Australia’s largest milk processor, Murray Goulburn (MG) has given its strongest signal yet, a commodity milk price index might be the best way to ensure pricing transparency.
In its submission to the Senate Economics References Committee, MG said its board and management were working with all members of the supply chain to explore options to improve transparency.
“It is MG’s view that an independently managed and tailored commodity milk price index would be beneficial to all participants in the Australian dairy industry,” interim chief executive David Mallinson said in the submission.
During the election campaign, Federal Agriculture Minister, Barnaby Joyce, promised to establish an index.
He committed $2 million towards setting one up, with the aim of giving better information to farmers.
Before lodging MG’s submission, Mr Mallinson flagged a full review of the co-op’s milk pricing structure.
“We support having transparency in the way we deal with farmers – the Code of Conduct is one way of doing that, but it might be done by other means as well.”
MG had “by far” the largest exposure to international commodities, of all Australian processors.
“With the amount of volatility we have seen in export commodity markets, we either need to have a different policy mechanism, to absorb some of that volatility,” Mr Mallinson said.
“If we go to a New Zealand model, we see they open at about 65-70pc of the forecast price, and if you go over the Europe, they have a monthly milk price, so they have a mechanism to deal with the volatility.
“We will be doing a full review of our milk pricing mechanism, in consultation with our suppliers and we will come back with the best process we can.”
The review would start in January, to be in place by the new financial year.
Chairman Phil Tracy also acknowledged the need to improve transparency, in a letter to suppliers, after the August meeting, with Mr Joyce.
“MG’s pricing mechanism has worked effectively for many decades and through many industry cycles but we do believe there is scope to improve the transparency of pricing for Australian dairy farmers,” he said. The submission was one of eight made to the committee, part of an inquiry into the dairy industry, last month.
In a covering letter to committee chair, Queensland Labor Senator Chris Ketter, Mr Mallinson said MG acknowledged the April profit revision had affected farmers.
Mr Mallinson said in taking the decision to reduce the farmgate milk price in April, the board considered all options around how to manage the step down to minimise the impact on all suppliers.
The Milk Supply Support Package (MSSP) was intended to deliver the most manageable cash flow impact for the broadest possible range of suppliers.
“The MSSP aimed to provide immediate support to farmer supplier cash flows without applying loans against individual suppliers,” Mr Mallinson said.
MG entered a trading halt in early April before announcing it would slash the price of milk solids to between $4.75 - $5.00.
In its submisson, MG acknowledged the “significant impact” the cut had on suppliers and “what transpired was unacceptable to them.
“The board is very disappointed and sorry that suppliers were put in this position, so late in the season.”
The MSSP, which was now being reviewed, was introduced to provide farmers with an estimated weighted average farmgate milk price of $5.47 kg/ms.
“The total support package provided through the MSSP was $183million, and suppliers were delivered an average cash price for their milk in 2016 of $5.53 kg/ms, not $4.80 kg/ms,” the submission said.
Mr Mallinson said in his letter, MG faced a “perfect storm” of the removal of European dairy quotas, for the first time in 30 years, the continuation of Russian trade bans and a slowdown in Chinese demand.”
MG’s diversified product range had seen it manage the volatility well through the first half of the year, but events and conditions during March and early April deteriorated far further than MG was expecting.
“Nationally, this was further complicated by a volatility in the Australian dollar and its impact on exchange rates.”
Mr Mallinson said commodity prices remained at historic lows, defying predictions of a price recovery.
“This global oversupply is estimated to be in excess of six billion litres of milk.”
Before the submission was lodged, Mr Mallinson said the co-operative had tried to be forthcoming in “who it was, what it did “and – more importantly – were we are going to now.”
He said while inquiries into the industry were “a drain on resources”, MG was committed to working with each one.
“I think, overall, it’s for the betterment of the dairy industry, for us to determine how best we work with those organisations.”