Dairy industry leaders and some farmers have said Murray Goulburn (MG) opening price is now below the cost of production.
Inverloch supplier Bec Casey, who runs a 320-cow share-milking operation, said the original price cut meant her and husband Glen lost two years worth of profit in one day.
MG – Australia’s largest dairy processor – announced an opening price of $4.31 per kilogram of milk solids (MS), after its supply package repayment is taken into account.
“It changes the ball game – break even is $4.40, and I am right on it – I make one cent,” Ms Casey said.
“I was extremely sceptical, but I didn’t think it would go down this low.”
Farmers have suggested MG’s new payment price worked out about between the high 20’s to 31.3 cents a litre for milk.
At $4.31kg/ms, the payment comes in at 69¢ below Bega and 49¢ below Warrnambool Cheese and Butter. It is also lower than the $4.75 to $5 it slashed the rate to, in April.
In a letter to its supplier shareholders, MG also announced a forecast full year 2016/17 net profit after tax (NPAT) of $42 million.
It's full year profit results will be announced in late August.
Farmers had been hit hard by rising fodder and water bills, after drought pushed up grain and irrigation prices. The Caseys were among 2500 dairy farmers, in four states, affected by the step-down and new opening milk price.
United Dairyfarmers of Victoria president Adam Jenkins said producers were “definitely” surprised, the price was so low.
“This opening price is below the cost of production for many dairy farmers and we’ll all need to pull together to get through the months ahead,” Mr Jenkins said.
“Dairy farmers are still carrying the weight of MG’s poor management decisions that’s led to the debt they’re being forced to repay on the back of this low opening milk price.
But Mr Jenkins said there was a desire in the dairy industry to move forward, with the UDV recognised Murray Goulburn had deliberately been cautious in its opening price.
“This is a conservative price, and it’s most likely that MG is erring on the side of caution, but it opens up the possibility of stepping up to a more reasonable price later in the season,” he said.
“The reality is we’re facing a perfect storm globally, with a massive oversupply of dairy commodities, volatile markets and exchange rates.”
He said the UDV had worked closely with dairy industry group Australian Dairy Farmers (ADF) for the past six weeks in an effort to move forward.
Mr Jenkins said the two groups would continue to look at the best options for dairy farmers and that UDV is taking steps to provide assistance for the industry.
“This has been devastating news for the dairy industry, especially given the additional cost farmers are carrying due to the adverse seasonal conditions,” Mr Jenkins said.
“Our concern is the health and wellbeing of our farming families, and also the service sector that provides such valuable support to the dairy community.”
Mr Jenkins predicted a shake-out of the industry but said farmers now needed to go back to basics.
“People are going to have to understand what their cost of production is - it doesn’t bode well for the industry,” Mr Jenkins said.
He said farmers would have to try and grow as much fodder as they could, have good stocking rates and calving patterns.
“It’s going to put a lot of pressure on the industry, so we are making sure we are helping those affected.”
Jessa Fleming, Portland, milks a herd of 250 cows and said the release of the opening price so close to the new financial year was frustrating.
“We will get through it, but it will be a very tight, and stressful, year,” Ms Fleming said.
“We understand they have to open conservatively, they are not going to make the same mistakes again, but it is very conservative.”
South-western supplier Craig Dettling, Macarthur, said there would be a big variation in payments, from farm to farm.
“We had budgeted on $4.75 for the full season, if we get $4.80, we will scrape through,” Mr Dettling said.
“They sound they are being prudent and conservative and there is potential for some of their savings. It’s going to be more of a cash flow thing, we will have tighter cash flow, and we will be making sure there are no more passengers.”
Mr Dettling said he would be looking at buying in less feed and growing more summer crops.
That would be helped by a change in seasonal conditions.
“Compared with the past two years, with two failed springs, a good spring this year will make a big saving, compared to that.”
Mead dairy farmer Dianne Bowles said she was “pretty devastated” by the opening price.
“We knew it was going to be bad, but nothing like this,” Ms Bowles said.
”I need about $4.80-85, so it’s a big gap, even at $4.80 closing and they have to get there – the tricky thing is, where I live, it’s either them or Fonterra.”
She said irrigation costs, at $180/ML were a significant factor, so any maintenance tasks would have to be postponed.
It was becoming apparent there were two or three different dairy production regions, in Victoria, which required a different approach.
”We have similar issues, but we all farm in different ways, that’s the tricky thing for government, one size won’t fit all – so I am hoping they will look at things regionally.”
Australian Dairy Farmers (ADF) president David Basham said MG’s opening farmgate milk price was “...well below the break-even point for many dairy farmers”.
Mr Basham said the financial implications of the downturn would put farmers under pressure for several years to come.
He said MG’s Australian Securities Exchange (ASX) announcement was not easily understood and did not provide the certainty its suppliers needed to make sound business decisions.
“Dairy farmers know our industry is not immune to the global volatility at play and we are resilient – farmers will work to adapt their businesses within this challenging environment as best they can,” Mr Basham said.
“Dairy industry leaders are united to provide farmers with the support they need during this challenging time and are working to deliver improved fairness and transparency throughout the supply chain.”
He said farmers could not be expected to continue to wear the full weight of financial risk in the dairy supply chain.
“As an industry, we are going beyond short term measures to create stability for our industry’s long term future. Central to this is finding new ways to manage price volatility for farmers, which ADF and its state members are working to address through simplifying supply contracts and improving transparency in the milk pricing system,” Mr Basham said.
“There are unfortunately no silver bullets to restore our industry, but there are resources available to help farmers navigate the current challenges and manage the impact of recent announcements. It’s important to make the time to take up these opportunities.
“The Dairy Farmer Central (http://www.dairyfarmercentral.com.au/ ) website launched a number of weeks ago lists all of these tools and more.
It also signposts events - some of these events will inform and help you plan for the season ahead, others provide an opportunity to take time out from the farm and get some perspective.”