Dairy processors: South Australia farmers move to the money

But a switch to supplying new player Beston Global Food Company has given the Inman Valley farmer a little breathing space.

While still sceptical, Tristan says there are positive signs in the state’s dairy industry.

When compared with Victoria, South Australia’s dairy industry is relatively small.

At 5.4 per cent of Australian milk production last season, about half a billion litres, and about 220 dairy farmers, it comes in behind Victoria, NSW and Tasmania in terms of volume. Tasmania is its closest competitor at 9.5 per cent.

Production, to May this year was down 8.1 per cent to 451 million litres, according to Dairy Australia statistics.

But despite its small contribution to the nation’s milk pool, the state boasts a smattering of large individual dairy operations and also has more than 15 buyers collecting milk from farms.

This season about 20 per cent of the state’s milk is ­expected to move processors.

Nationally, in February, 17 per cent of Dairy Australia’s dairy farmer survey respondents indicated they would like to swap processors.

The anticipated South Australian movement comes as new player the Union Dairy Company, at Penola, starts processing milk and Australian Securities Exchange-listed ­Beston Global Food Company ramps up production by taking on at least 60 million extra ­litres of milk.

Canadian-owned Warrnambool Cheese and Butter has also been a big winner in the South Australian milk swap. It has collected about 250 million litres across mostly western Victoria and the South East of South Australia as disaffected Fonterra and Murray Goulburn suppliers have jumped ship since late in the 2015-16 season when farmgate milk prices were slashed.

Until 18 months ago, Murray Goulburn was the dominant processor by volume in South Australia.

Now, it is understood WCB has significantly increased its foothold at the expense of MG and Fonterra, with Parmalat and Lion — another two large processors in the state — remaining stable.

It is hard to quantify the movement of milk at this time of the season, especially with some farmers on contracts that do not run out until next month and limited disclosure from milk processors.

South Australian Dairyfarmers Association chief executive Andrew Curtis confirmed there had been a “significant increase in movement”, but stressed it had not all been for negative reasons.

Andrew said with Beston expanding its milk intake, it came out with an early “competitive” opening price and farmers responded to this by changing processors.

On the other hand, he said some MG suppliers had “had enough” following a “series of bad decisions and bad communication from MG to their suppliers” and decided it was time to move milk processors.

Confidence has varied across the state as dairy farmers take stock of their individual positions.

“The mood for many dairy farmers is positive. They are keen to get on with it and can see the opening price as an ­opportunity to produce milk for a profit and can see some individual opportunity to ­expand,” Andrew said.

“The mood for a subset is quite the opposite. They feel trapped and don’t feel in the same position a lot of their neighbours.”

A group of dairy farmers on the state’s Fleurieu Peninsula have moved their milk supply to Beston.

Tristan, who milks 500 cows, finished supplying Parmalat on June 30, swapping to Beston.

“It is because of price,” he said. “We had no indication from Parmalat where they were heading, no indication of price. We made an offer and Beston accepted.”

Like many farmers in this region, Tristan said the South Australian farmgate milk price for those supplying the domestic market players should be closer to the price NSW and Queensland dairy farmers ­received.

The move to supply a new player that has processing plants at Jervois and Murray Bridge is a 12-month commitment for Tristan at this stage.

“We started a little sceptical because we supplied (now ­defunct) United Dairy Power and were worried about a new company in the system with no track record as yet,” he said.

“We only signed with them for 12 months, they need to be proven.”

Looking forward to being able to pay some principal debt, he is hoping to try to “catch-up” and this has changed his perception of dairying.

“A little more sceptical and wary now” about going into debt, Tristan said he would take a conservative approach to expansion, especially after years of dairy farmers selling young stock to pay creditors.

Not far away, Bill Fraser has ended a 10-year relationship with MG and a lifelong association with co-operatives by moving to Beston. Bill milks 300 cows at Waitpinga and moved to Beston at the weekend. Bill is chairman of the Fleurieu Collective Bargaining Group representing 25 million litres of milk.

“Certainly Bestons have come up with a pretty good price and were looking for milk, they probably had to pay that much to attract it in the first place, they are more of a niche processor but were looking for a substantial volume of milk,” he said.

LEAVING MG had been a hard decision for Bill.

He was a strong supporter of co-operatives and believed they were necessary to set the benchmark price in the industry. But Bill said other processors were more competitive and he needed a “sustainable price” to service debt, do some farm upgrades and replace machinery, all expenses that had been placed on the backburner.

“We were down over $250,000 in milk income in the last 12 months,” he said.

“We have had to make some fairly hard decisions and cut costs where we can. What has certainly saved us in the last 12 months has been the good season and also we run a few cattle on the side. The beef prices saved me in a business sense. That’s something I never thought I’d say.

“I guess the last 12 months have been pretty stressful — at the time you have got to make sound business decisions. I don’t want to do dairy for nothing, it’s too hard a job.”

A seasonal calver, Bill said he “struggled” to get $5kg/MS last season. Cutting $150,000 out of costs, some which were not sustainable, as well as good beef prices and a reliable season has helped Bill achieve a break-even point of $5 a kilogram of milk solids with a “small debt”.

He said he was happy to supply Beston as it was a local company, employing local people and paying a premium.

Another MG supplier who did not wish to be named due to contract implications said he wanted to shift because the differential in price between Beston and MG “was too big to ignore”.

Torrens Vale dairy farmer Wes Hurrell has swapped from Parmalat to Beston. He was critical of Parmalat for paying higher farmgate prices in Queensland and NSW.

“We see what happens in Queensland and NSW. Milk goes into the same bottle and is sold in the same shop and they get mid 50s-plus to 60 cents a litre, (compared) with 41 to 42 cents a litre for the exact same product (here),” Wes said.

He said Parmalat had a similar milk volume in South Australia as the other niche fresh milk processors combined. He said Parmalat compared its price with Fonterra and Murray Goulburn — which had lower prices — rather than local processors when it determined its premium. “It’s comparing apples with rotten apples,” he said.

Parmalat did not provide a comment to The Weekly Times.

Beston’s early “attractive price”, which is believed to ­include a base price of $6.05kg/MS with various incentives pushing prices up past $6.60kg/MS was Wes’s catalyst for change.

“They are also a South Australian company, producing the product in South Australia and they supply South Australian jobs, they have revitalised the dairy industry and are new players,” he said.

Wes said farmers were sick of “trying to chase a fair price” and the past 12 months had been the hardest.

“It’s mentally draining and causes more work and stress on top of what we have from just doing the job,” he said.

South Australian dairy is largely split geographically. The South East is home to generally larger operations with many supplying Victorian processors and farming on irrigation land. Further north are farms that have traditionally supplied domestic market processors, with the exception of a few, and have the ability to supply more niche processors that are paying significant farmgate price premiums.

At Penola, about 50km north of Mt Gambier, a new processor will kick production into gear at the end of this week.

The Union Dairy Company is a joint venture between global agricultural giant Louis Dreyfus and the Midfield Group at Warrnambool.

UDC managing director Daniel Aarons said the processor would not be disclosing the volume of milk it had ­recruited, but confirmed it had “exceeded” the minimum to start operating the factory.

It has a 250 million litre ­capacity and will continue to recruit milk for the next three to five weeks.

Daniel said almost half the volume had been recruited from South Australia and the rest from Victoria.

Last month he told The Weekly Times, the recruitment and procurement environment was “highly competitive”.

“Not a long time ago there was a great deal of loyalty in the industry between the farmer and the processor, but a great deal of (this) loyalty has waned and driving the moti­vation of farmers is now the ­return,” he said.

“What is in the best interest of the farmer from an eco­nomic point of view? It’s challenging. By nature farmers are conservative and … from our perspective in order to recruit milk we had to offer a very, very generous package.”

He said UDC would pay 25 cents kg/MS more than “the high two of the three (major) processors”, which operated in the region. This is WCB, Fonterra and MG.

The “default position” is that a farmer is no worse-off. “If they can demonstrate they are better off elsewhere we will match it,” he said.

Daniel said there were oppor­tunities and “pressure” on a new player entering the dairy industry following a ­tumultuous season.

“Prior to commencing (the project) there was a reasonable degree of stability in the sector,” he said.

“At the commencement there was stability and … ­record commodity prices etc. Shortly after commissioning (the project) the industry saw a significant downturn and what has happened in the last 12 months was foreseen by us.

“On one hand it has created an opportunity. On the other, the new landscape is putting a great deal of pressure on us to be competitive.

“I think the dairy industry used to rely on and anchor ­itself on old-fashioned morals and principles, and loyalty to the processor. It is fundamentally changing and now the economic return to the farmer is more important than loyalty to a specific processor, however that is putting a great deal of pressure on the processor to be competitive and reward farmers, otherwise they will walk.”

In the South East, Kongorong dairy farmer Barry Bruce has his farm on the market. Barry milks 900, down from 1200, and his milk production is down 30-40 per cent. He said this milk production drop was due to trying to keep his cost of production low and also that he was “making more money out of cull cows than milking cows”. Barry has stayed supplying MG due to “the uncertain future” of his farm as it is on the market and he did not think other options were good enough to switch.

“If we get out, we could save some share value, but we are not going to hang our hat on it,” he said.

SADA president John Hunt said on paper there appeared to be a lot of competition for milk in South Australia, but he was not sure if it was actually translating to the farmgate.

“What I can’t understand is that having more demand should increase the price, but has it?” John said.

“It amazes me that all the processors with different product ranges and mixes, different export and domestic ratios and they still pay within a few cents of each other.”

“At the moment, what goes through farmers’ heads is, could they pay more? Could they pay less? (Farmers) are all looking past the farmgate now (when it comes to selecting a processor).

“Prices are better but that is because there has been a lift in commodity prices. Has it been because of competition? How do we judge? I don’t know.”

John said the competition for milk had not even translated to interest at the farmgate.

“The state has capacity to double production,” he said.

“I thought (milk factory) reps would be coming up the drive every two seconds, but you don’t get that. You’d think they’d be giving away knives to get you on board,” he said.

Industry confidence has taken a battering across the state.

“The last 12 months confidence has been at the lowest I’ve seen it,” he said.

Looking ahead, he said farmers would be wanting to get out of the “big hole” that was dug, something that would take a few years.

He said South Australia was a “brilliant place to farm” but there were barriers to the state reaching its potential.

Two issues that go “hand-in-hand” were confidence and farmgate milk prices.

He said costs had also risen 24 per cent, with South Australian farmers paying double their Victorian counterparts for the natural resource management level and emergency services levy as well as skyrocketing power prices.

Source: The Weekly Times

Link: http://www.weeklytimesnow.com.au/agribusiness/dairy/dairy-processors-south-australia-farmers-move-to-the-money/news-story/cba25c5ec4d831d8647600917baa8f35

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