Don’t compare, don’t despair, on dairy: analysts

Don't compare, don't despair, on dairy: analysts


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Caution urged when comparing Australian dairy prices, to those overseas.

Leading dairy analysts have urged caution in comparing Australian prices to those in New Zealand and Europe.

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Farmers have been asking why Australian dairy prices were not keeping up to those in the European Union or New Zealand.

But Dairy Australia senior analyst John Droppert said while it was good farmers were looking around and comparing markets, he urged caution in doing so.

“You can compare but you have to be very cautious about it, they are not apples and apples,” Mr Droppert said.

“It’s a price that’s calculated differently – it’s very problematic to try to compare prices – but it’s the best gauge people have.”

He said rough calculations showed the European average was around $6.70 kilogram/Milk Solids (kg/MS), but the strong Australian Dollar/Euro exchange rate pumped that up.

“It is no surprise European farmers have historically received more,” he said.

When it came to New Zealand, calculations showed the long term average was $4.93 kg/MS, compared with $5.26 kg/MS for Australia.

TAKE CARE: John Droppert, Dairy Australia senior analyst, has urged caution, when it comes to comparisons.

TAKE CARE: John Droppert, Dairy Australia senior analyst, has urged caution, when it comes to comparisons.

Those figures had been measured since 2001-02.

Mr Droppert said it was “an old question - and the Kiwi’s were asking it in 2014-15.

“Most of the reasons for it are fairly mundane, it’s a different share of domestic versus export products and you have much more volatile prices, when you are exporting a lot more,” he said.

New Zealand prices were linked to the Global Dairy Trade (GDT) and were very responsive to it.

“In the case of Europe, the prices are monthly and they go up or down, or stay the same, every single month.

“At the moment it’s the product mix, as well – a high proportion of our milk is going into skim milk powder

“New Zealand is much more whole milk focussed and that is going much better than skim, in world markets.

“The Kiwis can export the butterfat, whereas a lot of ours gets consumed domestically.”

Fresh Agenda director Steve Spencer also agreed it came down to product mix and conversion costs.

In a recent blog post, Mr Spencer said the Australian processing sector was less cooperative in nature and much less concentrated.

“Competition for milk supplies has been a key pre-occupation for local dairy companies trying to fill capacity in the production-constrained environment and ‘pick the winners’ in terms of product and market mix, in view of their inability to compete on cost.

“In attitude and actuality, the Australian dairy industry is much less a global player than it was – accounting for around six per cent of global trade compared to a peak of around 17pc in the early 2000s.”

About 75pc of milk production was converted into tradeable products, which meant the industry was not immune to international markets, despite the increasing share of domestic consumption.

“The mechanics of the domestic marketplace – which is tough and getting tougher – and more particularly supermarket power, is an increasing focus for an industry that is withdrawing from the world.”

The industry in Australia and New Zealand was now dissimilar and it made less and less sense to compare them.

“What’s the reason for the gap this year?

“(Is it) a more bullish outlook from Kiwi dairy companies, and superior conversion efficiency – or does it reflect waning leverage and value capture on this side of the Tasman?”

X-Cheque managing director Dr Jon Hauser said processors needed to focus more attention on what it took to make farmers more profitable.

“Murray Goulburn (MG) is still in a heap of trouble – my assessment is that if MG ws running on their traditional economic profile, the value would be between $5.50 and $6 kg/MS,” Mr Hauser said.

“The real question that has to be asked is why aren’t other processors paying that amount?

“The answer is, they don’t have to.”

MG was the only organisation, which had a vested interest in maximising the milk price.

“This is the dance they are all trying to play, everyone wants the industry to grow, but the game of minimising input costs is inevitably going to lead to a loss of farm milk supply.

“You create your own future; if you underpay farmers – it will continue to cause people to leave the industry because it is not possible to survive.

“While you have a wounded company, that is bleeding milk like there is no tomorrow, you don’t have to think about it, as people will transfer.

“I don’t have to grow milk supply naturally; I can just steal it from someone else.”

Mr Hauser said companies, which were focussed on the export market, needed to ask what they needed to do to increase farmgate profits.

“It beats waiting for the competition to fall over,” he said.

“There needs to be, and I think there is to some extent, a dialogue and relationship between farmers and processors, as to how they grow their footprint, in terms of

supply and value of supply.

Major ingredients suppliers needed to focus their attention on maximising “the value opportunity” back to the farm – not just on the return on assets.

“Return on assets is fundamentally linked to supply, which represents 75pc of the asset base.”

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