A senior Victorian dairy industry analyst has disputed claims there was insufficient certainty to provide more accurate milk price forecasts.
Fresh Agenda director Steve Spencer said dairy farmers made the longest and largest capital investments in the value chain, and deserved much better than the information currently being provided.
“The events of the past few months have shown up a gaping hole in the information reaching Australian dairy farmers,” Mr Spencer said.
“While all the focus was on the major correction in 2015/16 milk prices and the remedies by the two largest milk processors to address the impact of ‘overpayment’ on their businesses, any signals about expected future prices got lost.”
He said the latest projected milk prices seemed to come as a shock – “frankly, for an industry with considerable worldliness and sophistication, that isn’t good enough,” Mr Spencer said.
“Perhaps the problem – the shock – is a combination of signals not being given clearly, as well as those signals not being read for what they are.”
He said it was no longer a valid defence to say there was not enough information, or insufficient certainty, to provide forecasts.
Fresh Agenda’s modelling showed a 2017/18 season outlook of a commodity milk value of about $5.20-5.60kg/ms, which should be translated into a farmgate price of $5.80 to $6.30kg/ms.
“This one is built on an add-up of the world and a constant reading of the forward indicators of supply and demand,” Mr Spencer said.
But he said this financial year, Fresh Agenda expected a value of just $4.10kg/ms, with the latest spot prices converting to a commodity milk value of $3.74kg/ms.
“The market is in recovery and has a way to go before averaging $4.10/kg for the year,” Mr Spencer said.
Fresh Agenda had a two year rolling outlook, for the global market.
“We have turned that outlook into a forecast commodity milk value – the expected farmgate value of the returns from a relevant mix of major commodity products, based on export prices, manufacturing costs and company margins.
“A commodity milk value isn’t the same as a farmgate milk price as Australian returns are typically higher than commodity values,” Mr Spencer said.
“The wholesale prices achieved by dairy companies in the domestic market are more stable and smoother than prices achieved from exports.
“In addition, Australian exports generally achieve a higher average price than product sold as bulk commodities, as there is more tailored specification sought by customers.”
He said in the last couple of years, the difference between southern Australian milk prices and the commodity value of milk had been worth close to 80c/kg milk solids.
Mr Spencer said the other major impediment was the impact of “forward-looking statements” on unit holder expectations, particularly in the case of Murray Goulburn (MG).
“If MG were to make a next season price forecast, for example, that would amount to a dividend forecast and hence a price-sensitive piece of information to investors in the Murray Goulburn Unit Trust (MGUT),” Mr Spencer said.
“The new structure has delivered a more cautious attitude to giving milk suppliers a meaningful future price signal, and recent events will no doubt make the company more cautious.”
Meanwhile, agribusiness banking specialist Rabobank said dairy producers were
“well prepared” for the current global downturn, with sufficient equity levels to put them in good stead to weather the current crisis.
The report, Oceania Dairy – Let’s Debt Serious said the 2016/17 season will be financially challenging, with milk prices for many export-orientated producers likely to remain below breakeven.
Senior dairy analyst Michael Harvey said Australian farmers had learned from previous cycles to generate cash buffers and set appropriate gearing levels in place, to help manage volatility.
“Over recent years, many dairy producers have taken the opportunity of improved farm profitability to pay down debt rather than expand their business,” Mr Harvey, the report’s co-author, said.
“Our analysis shows that average Victorian farm debt levels (in terms of debt per kilogram of milk solids) are now 20 per cent below the historic highs of 2008/09,” he said.
With equity likely to be eroded during the downturn, as farmers accessed working capital to manage the challenging conditions, producers would need to use the next upward price cycle to strengthen business structures.
“This may see farmers adopt a business strategy focused around reducing debt and rebuilding equity, rather than chasing the profit margin in the upswing,” he said.
Mr Harvey said the adoption of a flexible production system was also a good long-term strategy for farm resilience.
“The rules of engagement have changed for Australian dairy and it is no longer enough to be a low-cost, pasture-based milk producer,” he said.
“Instead, there needs to be appropriate flexibility in the production system so costs can be scaled back when times get tough.”
The Rabobank report said global market dynamics had finally caught up with Australia, despite dairy processors continuing to invest in value-add strategies.
“Australia can run, but not hide, from the global commodity market,” Mr Harvey said.
“Value-add may well be the sweet spot for the Australian dairy sector, though the reality is that not all milk can be moved into these channels and much of this higher-value output is still bound for global markets.”
Mr Harvey said with the 2016/17 season set to remain extremely challenging for dairy, there would be a significant focus on cost control.
“While this season will also be invariably difficult, producers are making on-farm adjustments to downgrade their feed requirements, cull less productive stock and defer their repairs and maintenance schedules.”
Rabobank also forecast prices would rise modestly in the first half of 2017.
“We are finally starting to see the taps of global supply turn off, as farmers around the world adjust production in the face of continued lower prices,” he said
“Our analysis shows that average Victorian farm debt levels (in terms of debt per kilogram of milk solids) are now 20 per cent below the historic highs of 2008/09,” he says.
An MG spokesman said the current situation, facing the company, was due to the result of global dairy prices, trading at unprecedented levels.
“All processors with a significant exposure to commodities products and export markets are facing tough conditions no matter what model they operate under,” the spokesman said.
Nearly half of all MG’s sales were export based.
“In the full year of 2015, domestic revenues were $1.6 billion and export revenues were $1.3 billion,” the spokesman said.
The spokesman said MG had twice indicated there was pressure on the milk price, in the six months until April.
“At our half year 2016 results, n February this year, we confirmed a FMP of $5.60 per kgms but advised that it was based on a number of factors including no further deterioration in dairy commodity prices or unfavourable changes to the exchange rate,” the spokesman said.
“We also reinforced the continued strong performance of international ready-to-consume dairy product sales (including adult milk powder) was necessary to partially offset the underperformance of the ingredients and nutritionals segment, due to very low commodity prices.”
MG went into a trading halt on April 22, re-opening on April 27.
