Muted sympathy for dairy processor pain over input costs

Under the Dairy Code of Conduct, processors can step down prices under what are seen as exceptional circumstances.

United Dairyfarmers of Victoria president Mark Billing said despite the global headwinds faced by processors, reducing farmgate prices this season was not an option.

"I note, with interest, the Australian Dairy Products Federation want to go back now, when the supply and demand situation is changing, to adjust the Code," he said.

While he was unaware of what the ADPF wanted to change, he said he had no doubt farmers would come under price pressure at the end of this season.

For now, his expectation was processors would honour this years prices.

If processors wanted to have a similar impact on the milk pool as in 2016, when they clawed back payments, "that will not bode well for the industry, in years to come."

The claw-back was a significant reason for dairy farm exits, in recent years.

Mr Billing said the market was "in action" when prices were set in June.

"Dairy farmers didn't force the processors to pay what they were paying, they went into it with their eyes wide open," he said.

"Processors are feeling the pain, but dairy farmers also felt the pain for a long time too."

The Australian Competition and Consumer Commission can impose penalties for retrospective price step-downs, which are prohibited in all circumstances.

But under the Code, processors can reduce farmgate prices temporarily, in an emergency or change in market conditions outside Australia.

The ACCC says that can only happen if there is a "highly significant" effect on supply, demand or costs in the industry and the circumstances are not caused by the processors' own decisions.

The ACCC has also delayed releasing its decision on Coles acquisition of two Saputo Dairy Australia processing plants.

In its latest quarterly Situation and Outlook report, Dairy Australia said processors were facing global headwinds, along with higher domestic raw milk prices, cost of production increases and consumer resistance due to higher prices.

Mr Billing said the Code had provided a more level playing field and processors were discovering the commercial reality of procuring milk, from a shrinking pool.

He said he was concerned about the loss of competition from processors - "there has been a rationalisation of suppliers to processors and we may see a similar rationalisation of processors."

He said he felt for New Zealand's dairy farmers.

Fonterra NZ announced recently it was reducing its 2023-24 farmgate milk price by a mid point average of $1 a kilogram milk solids, revising the range from $7.25-$8.75/kg MS to $6.25-$7.75/kg MS.

"The current pricing is below the cost of production, so they are going to have a really tough year," he said.

"Australia's retailers are taking advantage of that."

But former Australian Dairy Farmers director, Longwarry's John Versteden, said he was concerned at the unsustainable high prices, offered to farmers this season.

"Does a processor have to fall over, before we realise this is a mistake," he said.

He runs a 700-head herd and supplies Burra.

"We are heading for a massive cliff, it doesn't make sense where prices were set," Mr Versteden said.

He said he was concerned no one wanted to have an "honest conversation" about where the "real market" sat.

They were avoiding what was "the catastrophe that's likely to happen in the next half of the season when people start talking about a $6-7 a kilogram Milk Solids price.

"We can't ignore the fact the prices we have at the moment are unsustainable - on top of that, you have the China heifer job, which has disappeared overnight."

Mr Versteden said there was no balance in the marketplace, with NZ prices sitting at $2.60 a kilogram Milk Solids below Australia.

'We are very good about talking things up, but when things are not so good we need to talk about that as much - future planning is really important.

"I don't know how the processors are faring, but I think the Code has worked reasonably well on a rising plane of prices

"I don't know it works really well on a declining price plane.

"We haven't had to deal with it before - if the processors need to protect themselves, they will step down.

"I don't see how we are in any different position to when Murray-Goulburn had all those issues, years ago."

If there was going to be a downturn, it needed to be managed, rather than the industry facing "shocks," he said.

Nr Versteden said he was more buoyant about the season, with healthy soil moisture and drier conditions.

"This is probably the best four or five months of seasonal conditions we have ever had, it's been fantastic," he said.

'If it cuts out a bit short, that's not so bad, because we didn't fare that well in the last couple of years with all the mud.

"Apparently someone said a few years ago 'there's money in mud' but I'd like to catch up with that bugger down a dark alley, some time."

Other farmers had some sympathy for the plight of processors, but said they'd also had to face tough market conditions in the past.

Carlie Barrie, Woolvie, supplies ACM from her 300-head organic herd.

"We've been expected to absorb rising costs, we have had to cut back and learn to be more efficient, over the years, so it's only fair the processors have to do so too," Ms Barrie said.

"With there not being many co-operatives around now, a lot of trust has been lost over the years - it's hard to have sympathy for them, even though we do need them," she said.

She said power costs had risen significantly on August 1.

"I did have the processors in mind when received that increase - our dairy bill went up about 20 per cent, overnight," she said.

"I imagine, to a factory, that would be quite significant."

She was also concerned about feed costs, with a potential dry season ahead.

"We are about to start cutting silage next week, which is two months ahead of last year and that affected quality - but it is a bit of worry when you are cutting silage in September in our district."

The operation increased cow numbers, during a milder winter, allowing for increased production.

She felt processors would offset some of the loss in profitability this season, by reducing prices at the start of 2024-25.

"I don't think this year will be the issue, I think the first of July will be the crunch - saying that, we have 10 months, so things might change," she said.

"We know the processors never really miss out really."

Tyrdenarra dairy farmer Bruce Knowles said the Code was a "great piece of legislation", aimed at getting more stability into the sector.

He runs a herd of between 1500-1600 cows, with 700 replacements, supplying Fonterra.

"At the end of the day, people have to make sound decisions," he said

"They were aware of the environment, probably more so than the farmers, of what is happening out in the big wide world.

"From my point of view, they should have been a bit more responsible, in how they agreed to set their prices."

While processors were facing inflationary pressures, so were farmers.

"You would like to think the processors were actually doing their homework and they put all their ducks in a row," he said.

"At the end of the day there is no excuse, the dairy companies have to weigh that up - they still have to be profitable."

The ADPF has been contacted for comment.