As National Foods and their disgruntled Tasmanian suppliers head back to the negotiating table we can only hope this is a sign that sanity is returning.

As a dairy farm consultant I have often advised clients (mostly informally) on their milk price negotiations. The priority is to get the best sustainable price possible while not filling suppliers up with false hopes or unrealistic expectations. In the current spat between National Foods and their suppliers the TFGA should be commended for what has been a very sensible and pragmatic approach.

The fact of the matter is that National Foods are now offering a clear premium to any other processor in Tasmania. National Foods need to pay this premium for their farm gate milk as they require flatter curves than the export focused processors. As more step ups come through, there is also a likelihood that they will need to factor in further price increases to meet their commitment to suppliers across southern Australia (watch this space given the Xcheque forecasts).

In regions such as Tasmania with a strong export focus, individual farmers need to be very careful incurring high costs of production by flattening out their curves.  There is several times more milk in Tasmania than needed to meet the domestic requirements on every day of the year. So even though Tasmania has a very 'peaky' supply curve, this means that there is a limit to the value of an individual farmer flattening out their curve. As I stressed in an earlier Blog, everything has a replacement value. National Foods suppliers need to remember this. In addition, National Foods have several other potential sources for their milk including: Fonterra; another processor; and/or Tasmanian farmers who are not currently National Foods' suppliers but who think that the price offer is good enough to swap from their current processor. National Foods competes against other milk processors for their sales and if they are forced to pay too much above their competitor then they will be uncompetitive in the market and will not be able to sell their product - join the dots.

Based on past experience in Victoria, National Foods will source their milk from elsewhere if they believe it prudent to do so. When suppliers have pushed too hard (because they believed their milk was so much more valuable than the other 9 billion litres produced in Australia) it opened up the door for another group of suppliers whose expectations were slightly lower but still considered the premium offered by National Foods attractive enough to swap factories. The original suppliers then had to accept the next best price in the market which was lower than what they were offered by National Foods. The current situation is particularly sensitive for the Tasmanian group when you consider that Tasmania currently has a shortage of spring processing capacity - this is not the time to be holding a gun to National Foods head.

In summary:

1. Promoting a boycott of National Foods products is complete lunacy. If the reports are correct and sales of National Foods milk are down by 25% then National Foods now has too much milk in Tasmania if they didn?t have beforehand
2. National Foods is not a co-operative and as a private company should be purchasing its raw ingredients for as low a price as possible.  This however this should be balanced against the benefit of long term relationships with their suppliers
3. Farmers should not take their lead from ill informed, vote grabbing, populist politicians, removed from economic reality of the global dairy industry