MILK PRICES

Short-term pain for long-term gain

Dairy News Australia - - FRONT PAGE - MATTHEW GUNNINGHAM • Matthew Gunningham is a dairy farmer at Maw­banna, Tas­ma­nia.

FARM­ING IS a long-term busi­ness. I am con­cerned that the re­cent an­nounce­ment of open­ing milk prices has re­sulted in some very short-term think­ing amongst some of my fel­low milk pro­duc­ers. A long-term busi­ness such as farm­ing re­quires think­ing on a sim­i­lar timescale. If we are think­ing through a de­ci­sion to change to a dif­fer­ent milk pro­ces­sor, we must also con­sider the mo­ti­va­tions of that pro­ces­sor and the longer term con­se­quences of that de­ci­sion. The ma­jor­ity of milk in Aus­tralia is pro­cessed by com­pa­nies who are in busi­ness to make a profit by en­sur­ing that they max­imise gap be­tween their rev­enue and their costs. One of these costs is milk pur­chased from farm­ers. A well-man­aged and well-sup­ported dairy co­op­er­a­tive has a dif­fer­ent mo­tive. They are in busi­ness to min­imise the gap be­tween rev­enue and costs by pay­ing the high­est milk price pos­si­ble, in or­der to re­turn to the farmer the high­est pos­si­ble pro­por­tion of their sales rev­enue. This dif­fer­ence be­tween these mo­tives is night and day. This is high­lighted by dif­fer­ences be­tween the dairy in­dus­tries in the UK and Ire­land. Ire­land has a very good cli­mate for low cost milk pro­duc­tion. Ire­land ex­ports 90 per cent of its milk due to a rel­a­tively low lo­cal pop­u­la­tion (4.6 m peo­ple) and Ir­ish farm­ers have a high level of farmer own­er­ship in the in­dus­try be­yond the farm gate. On the face of it, the UK has many ad­van­tages — an ideal cli­mate for low cost milk pro­duc­tion and 65 m wealthy con­sumers right on their doorstep. Much of the UK dairy pro­duc­tion is con­sumed do­mes­ti­cally. How­ever, UK farm­ers have a low level of in­vest­ment be­yond the farm gate. The high level of Ir­ish farmer in­vest­ment in their milk pro­ces­sors en­sures that farm­ers cap­ture the max­i­mum pro­por­tion of their milk rev­enue, re­gard­less of cur­ren­cies and world com- mod­ity prices. Other com­pa­nies in Ire­land wish­ing to pro­cure milk must al­ways pay as well or bet­ter than the co­op­er­a­tives to se­cure sup­ply. The UK dairy in­dus­try does not have this bench­mark and so the pro­ces­sors pay out a lower per cent of their to­tal rev­enue to farm­ers. As with many things, these dif­fer­ences may seem to be small to be­gin with, but over mul­ti­ple busi­nesses, over mul­ti­ple years these small dif­fer­ences com­pound. The dairy in­dus­try in Ire­land is vi­brant and grow­ing as farm­ers look for fur­ther op­por­tu­ni­ties to sup­ply an in­creas­ing world pop­u­la­tion with high qual­ity dairy prod­ucts from a low cost base. On the other hand we see a UK in­dus­try that has been sys­tem­at­i­cally crushed by multi­na­tional cor­po­ra­tions who con­sis­tently pay milk prices that are lower. I think we are at an im­por­tant point for our in­dus­try. The new lead­er­ship team at Mur­ray Goul­burn have been given the task of fix­ing the is­sues that have be­set the or­gan­i­sa­tion over the re­cent past and chart­ing a course to a long term sus­tain­able future. They ac­tu­ally need our sup­port to do this. The de­gree to which they achieve this will af­fect all dairy farm­ers in Aus­tralia, not just MG sup­pli­ers, as it en­sures that the bench­mark milk price that all com­pa­nies must pay to se­cure sup­ply is a higher pro­por­tion of the rev­enue than these com­pa­nies would nat­u­rally wish to pay, given their mo­ti­va­tions as cor­po­ra­tions serv­ing the in­ter­ests of their own­ers. We are con­stantly told that farm­ers are price takers. This is only part of the story, as we have seen in the UK vs Ire­land ex­am­ples. Farmer own­er­ship be­yond the farm gate de­ter­mines how large a pro­por­tion of the re­turns from the mar­ket farm­ers ac­tu­ally see. It is vi­tal for our long-term pros­per­ity that farm­ers cap­ture the high­est pro­por­tion of the to­tal rev­enue avail­able. This is why the most pros­per­ous dairy in­dus-

We are of­ten told that farm­ers are price takers but this is only part of the story.

tries around the world are all un­der­pinned by well man­aged and well sup­ported co­op­er­a­tives — they ‘keep the other com­pa­nies hon­est’. No mat­ter how well in­ten­tioned these other com­pa­nies may be on milk prices, their in­cen­tives and mo­ti­va­tions can­not fail to pull them in another di­rec­tion. A long-term busi­ness such as dairy farm­ing re­quires long-term think­ing. Any de­ci­sions to change milk pur­chasers based on a) pro­jected fig­ures, and b) only for the com­ing sea­son, is try­ing to solve a prob­lem across two com­pletely dif­fer­ent time hori­zons us­ing the same think­ing. This does not work. I was farm­ing in the UK in 1994 when the milk mar­ket dereg­u­lated and it took the dairy com­pa­nies only two years of of­fer­ing slightly above the go­ing rate for milk to at­tract enough farm­ers away from the co­op­er­a­tive and weaken it to a point of ir­rel­e­vance. These com­pa­nies have had the up­per hand for the past 20 years and UK dairy farm­ers have been the losers com­pared to their con­tem­po­raries in neigh­bour­ing coun­tries. None of this is easy stuff. There is not a sin­gle quick solution. How­ever, with sup­port from sup­pli­ers and a sys­tem­atic ap­proach to grind­ing away at the prob­lems, the new lead­er­ship team have made a pos­i­tive start at tackling some dif­fi­cult is­sues. We are al­ready on the path — now is not the time to turn away. I think it’s as sim­ple as ask­ing your­self: would you pre­fer a bet­ter price this year fol­lowed by a worse price forever, or are you pre­pared to stay the course, recog­nis­ing the nat­u­ral mo­ti­va­tions of the other in­dus­try play­ers to pay less. Now is the time to ap­ply long-term think­ing to en­sure brighter future prospects for your own busi­ness and the in­dus­try as a whole.

Matthew Gunningham

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