My blog on milk price transparency last week was prompted by a question on the Australian dairy farmer e-mail forum, Ausdairy-L. It came from an Australian dairy farmer who asked why milk prices were so far behind the Fonterra New Zealand forecast. There followed a furious discussion which amongst other things suggested:
- That this was payback because Fonterra had taken a beating on milk price in NZ to fund Australian milk purchase
- NZ had taken opportunity in a rising exchange rate and were more able to capture the value of commodity price rises because of their greater exposure to export markets
- Fonterra were trying to boost confidence at a time when farmers and banks were very nervous about debt and the capacity of farmers to pay
In the end saying nothing was too much to bear. Essentially our view is that it is far too early to write off the Australian processors and their capacity to pay. We wrote:
There are lots of reasons why the SE Australian benchmark milk price might fall behind NZ this year but if history is a guide then there won't be much in it. For reference:
- On average the Australian price has been a little better than NZ since 2000 (http://www.xcheque.com/data/charts/aus-annual-milk-price.html).
- Australian domestic ingredient prices are rising rapidly and they tend to follow a flatter and later sales profile than the export market. This means Australian processors should capture the rise in value in the second half - a plus for their economic model.
- Since 94/95 stepups have varied from $0.23 / kg MS to $1.57 / kg MS during the season (2 - 12 cpl or 7% - 25% of the final price - ignoring the step down last year). We have already seen two stepups totalling $0.32 / kg MS this year - unusual so early in the season and in past years a precursor to a very good second half as well - but we did start very low.
- The competition for milk supply means there is additional premium value in the Australian market that is not shown in the benchmark milk price. This is in many form of share dividends, interest free loans, a direct cash premium, and other incentives.
So yes, Fonterra NZ may have positioned themselves for a day in the sun but personally I don't think Australian dairy farmers should worry about being the poor cousin.
In a magnificent piece of timing, Australia's largest processor and co-operative Murray Goulburn, stepped up their milk price the following day - and it was a big step up - a price increase of over 8% ("Australia's major Co-op steps up for AGM" Xcheque.com, 25 November 2009). This brings the total step ups to over $AU 0.60 / kg MS. In so doing MG regained their place as the determinant of the benchmark milk price. It will be interesting to see the response of the other (private) processors.
There is still some way to go to the end of the season, and still a big gap between the current Australian price and Fonterra NZ's forecast, so who can tell. If it was a rugby game I'd say that Australia was kicking against the wind and running into a very large pack of All Blacks. But don't discount the fullback MG - he's a very canny and seasoned player with a penchant for the last minute field goal.