Fonterra’s Australian head, Judith Swales, has told a Senate inquiry the decision to step down milk payments, in April, was the most difficult she had ever been involved with.
Ms Swales, the company’s chief operating officer, Velocity and Innovation and Australian Milk Supply general manager Matt Watt fronted the Senate Economics Reference Committee into the dairy industry, which held hearings in Melbourne.
“Whilst we did try to warn farmers about the volatility and the sustainability of the milk price and the possibility of a step-down, we were a lone voice and we were roundly criticised for trying to talk the industry down,” Ms Swales said.
She said Murray Goulburn’s (MG) decision to introduce a step down in late April “came as shock to us.”
Fonterra was caught between a “rock and a hard place”.
“On one hand, we had a global oversupply of milk, coupled with weak demand, which led to global commodity prices hitting 10-year lows.
“On the other hand, locally, we were contractually locked in to paying farmers an unrealistic milk price that did not reflect what was being earned in the market.”
Ms Swales said Fonterra had never asked farmers to repay any money.
“We also put in place a number of measures to try and help farmers through what we know was an extremely difficult and challenging period,” she said.
Mr Watt acknowledged the milk price cut had been “massive, emotionally and financially.
“It has been heartbreaking,” Mr Watt said.
Fonterra offered farmers low interest loans, made available free and confidential counselling and introduced an additional autumn offset payment.
“What farmers are telling me now is that they need clearer price signals,” Mr Watt said.
“They want more transparency. They want to make sure that, as a processor and as an industry, we are investing in the right places.”
A better season and upswing in the market had resulted in Fonterra paying a competitive milk price “and one that reflects what actually can be earned in the market, not one that is funded by debt.”
Fonterra was also investing in new plant and equipment in its Stanhope cheese plant, Wynyard, Tasmania and Cobden.
Tasmanian Jacqui Lambie Network Senator Jacqui Lambie asked why Fonterra matched MG’s price.
Mr Watt said it was a contractural obligation.
“We set up an agreement when Fonterra entered the Australian market a little over 10 years ago and Bonlac was failing.” Mr Watt said.
“The agreement that we made at the time, and that has endured ever since then, is that we, at a minimum, would match the largest processor in Victoria—which is Murray Goulburn—in terms of our price performance.”
Under questioning from Victorian Greens Senator Janet Rice, Ms Swales and Mr Watt agreed that Fonterra did not have to match the MG price.
“By the end of the season you had to, but at the beginning of the season you did not have to match the Murray Goulburn opening price,” Ms Rice said.
“You could have opened lower than that. That was your choice.”
Mr Watt said in late June – when the opening price was being set – the market supported $5.60kg/ms – “we had reasonable confidence at that point.
“What we saw in the ensuing 10 weeks was a massive drop in terms of global commodity prices.”
Mr Watt said that, even though the milk price was ‘unrealistic and overinflated’, farmers were clear it was an obligation they expected Fonterra to meet.
“So have you reviewed that?” Ms Lambie said.
“Are you doing anything different with that in your contracts now?,” Ms Lambie said.
“It is misleading, really. If you knew that they should not have been getting that price but you were still out there saying that you are going to be paying that price, isn't that doing something to the markets?”
Mr Watt said Fonterra was reviewing what it did, to protect farmers and the industry from the current crisis happening again.
Ms Lambie asked about claims the loans Fonterra had offered were not transparent or equitable, as the entire network had to pay interest, whether farmers took them out or not.
Mr Watt said the loan was offered over three years, starting from 2017.
“We wanted to be quite transparent with our farmers on the interest cost of those loans, so we initially said, 'If all farmers take up loans to the degree we expect them to then the cost of that will equate to two cents per kilogram of milk solids,” Mr Watt said.
“In terms of how we calculate our farmgate milk price, we will effectively deduct that from the cash payment that we make to our farmers.'”
About 44 per cent of farmers took up the loans, reducing the amount of interest on the capital to one cent.
Fonterra had introduced a global dairy update, to share more information with farmers about what was happening in the markets.
Mr Watt said the update detailed data points on movements in the key commodities, such as whole milk powder, cheese and currency, for example.
“That will influence price. So it is providing more data points,” Mr Watt said.
“I think the continued evolution and offer of things like our fixed base milk price program give farmers an option to say, 'If price security, particularly in my business, is an issue then how can I get an option to provide some protection on that?'
“I know there are broader industry moves around broader transparency of what is happening in the market, and we are only too happy to participate in that as well.”
Ms Swales said Fonterra’s dairy update would act in a similar way to a milk commodity price index.
Ms Swales also said Fonterra needed to be careful, in responding to calls not to impose further step-downs, late in the season, in the future.
“We need to be careful making statements that say, 'We guarantee we won't step down,' because the danger is that we will start the price so low that it will not actually encourage farmers to invest and grow their milk,” Ms Swales said.
“It is something that would have to be considered very carefully to make sure that we do the right thing for everybody. “
