As a starting point let me explain the situation for our overseas readers and those that don't quite know how the Australian milk price system works. First of all we are mostly talking about southeast Australia - primarily Victoria and Tasmania but with some overflow into South Australia and New South Wales. This is the heartland of the Australian export dairy industry and home to approximately 80 % of Australian milk production. The major processors here are Murray Goulburn (MG), Fonterra, Warrnambool Cheese and Butter, and Bega / Tatura.
The traditional milk pricing mechanism for SE Australia has started with an opening price set in July. Depending on the market conditions this could be anything from 75% to 95% of the final price. During the season milk price step ups are announced and more often than not these are back-paid to the start of the season. There has only been one year in the past 15 when the milk price has been stepped down part way through the season - in 08/09 following the global financial crisis.
The timing and quantum of step ups is a subject of much uncertainty and speculation in the market. It is also something of a game between processors who jockey for position, especially early in the season. In the final analysis it is Murray Goulburn, the largest processor and the only remaining true co-operative that sets the market. In this game MG play their cards very close to their chest while almost everybody else watches closely and tries to second guess their strategy. In the end most processors post a final milk price after MG has finalised theirs - they want to be able to claim a premium but don't want to finish too far in front.
Contrast this with New Zealand where for most farmers Fonterra effectively is the market. Fonterra has a similar payment step up process to Australia but they will provide a forecast price early in the season and then ongoing updates throughout. It is not a contracted milk price, just their best guess. In most years this forecast is a conservative but they can get caught out. They too had to step down the 08/09 milk price forecast in response to the GFC.
So SE Australia and New Zealand have a similar structure for milk payments - an opening price and then progressive increases during the season, back paid to the start. This is an almost essential requirement of the cash flow characteristics of a very seasonal milk supply, and the associated ingredient manufacture - especially for a product like cheese which for the most part needs to be held for 3 months or more before sale. Why is it then that Australian processors don't follow Fonterra NZ's lead and forecast a final price? Here's some suggestions:
(1) The processors don't know their final milk price until near the end of the year when all sales and costs are finalised
This seems like a reasonable excuse but frankly I don't buy the argument. You can't run this type of ingredient business successfully unless you have a pretty good operating business model. This will forecast how much product you are going to make, when you are going to sell it, and what value you will get for it - well in advance. The cash flow demands of the business require this. In addition most of the action occurs in the first half of the year - both production and sale. That is a function of the seasonal production profile and the need to pre-sell product to manage the finance risk. At the very least we would say that a forecast in December or at the latest January should be a good guide to final performance.
(2) Anything could happen and probably will
This is a variation on the first point and here's a challenge to the processors. In the 13 years from 95/96 to 07/08 our December forecast for the performance of benchmark processor is within $0.30 / kg MS of the final result (2 cpl). The average difference during this period is $0.06 / kg MS. Now this is a theoretical model! Surely the processors can do better with the information they have to hand? The past year will be cited as the exception to this rule and yes we got it wrong too - by a long way ($1.30 / kg MS) - but does one bad and completely unpredictable year justify so much caution?
(3) An overly optimistic outlook is worse than uncertainty
I agree! Most if not all farmers would prefer to be given a conservative estimate and enjoy the benefit of unexpected step ups at the end. Yes some margin for error is reasonable but the error and risk narrows considerably as the year progresses. We are suggesting that that a formal forecast to at least 90% of the price is possible by December along with a thumbs up or thumbs down in terms of the second half prognosis. By March we would expect the forecast to be better than 95%.
(4) It's a tough market out there. Fight for milk supply and keep your competitors guessing
In an historical sense it has probably been conservatism of Management and Boards that has held back a more open milk price forecast - why put your head above the trench if you don't have to. In more recent years there has been fierce competition for milk supply and market position. In this respect keeping your competitor guessing gives them less time to plan and respond. You may even catch them out completely and drive them to the wall. A cruel rationale but possibly justified in the current environment.
(5) Uncertainty and obfuscation of milk price helps in ingredient sales negotiations
The argument is that if the customers know the milk price there is less opportunity to use the uncertainty to maximise ingredient sell price. To which I would say - bollocks! The major buyers are much smarter than that. On a global scale ingredient sell prices are primarily determined by competitive tension between Europe, NZ, Australia, and the US. Australian milk price is determined by the value of international commodities and not vice versa.
(6) Opportunity is lost if farmers don't know what to expect
Here's one for the pro-transparency lobby that has relevance in both good and bad years. Because of the seasonal nature of the milk production curve, failure to provide supplementary feed in the critical period from December to January will mean that production will be lost - even if the the market price opportunity is there to justify the feed costs. That is exactly the situation this year, as it was in 07/08 when the opening milk price was much lower than the close. Only the brave (or smart?) farmers will punt on a big rise in the second half milk price. The other aspect of this is that the factory loses opportunity for more production, overhead recovery, profit, and a higher milk price - it is a lose - lose scenario. Conversely, if the outlook is bad and there is not much opportunity for a milk price increase then farmers can take steps to minimise their exposure to feed and other costs - more milk does not always mean more profit - for both farmers and processors.
We'd be happy to hear more arguments for and against transparency but these seem to be the main ones. On balance I would vote for complete silence by the processors - leaving plenty of opportunity for a business like ours ... but I jest. There is just as much opportunity in providing analysis and commentary in a very sophisticated predictive futures market like the USA as there is in an information vacuum. It means that the basis of competition for milk supply changes but it doesn't mean the market is less efficient - probably quite the contrary. The emphasis moves to the ability of processors to manufacture and market their product in a more cost effective and profitable way - either keep up or move over, someone else is coming through.
Editors Note: On November 24th Murray Goulburn stepped up their milk price by approximately $0.30 / kg MS (~ 2cpl) bringing the total step ups for the season to approximately $0.60 / kg MS. Managing Director Steve O'Rourke encouraged suppliers to speak to field officers and review their farm budgets. He went on to say: "We believe there is now the opportunity to increase farm profits as the milk price / grain price ratio becomes more positive." - Well done Steve!