Australian dairy farmers call for independent government review after Fonterra slashed farmgate prices

A group of Australian dairy farmers is planning a rally this week, with more to follow in a push for the federal government to urgently establish an independent review of the country's dairy industry after farmgate milk prices were slashed by Fonterra Cooperative Group and other processors.

The group, Dairy Power, said the "unacceptable retrospective reduction in milk price," which affects 75% of farms in Victoria, threatens to push farmers off the land or further cull their herds.

"Dairy farmers are not going to survive if they're losing money," group president Chris Gleeson said. "The average farmer is forecast to lose $A15,000 this season and more next season. Without immediate action, the industry will continue its downward spiral."

Fonterra last week cut its forecast farmgate milk price to its Australian dairy farmers for the current season to $A5 per kilogram of milk solids, down from an earlier forecast of $A5.60/kgMS, to better reflect the oversupply of milk weighing on global dairy prices.

It followed Australian dairy giant Murray Goulburn reducing its farmgate milk price to a range of $A4.75 to $A5/kgMS last month from a forecast $A5.60 as it struggles to meet profit forecasts outlined in the prospectus for its ASX partial float last year.

Murray Goulburn is offering farmers a support package that also protects its longer term supply by providing a payment that will top up payments to A$5.47/kgMS this financial year and then be recovered from supplier milk payments over the next three years.

Most of Fonterra's 1800 or so Australian suppliers are members of Bonlac Supply Co, which has a supply agreement that requires the New Zealand-based dairy processor to match or better the price paid by Murray Goulburn.

This meant its Australian suppliers were paid well above their Kiwi counterparts last season. The big difference between the two markets is that most of New Zealand's milk is exported and subject to global pricing while in Australia about 60% supplies the domestic market.

Fonterra Oceania managing director Judith Swales said the most important thing Fonterra could do for its farmers and the industry is to send the right price signals.

"We've said Australia is not immune to the global challenges, and we've been upfront all season cautioning our farmers to prepare for a lower milk price environment," she said in an emailed statement.

Fonterra chief executive Theo Spierings caused a stir last year when he said Australian dairy farmers were being paid too much for their milk.

The revised Australian milk price reduces the cost of goods sold for the loss-making Fonterra Australia by about $A48 million although that's subject to other factors such as final milk volumes. Fonterra has already reduced payments for its New Zealand suppliers to $3.90/kgMS for the current season which is below the cost of production for most though the shareholder dividend is likely to be higher than usual at 45-55c a share.

Fonterra Australia's supply contract in its second-largest milk pool doesn't lock supply in. However, the 60Ac/kgMS support loan it is offering farmers, repayable from 2018, is conditional on them committing to supply it for the next three years without any price guarantee, Mr Gleeson said.

The existing contract agreement is in place until the 2019 season.

Fonterra has said it will continue to meet the minimum benchmark milk price but from next season farmers will also face deductions to recover repayments from its farmer support package, equating to 20 to 27 Australian cents/kgMS for three years.

Farmer Power, which is separate from the main farmer industry groups Australian Dairy Farmers and United Dairyfarmers Victoria, is planning a rally this Wednesday at Terang in south-west Victoria which Gleeson expects will be well attended. He said there's likely to be more held in other areas after that. About 600 farmers attended a similar rally three years ago which called for state and federal action to combat low milk prices and dry conditions.

An Australian Dairy Farmers spokesperson said there was no easy solution for the challenges the industry was facing. Its focus initially was on the health and well-being of farmers, particularly for those in Victoria and Tasmania that have already been struggling with dry conditions in the past year.

Neither it, nor the Victorian lobby group, have given their backing to Dairy Power's rally though they have been talking to them.

ADF is calling for earlier and better forecasting by the dairy processors given the significant drop in payments this season and is convening a meeting with federal and state government officials along with the industry to look at longer-term action to address low milk prices.

(BusinessDesk)