Milk pricing change aired
Fonterra should introduce a quarterly-based milk price system, which would reduce price volatility and lessen the risk of farmers going out of business, says ASB rural economist Nathan Penny.
If farmers were given forecasts which covered just the quarter ahead and were paid at the end of the quarter, they would know more accurately how much milk to produce.
In a paper titled ‘‘Lessons from the dairy downturn’’, Penny said under the present system, Fonterra usually provided a conservative forecast early in the season, partly because it did not want to overpay farmers and later claw back payments.
‘‘They build in uncertainty so they are conservative, and then they layer on the technicality of possibly overpaying.’’
Penny said the advance payment system compounded the issue. The payments started off low, which did not reflect the market price, causing farmers to under produce.
At present advance payments were about 65 per cent of the market price. Penny argued that by using a quarterly payment system, Fonterra could be more precise, which would most likely lead to a higher advance rate.
He estimated under a quarterly system, payments would be about 80 per cent of the market price.
Later in the season, the situation was reversed so payments were higher and as a consequence farmers overproduced.
From July to October retrospective payments kicked in, which were also higher, and again because they did not mirror market prices, they led farmers to overproduce.
He gave the example of the 2013-14 and 2014-15 seasons. In the first, the price hit a record $8.40, but the next season prices began to tumble.
Because farmers were still receiving high prices in late 2014 from the season before, they continued to produce at an elevated level.
Federated Farmers dairy chairman Andrew Hoggard said he could see some merits in the proposal, but it contained some potential fishhooks as well. ’’It’s hard to change production midseason. You set yourself up at the start of the season and it’s not like you can call up another shift to work 24/7, or find extra cows.
‘‘On the other hand if you had a mid-season crash, you would have banked something for the second part of the season and you could wind things down,’’ Hoggard said.
Vice-chairman Chris Lewis, who supplies Open Country Dairy which pays out a different price three times a year, said ‘‘everyone’s got to run their own race’’.
Penny said the cost of volatility was high, potentially putting farmers out of business. He pointed out New Zealand was the world’s largest dairy exporter, exporting 2 per cent more dairy products in the June 2016 year than the second-largest exporter, the European Union. ’’Contrary to general belief, NZ farmers are not necessarily subject to the whims of global dairy markets. Indeed, they have more pricing power than they are normally led to believe. In short, if NZ farmers produce less, they will get paid more, with the net effect higher incomes overall.’’