Stepdown would come back to bite processors

Stepdown would come back to bite processors

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SOLID GROUND: Bega Cheese chairman Barry Irvin talks about stepdowns in the face of COVID-19.

SOLID GROUND: Bega Cheese chairman Barry Irvin talks about stepdowns in the face of COVID-19.

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Fonterra Australia increased its minimum milk price from $6.06 a kilogram of milk solids to $6.40/kgMS on Wednesday and dairy social media forums were flooded with speculation about a future step-down.

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With the news that Fonterra Australia had increased its minimum milk price from $6.06 a kilogram of milk solids to $6.40/kgMS on Wednesday, dairy social media forums were flooded with speculation about a future step-down.

In response, a Fonterra spokesperson pointed to its updated standard supply agreement, which shows a new minimum price of $6.40/kgMS.

"The revised opening price is aligned with our business plans and forecast for the year ahead, although the majority of our production is yet to be sold or ordered," the spokesperson said.

"We now need to focus on allocating the milk to the streams that deliver the most value and manage our sales through the year to deliver this price."

READ MORE: Fonterra ups its price

Under the mandatory Dairy Code of Conduct, processors must not drop prices below their published minimums unless there are exceptional circumstances.

The Australian Competition & Consumer Commission, which acts as the code's watchdog, says it "considers that some of the circumstances that may meet the 'extraordinary event' requirement are:

  • the imposition of import restrictions in a key foreign market in response to a temporary biosecurity threat, or
  • a temporary trade shock involving one of Australia's major dairy trading partners."

On Monday, Bega Cheese chairman Barry Irvin said there was little likelihood further waves of COVID-19 outbreaks could justify a step-down.

"Bega's got a very strong record of not stepping down that was demonstrated particularly in recent years," Mr Irvin said.

"You can never say 'never' because, of course, something globally extreme could occur, but I think there's much nothing much more extreme than what we've experienced with COVID-19.

"So, you know, it would be our endeavour to avoid it in all but very trying circumstances."

United Dairyfarmers of Victoria president Paul Mumford said he thought processors who called for a step-down would face a backlash.

"Yes, it is possible [market collapse due to COVID-19] may enact a step-down clause but, if that was to take effect, I would say that it's a challenge for the processor, knowing that this is the first year of a mandatory code in effect and that the ACCC and the minister of the day is hot on the topic," he said.

"Dairy is front and centre in everyone's conversation and if they were to enact that clause, they would be under so much scrutiny and essentially could be made an example of."

Mr Mumford said the code's requirement to publish minimum prices meant processors had to be more prepared.

"It has essentially forced them into making sure that they've done their due diligence and that they can justify the prices they've actually got now," he said.

"And it comes down to the exposure of the product mix that the processors have ... so you don't put all your eggs into one basket.

"I think that is something clearly that most processors have learnt."

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