Dairy processors defend their lower opening farmgate milk price offer

The Australian Dairy Products Federation (ADPF) said on July 1 the estimated weighted average farmgate milk price in the southern region ranged from $7.94 to $8.20/ kilogram Milk Solids.

Processors opened with low prices on June 1 and didn't offer step-ups during the month in comparison with last year's "bidding war" for milk.

Dairy bodies have estimated that is a "break even" figure for many farmers, with one industry leader saying farmers would be "working for nothing" if the price did not increase by the end of the season.

ADPF chief executive Janine Waller said the new farmgate milk prices (FMP) were more closely aligned with global market conditions, as processors moved to ensure Australian dairy products remained competitive.

For the FY24/25 season, processors offered an FMP that aimed to "sustain the viability of the Australian dairy industry, keep factories operational, protecting jobs, and supporting farmers and local communities", she said.

"The last couple of year's record-high milk prices, led to an influx of international dairy products, resulting in unprecedented imports and high consumption of cheaper overseas alternatives," Ms Waller said.

"In FY22/23, imports surged by 17 per cent (including a 29 per cent increase from New Zealand and 16pc from the United States), leading to the highest ever consumption of overseas dairy products in Australia - nearing 30pc, or 344,000 tonnes."

Ms Waller said following two years of record high FMP's, the estimated weighted average milk price remained up to 14pc higher than it was three years ago.

While the gap between FMP and global markets was closing, the new season's price was up to 17pc higher than the spot Oceania commodity milk value (CMV) of $6.98/kg MS.

That was an "important milk price indicator," Ms Waller said.

"Compared to the FMP paid by major global competitors, the southern Australian price remains at a premium," she said.

"It is up to 10pc higher than New Zealand's milk price midpoint of A$7.43/kg MS (protein adjusted)."

The announced FMP's were "minimums" for the season, with incentives on offer and the possibility of price reviews as global market conditions improve.

But dairy farmers have questioned processors' reasons for the lower prices.

United Dairyfarmers of Victoria president Bernie Free, from Winslow, said the price needed to be above the export mark "because all the factories in Australia rant and rave how they are always looking for the highest priced market".

He said the southern milk pool price should attract three premiums above the minimum.

"When ADPF and the manufacturers talk about what the world export price is, that is the absolute minimum," Mr Free said.

"There needs to be a premium, because the factories always tell us they need the quality they want is so they can sell into the highest possible priced export market, the next premium is for the percentage of milk that goes into the domestic market and then there needs to be a premium for the scarcity of milk.

"Paying a premium for scarcity encourages people to stay in the business of producing milk and new entrants into the dairy industry."

Using the Global Dairy Trade (GDT) as a benchmark was also misleading, he said.

"It was originally set up by NZ to get rid of the product they couldn't sell - that is the absolute bottom end of the market."

A continued low price would see the milk price shrink, he said.

"You look in western Victoria, SA and Tasmania - they are all struggling for green grass and hay is getting to the point now it doesn't really matter as to how much you can pay, it's a matter as to where you can find it," Mr Free said.

"There is a limit to how much what price you can pay and how long you can pay that, before we start selling cows and producing less milk."

Benjamin Vagg, Leongatha South, said the signals this year were "very contradictory", when compared with the same time last year.

He said processors were likely to be chasing milk in the back half of the year, but no-one was going to be producing it.

"It's going to set them up to have to go and hunt milk," Mr Vagg said.

He said he spoke regularly with several south-west Victorian farmers who were not going to increase milk production, "no matter what the spring does - they are just not going to push the system, like they did last year.

"We might be more in line with global prices, according to ADPF, but it is not aligning with what they need, which is full stainless steel.

"Last year proved global prices mean nothing, in the Australian dairy context."

Mr Vagg said the pendulum looked like it had swung too hard, one way, but it had now swung back hard the other way.

"Somewhere in the middle is actually where everyone could be happy - but know one knows where that centre point is," he said.

Lachie Sutherland, Larpent, said it appeared processors were transferring risk back to farmers.

"It appears after last year a lot of them made a significant loss," he said.

"Unfortunately, I think that's going to be followed on with what I think will be a decreased milk pool, the year after."

He said the price was "very close" to the cost-of-production, which would put the squeeze on farmers until they got an increase.

"If they don't give us an increase in price, they are going to have less milk, next year," he said.

"That may well result in another bidding war but that the industry would continue to contract.

But he said processors were not encouraging suppliers to stay loyal - "you just depart on friendly terms, you never know where you are going to be in the future".

Incentives were being offered for production and growth, but none to existing suppliers, he said.