Coles no-one but you believes the spin anymore

I have been quiet on the milk wars saga of late. This is in main because I am finding it hard to keep up and its exhausting me. All in all the whole debacle is just bizarre. One minute large numbers of NSW and QLD dairy farmers are being paid just 12c/litre for large volumes of their milk known as T2 milk. The next minute they are being told all their milk will be paid at T1 price (full price) from February to July 2013. Then they have just being told they will be paid at T1 price  as of 1^st December 2012. Fantastic news if cows where machines and you could just turn their udders on and off but it appears that whilst the rest of the world knows they aren’t machines but living breathing things the milk processor Lion doesn’t

Then the Xcheque newsletter lobbed into my in tray this morning and allowed me to share with you a reasonably uncomplicated update on the milk price situation and farmer exits. Xcheque is owned by the very insightful and bright mind that is Jon Hauser. The newsletter directed me to this excellent article penned by Kai Tanter and titled “Let them eat cake – the ongoing saga of T2 milk price and a Lion in winter”

So for all the fabulous dairy farmers supporters out there here is an update on the situation at the farm gate from the experts

“Let them eat cake – the ongoing saga of T2 milk price and a Lion in winter” by Kai Tanter

What kind of responsibility do processors have to their farmer suppliers? The fight around tier two (T2) milk payments in Australia is one where domestic processors, and their supermarket customers, seem to want to have their cake and eat it too – flat milk all year round but at a market benchmark price that has no relevance to this requirement. This has resulted in a commercial and public relations mess. It also appears to have triggered another wave of farmer exits from the Australian dairy industry.

Lion is the processor who has copped the most flak over this issue from farmers recently. They may be moving into their good books after announcing a price rise for the first half of next year. Their NSW, Queensland and Tasmanian suppliers, many of whom claim they have been treated unfairly by Lion, will no longer be subject to T2 milk prices from February to July next year. The T2 price is currently 15 cents per litre (averaging around 12c/litre ). This will be replaced by the T1 price for all milk – currently 47.5 cents per litre for northern NSW and southeast Queensland.

The most recent round of T2 prices were introduced in July of this year. The price is for milk that exceeds Lion’s requirements for their domestic fresh dairy product business. Many farmers were in uproar and said that they could not produce milk at those price levels, or at the effective average price of tier one (T1) and T2 milk. This however seems to have been the point. Lion said that they had too many farms in NSW and Queensland and that they didn’t need the milk, and especially during Australia’s peak production period across spring and early summer.

“Basically there needs to at some point be a rationalisation of the amount of farms that are in those two states,” said Lion’s director of procurement, Murray Jeffrey.

Things seem to have changed over the last couple of months, hence the removal of T2. But why? Australia’s pasture based milk production is highly seasonal and it is normal for more milk to be available in some months than others. Lion says that it is the recent decline in milk production that has allowed them to make the change.

“Given that there’s been a steady decrease in volume over the last two or three months it’s allowed us to purchase Tier 2 milk at Tier one prices in South East Queensland and NSW,” said Mr Jeffrey.

Figure 1. Central / North New South Wales + Queensland milk production.

 

Less now, maybe more later – but at what cost?

Lion’s price attack on surplus milk might have given them more than they bargained for. The Land recently reported that since the introduction of T2 pricing in July, Lion’s milk receivals have decreased by 15 percent relative to two years ago. This is much more than a normal season decrease, especially against the background of relatively good rainfall and low prices for irrigation water.

It’s not just in the last three month’s that Lion’s receivals have fallen. Ian Zandstra, president of Dairy Farmers Milk Cooperative (DFMC), who are Lion’s major supplier of fresh milk, estimates that Lion’s milk pool from DFMC suppliers has decreased by 20 percent in the last two years. He attributes this to the low milk price.

The seasonality of Australia’s milk production is in part responsible for this situation. There is a lack of fit between the demand for dairy products, which stays the same all year round, and the supply of milk, which varies depending on the season. Processors like Lion want to be guaranteed a set supply of raw milk all year round, but if a traditional dairy tries to meet this demand, it results in surplus milk during high yield months.

The two tier milk price system has been devised to send a clear message to supplier about how much milk the processor (=supermarket and consumer) wants and when they want it. It is not a bad idea in principle but the brutal and uncommercial value that has been placed on T2 milk completely undermines the overall value of the dairy enterprise.

The justification for the low T2 price is that this is the effective return to the processor when they transport it to Victoria and sell it to a commodity processor. In other words “It is not our responsibility to add value to this milk … and by the way you will have to pay for the cost of getting rid of it”.

The supermarkets are just as culpable in their denial of responsibility for this milk. From an earlier article:

Coles claim that they have no effect on T2 prices, saying that their retail and farmgate milk prices have been decoupled. “Coles’ house brand milk contract with Lion is based on tier one milk pricing… [and] Coles has no influence on Lion’s decision to reduce tier two milk prices,“ said a Coles spokesman.

They might be one step removed from the buying process but in our opinion the supermarket chains cannot divorce themselves from the economic reality of the dairy industry.

The underlying assumption in the argument presented by the spokesmen for Lion and Coles is that the price for T1 milk is fair and reasonable compensation for the flat milk production profile they require. According to Murray Jeffrey:“We already pay NSW and Queensland suppliers a premium on the world price.“

But do they, and what is the world price? It turns out that the world price is the price that export processors can extract from world markets for commodity dairy ingredients. It bears no relationship to the price that farmers are paid for fresh milk in other developed countries, and it certainly bears no relationship to the cost of producing milk on a flat production basis all year round. Discounting T2 milk well below cost and its intrinsic value is just rubbing salt into an already festering wound.

So the reality for Australian farmers that are servicing the domestic consumer market is that they either need to cop a huge penalty for producing surplus seasonal milk, or move to flat production with a tier one milk price that is inadequate to support this production system.

In the southeast of Australia ( Victoria and Tasmania ) farmers at least have a choice. They can choose to supply an export ingredient processor where they have half a chance of matching the milk price to the lower cost of a seasonal pasture based production system.

What choice do farmers in the northern half of NSW and Qld have? Ship their milk south? Sell milk at the local farmers market? We don’t think so. The choice seems to be: accept this milk payment system or get out of milk production. From the recent reduction in milk supply it looks like the second option has been a popular choice.

This has been a year full of contradiction and irony for the Australian dairy industry. “Down Down Down” has been the catch cry from the supermarkets. In association with this has been the supermarkets call of “Me Me Me” when it comes to allocation of shelf space to product brands. “No No No” has been the consumer cry regarding the inclusion of permeate in milk – with the effect that removal has increased the cost of fresh milk production. “Down Down Down” has been the message to farmers on milk price. “Up Up Up” has been the cost direction for the purchased feed that is so essential for a flat domestic milk supply.

Just about the only thing that makes sense at the moment is “Out Out Out” which has been the farmer response in those regions where there is nowhere to go with this unsustainable economic equation. It looks like Lion may have come to the same conclusion. The last word goes to outgoing Chief Executive Rob Murray:

“We don’t make any money [on milk],’’ Mr Murray  said. ‘‘The simple truth of that is nobody is making money and you can’t make money if [consumers] buy milk at $1 a litre, it physically can’t be done.’’

Mr Murray described Lion’s dairy division as a “charity”, saying that “in fact a lot of charities do better”.

Back to me

If Lion think they are a charity where does that leave the farmers supplying fresh milk in this country?.

On dole queues?. Not good enough Coles. Its time to take responsibility. When you pay peanuts you get monkeys and farmers aren’t stupid and they are voting with their feet big-time . And where does that leave consumers? Milk from China?