HUME Liberal MP Angus Taylor says the dairy industry’s latest crisis has opened a big opportunity to introduce a new transparent milk pricing index into the Australian market like the one used in NZ which he helped implement.
Years before entering federal politics in 2013, Mr Taylor worked in NZ as a consultant with McKinsey where he laid the foundations to establish the national farmer owned co-dairy co-operative Fonterra, in deregulating that market.
A critical element of that transformation away from a monopoly buyer - the NZ Dairy Board which had legislated rights to purchase milk from dairy farmers and sell product overseas or direct to local consumers - was a robust transparent pricing index.
To cut a long story short, the independent milk pricing mechanism - which farmers eventually came to trust by legitimising farm-gate returns – helped break the ongoing industry deadlock and was calculated by global financial agency Standard & Poors.
Mr Taylor said a critical element of the federal government’s dairy support package announced today by Nationals leader Barnaby Joyce was a $2 million commitment to increase milk pricing transparency.
He said Murray Goulburn’s decision last month to retrospectively downgrade farm gate milk prices which was then followed by Fonterra, represented a failure in market pricing.
The price for exported milk powder and other exported dairy commodities sets the local milk price - but farmers need greater transparency of “what that export milk price really looks like”, he said.
“The New Zealanders spent many years perfecting the methodology for setting that price index,” he said.
“Yes it’s true that a milk price may include a value added component but that needs to be treated separately and the New Zealanders do exactly that.
“We need a transparent price index here which allows farmers to make advanced decisions about their production, like their feeding regimes and other critical decisions.
“We need a price index that’s accessible to all farmers and industry participants.
“The New Zealanders set this index up many years ago and it has been instrumental to the development of their industry.
“I was involved in that process and it has had a terrifically positive impact for the NZ dairy industry in giving farmers an understanding of how their product is priced and how it should be priced and that is central to their own decision making.”
Mr Taylor said that increased transparency for local milk pricing would help to prevent a repeat of the “terrible circumstance” that Australian dairy farmers currently face.
He said the management oversight and operation of the pricing index were all details that would need to be worked out with many options available.
But he said increasing milk price transparency, by developing a deeper understanding of how international prices for milk powder, butter, cheese and other products “translate back to a milk price at the farm gate”, was critically important.
“Giving farmers the best possible information about the price they’ll receive for their milk is absolutely instrumental to allowing them to make the best possible decisions,” he said.
“Clearly what we’ve seen in this current case is a failure on that front but better price indexing and better information to farmers about milk prices will help them make better decisions and avoid a repeat of these circumstances.”
Mr Taylor said if implemented, dairy processors like Murray Goulburn and Fonterra would need to take the milk pricing index into account when making their individual pricing offers to farmers.
“Fonterra understands that well because that’s the model that they work with in NZ and the New Zealanders have many years of history in working with this type of price index,” he said.
“It’s important that everyone has a better understanding of how prices are set in the industry and how that relates back to a sustainable price for milk and it can be done - particularly in export states like Victoria and Tasmania where this (crisis) has happened - with more transparent and better pricing information.
“This is about having better pricing information and giving farmers access to a better understanding how the production of a litre of milk, or a 1kg of milk solids, translates through to a price in the international market.
“If we can get that information back into the hands of farmers in an easily usable form then they can use that to make better decisions.”
Mr Taylor said the New Zealand dairy industry wanted a better way of understanding what the right price was for their milk which led to the index being established.
He said they understood a dairy co-operative or milk processor could make a premium for that milk by making products like baby formulae product.
However, at the end of the day they wanted a better understanding of how the price of skim milk powder, whole milk powder, cheese and butter translated back to a price for milk, he said.
“The New Zealanders spent a lot of time working on what’s effectively a price index that allows farmers to understand how skim milk powder, whole milk powder, cheese and butter prices translate back to a price for milk, on a regular basis,” he said.
“That work was done almost 20-years ago and was fundamental to allowing the formation of Fonterra because it gave farmers an understanding of what a fair price was for their product.
“If you understand that then you can hold your local processor, whether it’s a co-operative or a private processor, to account.
“That understanding of the milk price also allowed deregulation to proceed in NZ with farmers having deeper knowledge of what a fair price was.
“It was absolutely fundamental to reforming the industry but what we’ve lacked in Australia is an equivalent approach and this is something we should be pursuing.
“This is a terrible, terrible time for the farmers who have been impacted but it is now critical that we learn from these mistakes.”
Mr Taylor said the period of time taken to implement the milk price index would not depend on the actual calculations but on bringing industry participants and others “along” and to understand its methodology while building a system “everybody trusts”.
He said during the NZ experience, a lot of debate and discussion occurred with a very smart, well-motivated group of farmers leading the way and “that’s often the best way to do these things”.
“This will work best if there’s a well-motivated group of farmers who really understand the issues leading the way,” he said.