Concerns raised about a dairy sector disconnect

Mr Walsh said it appeared the two sides of the industry didn’t seem to be talking to each other.

“I am very concerned the two sides of the industry don’t seem to be understanding each other – more processing capacity on the one hand, but the risk of less milk happening in the future,” Mr Walsh said. “There is something not quite right, there.

 “There’s been major investment by Fonterra, at Stanhope, by Freedom Foods, Australian Consolidated Milk has built a new plant, at Girgarre, and there’s talk of a new plant, at Cohuna.

“You have investment in more capacity, but a decline in milk production.”

He said at least one farm a week was being sold, in northern Victoria, due to the high cost of water and feed.

Farmers were also culling herds, to try and trim the cost of production.

Read more: Dairy farmers making early cull call

“How can intelligent people be making some of these decisions around investment, when there is declining production, and all the signals for dairy farmers are that they are not getting paid enough for their production?” he said.

United Dairyfarmers of Victoria president Adam Jenkins said it was a challenge.

‘There’s not the investment going on, on-farm, as there is in the processing sector, and I think that's something that needs to be looked at,” Mr Jenkins said.

“We talk about value adding, and moving up the value chain.

“But, at the end of the day, our farmers are getting a farm-gate price based on the world market, which is a commodity price.”

He said changing supply patterns involved “a huge amount of risk.

‘We have identified that one of the big things is the pricing structure needs to be revamped.

“We need to make sure they are delivering value, back on farm, and so we can grow the whole supply chain.”

But processors said they were looking at a long-term view.

Australian Consolidated Milk’s commercial general manager Peter Jones said the current adverse conditions, affecting the viability of dairying in northern Victoria, were short term.

Read more: Dairy Australia about to revise milk production figures downwards

“Drought is a factor that is not new, and this is a phenomenon that will continue to impact agriculture in the region,” Mr Jones said.

“The effects of this drought has created a perfect storm of pushing the cost of grain from export parity pricing to import parity pricing, reduced the availability of hay and has increased the demand and therefore cost of water.”

He said ACM’s Girgarre investment, only weeks away from coming online, was a highly efficient, specialty site enabling the company to process conventional, organic and even goats’ milk. 

“The site will process the milk into specialty powders and cheese,” Mr Jones said.

‘Our belief is that if we can get the fundamentals in our business right the flow on effect will be a better financial outcome for our suppliers and assure a future for their families in dairy.”

New investment in the area was a vote of confidence in the long-term viability of dairy in the region. 

“As an industry, we need to continue to invest to improve our conversion efficiencies to enable us to remain globally competitive,” Mr Jones said.

Investment in the region also needed to be balanced by the fact that the processing site at Rochester was lying dormant and not likely to come back into production any time soon. 

“The mothballing of this site takes 800 million litres of processing capacity out of the north. 

“ACM’s new site will have capacity for approximately 200 million litres which is the right size for our business.”

Fonterra managing director Rene Dedoncker said it had been a challenging season, with drought and high input costs, and volume forecasts were lower this year.

But he said the long-term outlook for dairy remained positive.

“There is demand-led growth in Japan and China, particularly for Australian dairy, which is why we’re confident in the future,” Mr Dedoncker said.

“We hold around a 20pc share of Australia’s total milk production, and the expanded Stanhope plant is crucial to helping generate additional value from the Australian milk pool.

 “Whether it’s the commissioning of new plants or the growing of sales volumes, these initiatives are long-term plays – getting them right and getting value flowing through the supply chain does take time.”

The key pillars, which are the demand for these products and the investment that enables them to be produced, are in place.

Rabobank senior dairy analyst Michael Harvey said there was no doubt there was excess processing capacity, in northern Victoria, and across the Australian dairy supply chain.

“The industry is coming out of a wave of capital expenditure by a number of dairy companies which has expanded production capacity,” Mr Harvey said. 

“There are still new projects in the pipeline, so there is still some more capacity to come on-stream in 2019. 

“Long-term if these plants are not running at or near peak utilisation rates then there is a clear risk of lower return on investments originally expected by dairy companies.”

But he said consideration of where the excess capacity was situated and what capability and product mix the plants had, needed to be considered when assessing the Australian processing landscape.

“There is no doubt the largest portion of the excess processing capacity is sitting in Northern Victoria,” Mr Harvey said.

“So there is elevated risk for manufacturers in this region to maintain plant utilisation.”

He said processors decided to build new plant based on due diligence and planning.

“The timeframe to develop and build new plants, or new plant capability, is quite long and decisions would have been made well before this drought started impacting milk supply growth,” Mr Harvey said.

Many processors had also successfully recruited new suppliers, at the expense of Murray-Goulburn.

“That’s no longer the case,” Mr Harvey said.

“With milk supply now forecast to fall to two-decade lows potentially, there will be pressure in the supply chain for a number of years ahead.

“So right now you would expect possibly slowdown in new investments and the industry is acutely aware of the lack of milk supply.”

He agreed some of the investments had been made out of necessity.

“For example, there are processing plants that are being specifically built to handle the growing milk pools of organic milk or purpose-built UHT capacity to service markets in Asia,” Mr Harvey said.

“By far and away the major investments have seen been in increasing mozzarella production which is not surprising given the strong demand in China and more attractive export returns for mozzarella versus other commodity streams.”

It wasn’t surprising it would be a competitive market for dairy companies to source milk, for an extended period.

“While competition for milk supply is welcome by dairy farm businesses – running inefficient plants long-term is detrimental to the overall profitability of the value chain,” Mr Harvey said.