyalty.”

For younger farmers Karina and Brendon Glass, the news in mid August that their next milk cheque was worth absolutely nothing was the final straw. The couple were milking 500 cows at the start of last year, but sold their herd down to just 75 after the announcement of price cuts in April. Following their zero-dollars milk cheque they made the heart-breaking decision to sell their remaining cows, keeping only their young stock.

Others such as Deniliquin’s Johnston family have exited the industry altogether.

Farmer loyalty to their cooperative has been destroyed. Long-term suppliers like Cohuna farmer Greg Goulding, whose family had supported the cooperative for 60 years, have sent their milk to a rival company.

Murray Goulburn’s losses rose from 270 million litres to an estimated 350 million litres as large, financially healthy and long-term dairy businesses also switched to supply competitors.

Brendan Martin, who manages an 800-cow herd south of Echuca producing seven million litres of milk a year, switched from Murray Goulburn last September to better-paying Tatura Milk after space in the rival processor’s operations finally opened up for his milk.

“We left pretty easily; they had nothing to hold us and Tat Milk was offering us 8c a litre more than Murray Goulburn; that’s $50,000 a month more income for the same work and the same costs,” Martin said. “I think Murray Goulburn was surprised; they were banking on no one else having the capacity to take such a lot of milk from us bigger suppliers.”

In the same Rochester dairy region, two other significant producers with large milking herds and good businesses quit Murray Goulburn after the co-operative’s rock-bottom farm milk price for the 2016-17 year of 33 cents a litre proved far too low to survive.

Despite having to refund forward incentive payments to Murray Goulburn, David Christie, whose family had been with Murray Goulburn since its formation in the 1950s, switched the four million litres of milk produced on his Rochester farm in northern Victoria to Bega’s nearby Tatura plant last week.

Three big farmers in one district walking, taking 16 million litres of milk and their 2200 cows with them, is bad news for Murray Goulburn.

The same pattern is being mirrored in other Victorian dairy districts. Murray Goulburn farmers in the west of the state switched to supply Canadian-owned Warrnambool Cheese and Butter Company and the new Midfield-Louis Dreyfus milk powder factory at Penola.

Murray Goulburn threats

Panicking, Murray Goulburn sent out a legal letter to warn all major dairy processors that any active attempts to convince its dairy farmers to shift processors and take their milk away could be viewed as “aiding and abetting the breaking of a contract”.

Bega Cheese chairperson Barry Irvin has fiercely criticised Murray Goulburn’s “immoral” treatment of its milk farmers. He told the Australian on September 8 that executives at its subsidiary Tatura Milk were recently phoned by Murray Goulburn’s general manager of milk supply, threatening legal action if farmers with Murray Goulburn contracts were approached or encouraged to move.

“A couple of specific cases around Rochester were mentioned, but there are many more,” he said. “My view is bring it on. Some of these guys are coming to us in tears, asking us to take them on; this is not us twisting their arms.”

Big farmers now swapping milk companies confirm there is no milk-hunting going on. They say they made the initial approach and want to leave Murray Goulburn to improve their profits.

Farmers argue that any past contract to supply milk to Murray Goulburn is now null and void since the company had not acted fairly or in good faith towards its suppliers with its retrospective reduction in the milk price. The unprecedented clawback is an issue that two class actions will focus on, and is being investigated by the Australian Competition and Consumer Commission.

Victorian dairy farmer Paul Weller, a former Murray Goulburn board member, has supplied more than five million litres of milk a year to Murray Goulburn’s Rochester butter factory from his two farms at Lockington. Despite the clawback, Weller stayed loyal, expecting a better milk price offer for the 2016–17 year from July.

“But when the opening price came out, it was an easy commercial decision for us to move. Fonterra offered to pay me $4.54/kg while Murray Goulburn said the best they could do was $4.10/kg. I just rang and said I was leaving,” he said.

Murray Goulburn has admitted it is close to reaching the point where it will have to close processing plants. The impact this will have on their remaining members and local farm communities is yet to be seen.

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