There is a bit of a media frenzy around the plight of dairy farmers with the recent price drops by Murray Goulbourn and Fonterra here in Australia (Facebook support group for branded milk goes viral, image shared more than 20,000 times) While I am empathetic with the terrible situation that dairy farmers find themselves in I am concerned that the short term sugar fix of these sorts of campaigns will make people feel better and then be able to ignore the realities of the situation while the media and social media wagon rolls on to the next issue.

Lets look at some facts

• Milk production in Australia in 2014/2015 (the last full financial year) was 9.731 billion litres (yes you are reading that right, approximately 421  litres for every man woman and child) and the majority of that was produced in Victoria (66.4%).
• Per capita consumption of liquid milk was 105 litres (so approximately 25% of all production)
• Of that consumption only about half goes through supermarkets (information via Dairy Australia) and about half of that is in non branded product rather than in existing branded product.
• So roughly 6.25% of milk produced in Australia goes through non branded supermarket product.

So if we were wildly optimistic  and we could change 10% of that back to a branded product (and I am almost completely sure that would not be achieved even in the short term) that would mean that effected a change of 0.625% of the total production or 60 million litres of milk. Lets be even more wildly optimistic and assumed that 50% of the change resulted in an extra 20 cents per litre that went completely back to the farmers  for all of the product (Coles has announced it would develop a new milk brand which would return 20 cents a litre to a fighting fund aimed at helping dairy farmers facing devastating cuts in their payments from processors).

That would result in an extra $6.08 million going to dairy farmers. A welcome number but a net increase of 0.0625 cents per litre across all milk production. That is an extra 1/16th of a cent per litre increase in the price paid to farmers. To put that another way just under 1 cent per cow per day (1.74 million cows in the herd).

So while I am fully supportive of the highlighting of the issues the grim reality is that they are unlikely to effect long term significant change and the entire market needs to be looked at.

So given all of that what needs to be done

1/ Alter the crazy payment system 

All of us in business would love the current set up for the dairy companies where they can go back to their (mostly captive) suppliers and tell them “hey we did not make as much money as we would have liked so we are getting back some of what we paid you so we can restore our bottom line””.  Imagine being a shop in a shopping center and being able to go back to the center owner and say I have not made my profit target so you have to refund part of my rent for the last 12 months. Or being a small building company and going back to your concrete supplier and doing the same thing. You would be laughed at. Why do dairy companies get to do this? Part of the reasoning is that it allows them to provide more stable pricing. Hasn’t that gone up in smoke. This will not change the long term average pricing but it will avoid the sort of current retrospective clawback that is occurring which hurts people in much larger ways.

2/ Continue to drive towards value added and branded product owned by farmers and companies that share gains with their farmer suppliers

While there have certainly seem to have been problems with the approach that Murray Goulbourn has taken the overall strategic direction is correct. If you want to continue to supply commodity products you will get commodity prices. So you have to create products that create higher margins by providing greater value to the customer. No-one should pretend or believe that a drive towards value adding  is easy. It is particularly hard for farmers who have been used to having a primarily production driven focus and some of whom believe that the companies who buy their product have some sort of obligation to do so because they are producing it. Having been on the board of a farmer owned company that followed this strategy, partly because I banged on about it for years, I can attest to the difficulties of this change in practice. The good thing is that it does not have to be a majority of your product. You can still be part of commodity markets to drive economies of scale that keep your costs low while 10 or 20% of your product significantly increases profits. A word of caution though, a different group of people have to be involved in the commodity part and the value added part. They require a completely different mindset.

3/ Increasing use of technology to drive transparency

This follows on from my second point. It is fine for consumers to buy branded products but if those products are owned by a company that pays it farmer suppliers commodity rates then there is no benefit to the farmers. The use of data, and social media systems to demonstrate that the brand treats its suppliers differently can then drive brand loyalty. The farmers also have to change though. A partnership where both parties drive towards customer value is necessary for this to work. That will provide long term change rather than a quick social media driven hump.

4/ Price contracting/hedging systems for farmers

If farmers want to complain about the prices they receive and or the volatility of them perhaps they should take more control of that pricing. We already see this used widely in other agricultural industries with grain farming and marketing being  a case in point.  Then they can complain about themselves. However the reality is that even done well this is likely to only smooth out the volatility. Just as the vast majority of people believe that they are an above average driver  It is a fool’s game to believe that everyone can beat the market.

 

All of this means a long term grind towards change rather than a quick fix. That is the reality of agriculture and agricultural investment at the farm level.

Addendum May 26th 2016

Talking to farmers this week from outside the dairy industry this week (I am at an Australian Ag conference) several things are clear:

1. They are sympathetic to the plight of dairy farmers.
2. They cannot believe the crazy pricing system (see above) but believe that dairy farmers have to hold some responsibility for agreeing to it.
3. That you can’t beat the market.
4. That they believe that the supermarkets are actually rubbing their hands together in glee with the social media campaign because they are selling more higher priced branded product where they make a bigger margin. Every farmer I have talked to believes the supermarkets are making more money and little or none of that money is going to dairy farmers.
5. That if farmers want to get better margins they have to own the assets that provide branding and value to customers or they will continue to ride the ups and downs of the commodity cycle.

Change will not come quickly if at all.

Paul Higgins