Opening Price vs Market Price

Jun 16, 2017

Over the past week, we have seen several milk supply companies announce their opening milk prices for 2017-18. While there will always be some variances in the opening prices for different companies this price generally reinforces the relative strength of market price improvement.

Further reinforced by Dairy Australia in their recent Situation and Outlook report, the improved outlook for 2017-18 offers sustainably better returns with indicative prices for the year approaching $6 /kg ms.

Bega and Warrnambool both stated their opening price of $5.50/kg ms. Over the years both companies have been very consistent with their prices reflecting the world market, and their farmer suppliers have been paid accordingly. We can be confident that the opening prices of both Bega and Warrnambool reflect the steady upward improvements we have seen in world market prices over the past 6 months.

This week we also saw the release of Fonterra’s opening price for the coming year at $5.30 /kg ms, which is Fonterra’s true interpretation of the market price and reinforces the variances in opening prices between companies.

A short while ago Fonterra announced it was going to pay an additional 40 cents/kg ms to all its suppliers for the 2017-18 year to account for the step-down and claw back it applied to its suppliers last year.

While most Fonterra suppliers welcomed this news, there has always been concern that the 40 cents compensation payment would be marketed as part of their price for the 2017-18 year.

In a recent meeting with Fonterra, ADF was assured the 40 cents would be defined as a payment on top of their market price for 2017-18 and not actually part of the price. ADF was concerned that this compensation payment if marketed as part of their opening price to farmers, could be used to give Fonterra a perceived unfair advantage over all other companies.

We believe that companies who did the right thing by their suppliers for the 2015-16 year should not be accused of lagging behind Fonterra’s price for 2017-18. The announcement of the additional 40 cents as compensation was for the major step downs and clawbacks Fonterra applied to their suppliers during May 2016.

So, it was with considerable disappointment that we saw Fonterra’s announcement of their opening price and the supporting media release from Bonlac Supply Company. In their communications, they portrayed their opening price to incorporate the 40 cents to make the price $5.70 /kg ms, which makes them look like they are 20 cents/kg ms ahead of the competition.

Not only is this unfair to other companies which are above the Fonterra announced $5.30 opening market price, but it is also misleading to all their suppliers. It is a fact that the 40 cents/kg ms to be paid to all Fonterra suppliers this year is a compensation payment for 2015-16 – and should not, at any time, be characterised as part of the market price for 2017-18.

This past year, ADF and our state member organisations have worked in collaboration with companies to develop a Code of Practice on Contractual Arrangements. Most of the dairy companies participated in the development of the Code and agreed that one of the most important elements of the Code was the need for greater transparency in pricing for farmers.

By monitoring the application of the Code with farmers, we will be able to assess whether companies are conforming to the transparency principals outlined within the Code of Practice.

There is a real danger that Fonterra’s current characterisation of the 40 cents/kg ms being added to their market price for the year will give the wrong signal to all farmers and other companies that transparency only goes a small way.

It is important that all dairy companies remain fair and transparent in their pricing. The inconsistencies have indicated Fonterra and BSC are not being completely transparent with their suppliers. These types of contradictions are nothing but misleading at a time when the dairy industry has committed to rebuilding trust along the supply chain.

John McQueen

Interim ADF Chief Executive Officer

 

Not All Bad News

Nov 11, 2016

The American people have spoken and made their choice. It is amazing how things can change overnight. President Elect Trump’s victory in the United States presidential election has created a little bit of a stir in Australia and around the world.

Australia has an open economy and we are heavily reliant on exports. We depend on international stability and open borders to drive our economic growth. If Mr Trump’s views, which were expressed during the election campaign are realised, then the world trade environment is in for a very bumpy ride.

The Turnbull government promised that the ratification of the Trans Pacific Partnership (TPP) would deliver valuable new markets for Australian dairy. It was an ambitious pact that would have covered nearly 40 per cent of the global economy and solidified US leadership in the Asia-Pacific.

While Mr Trump’s election win has made the ratification of the TPP less likely, it is not all bad news for Australian dairy.

In fact, this election could open Australia to new opportunities and strengthen economic ties with countries in ways we never thought possible.

The China-Australia Free Trade Agreement (ChAFTA), ratified almost a year ago is a partnership that has the potential of becoming even stronger.

Australian Dairy Farmers (ADF) lobbied hard and strong for this once-in-a-lifetime deal and was closely involved in the negotiations.

Our dairy exports to Greater China have increased 46 per cent over five years, making it our largest dairy market export by volume and value. Import values have increased by almost 65 per cent year-on-year from approximately $456 million in 2014/15 to over $750 million in 2015/16.

The first half of 2016 saw the value of Australian dairy exports double. China’s market for Australian consumer goods has become much more sophisticated, with strong sales growth from supermarket chains and convenience stores. A growing middle class of roughly 300 million people want what Australia offers. Our industry’s ability to benefit China with safe, healthy, reliable sources of quality dairy products is essential for us in the long term.

China remains the largest importer of dairy products and it is still growing. About 16 million babies are born each year in China, and with the relaxation of the one child policy, that number is projected to beyond 20 million annually in coming years.

Over the long term, ChAFTA means more jobs across the Australian dairy industry both on farm and in processing plants. It will provide our industry with the confidence it needs to invest for a strong future.

Whatever transpires from the policy direction of a new US President and administration, the Australian dairy industry and Australian Government will do everything possible to ensure any changes in direction on US trade policy does not adversely impact the gains we have won for our dairy products access to markets.

The dairy industry’s long term growth will come from our ability to bounce back and make the most of the all the opportunities that are presented.

David Basham

Acting ADF President


 

 

The Difference is in the Detail

Sep 23, 2016


Over the last few days, New Zealand based Fonterra lifted its forecast milk payout for the second time. On Wednesday the estimated Farmgate price was boosted by a further 50 NZ cents to $NZ5.25, while the company maintained its dividend payout to farmers resulting in a total amount of $NZ5.75 to $NZ5.85 per kilogram.

Australian companies are between 10 – 20 per cent below New Zealand’s latest forecast. 

While Fonterra's announcement follows the increased global dairy prices at the Global Dairy Trade auctions, Australian farmers are still waiting for theirs. Although there are any number of reasons why we are behind New Zealand, it still makes for an interesting conundrum when Australia has a bigger domestic market and yet our prices remain unadventurously low.

This really highlights how volatile the world milk price is and why we need regular, clear and realistic market signals in Australia.

By establishing a commodity milk price index tool there will be greater transparency to allow farmers to make their own assessments on milk price forecasts. Farmers will be able to better balance risk along the dairy supply chain, especially when it comes to managing the effects of world milk prices.

New Zealand already has a milk price index and it works quite well, as they have over 90 per cent exports, and can set themselves against the world market.

In Australia we have a 65 per cent domestic market and a different export commodity mix which should deliver a higher price for Australian farmers than the New Zealand price in a low commodity market as we are in now. Therefore, Australia needs to have an independent commodity index rather than use New Zealand’s due to our different export commodity mix.

ADF has had extensive discussions with government on the proposed index and we are looking forward to help shaping this important tool. It’s vital we get this right so all farmers have the ability to use the global information to assist them when they negotiate supply contracts with processors.

The index needs to be independent and transparent with easily accessible data that isn’t hard or complicated to use. It needs to be updated daily to capture the latest market intelligence from around the world and should translate commodity market and currency trends back to Farmgate prices across Australia. The index should also deliver a forward-looking price indicator to capture restored certainty and decision-making resulting in improved farmer confidence, better on-farm investment decisions, and ultimately higher farm profitability.

We have no doubt that our processors will increase their milk price forecast which is why we support the index and want to ensure it is a true indicator of commodity prices and meets the requirements of the Australian dairy industry as a whole.

The index will also give farmers the tool to better understand the impacts of world market trends and to be better armed with questions of the company they supply.

David Basham

Acting ADF President

 

Global Milk Prices Are On The Rise

Sep 09, 2016

Recent data on global dairy prices shows a positive rise that looks as if it might continue.

The average price in the Global Dairy Trade auction overnight rose by 7.7 per cent. This followed two consecutive rises in the past month, with a 12.7 percent increase in prices at the most recent auction, while the important whole milk powder (WMP) price rose by 3.7 per cent.

These results have driven the index to an 18 month high.

Analysts are predicting further rises in the global milk price which suggests that the worst might be behind us and we may start to see some stability return to the global milk supply. This will hopefully occur through rebalancing of supply and demand due to cut backs in EU production, intervention buying of SMP (skim milk powder) in Europe and increased buying in China.

Although these increases are nowhere near enough to return to sustainable prices it is pleasing to see that prices are on the rise and things may be looking better in the long term.

Unfortunately, the most optimistic scenarios see the market turning in any meaningful way in the first quarter of 2017.

As dairy farmers we have a limited capacity to manage the market price so it is important to always focus on what we can manage, remain aware of industry risks and maintain a low cost production system so we are in a better position to weather any storms.

While we are an industry that has been under intense pressure, we are also an industry that has the know-how and resilience to overcome adversity and thrive in the long term.

ADF, together with our state members, is continuing to fight for farmers. Even though we won’t be able to solve all of the issues farmers are facing, we are working to relieve some of the pressures to create change to ensure that an unfair share of the risk in the value chain is not taken by the farmer and that recent events in the industry don’t happen again.

Collaboration is the key to get us where we need to be. Our industry relies on all the elements to operate effectively. Farmers need processors and vice versa – so the solutions require all of us to come together to ensure a positive future.

While we wait for the uptick in prices we must remember that we are a resilient industry with a long, sustainable future ahead and our profitability depends greatly on the continued support of the Australian public.

It is important to remind the community that dairy farmers – regardless of the challenges they face are good business people, who care for their cows, work to enhance the well-being of their people and that every efficiency we make on farm has ties to minimising our impact of the environment.

To view the global dairy price index [click here]

David Basham

Acting ADF President


 

 

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