Comparisons with Australia

Comparison of NZ Dairying to aspects of the Australian Dairy Industry

LM

The current state of Australian dairy industry is best revealed by some very good analysis done for Dairy Australia. The analysis also provides a lot of generic information about world dairy markets including much relevant to NZ dairy farmers. It is essential reading and is available:Australian Dairy 2007 - Situation and Outlook

There are some striking differences indicated by the first three paragraphs of the report, as quoted:
“This report has been prepared for the Australian Dairy Industry to provide participants and stakeholders with a comprehensive and objective assessment of the industry’s position and outlook, as a resource to the dairy industry for information and planning purposes. The work has been funded by Dairy Australia.

The report has been written by Steve Spencer of Freshlogic, and Dairy Australia’s Strategic Analysis team; with support of members of the Trade and Strategy group. The project has benefited from the considerable input of a project steering group of dairy farmers, management executives of Australia’s major dairy co-operatives, as well as ADF Limited and Dairy Australia management.

The project group wishes to acknowledge the valuable assistance and cooperation of industry participants who were consulted in the preparation of this project package, including company management, farm consultants and advisers as well as participants in the 2007 National Dairy Farmer Survey.”

The attitude to providing information is refreshing, Dairy Australia has a strategic analysis team, and the breadth and co-operation across the industry is impressive. Dairy Australia reports a three-year revue of their activities:Dairy Australia 3 Year Review

All this from a budget about half of that poured into Dexcel/Dairy Insight. Contrast the situation regards strategic analysis with that illustrated at Dexcel in the following link:Dexcel Gets Fonterra Strategy

Fonterra Chairman Henry van der Heyden said that current lack of cohesion had the potential to undermine the competitive strength of the New Zealand dairy industry.
“We see this agreement as providing the lead for the dairy industry in retaining that competitive strength,” says Mr van der Heyden. “What we have at the moment is a segmented approach by the industry towards initiatives aimed at driving production growth with no overall strategy to assist in maintaining our world leadership position,” said Mr Van der Heyden.
“That means we are not using the skills, knowledge and people within the industry to our full advantage and there are potentially significant business risks if we continue that approach.

One problem has certainly been accurately identified. The strategic functions being carried out by Dairy Australia once had equivalents in NZ but these disappeared between the reforms of 1980’s and the formation of Fonterra. The current NZ situation regards identifying and setting dairy industry strategy is significantly inferior to that in Australia.

A look at the history of the Australian dairy industry suggests an early history similar to that of NZ in terms of exporting to Britain, but with a better balance between local supply and export markets. The Australian government doesn’t seem to have favoured co-ops to the detriment and eventual demise of investor owned dairy companies as in NZ.

Australia didn’t chase or didn’t get quota for butter and cheese to the EU when Britain joined in 1972. This lack of quota doesn’t appear to have hindered the Australian dairy industry.

Through the 1970’s, 80’s and 90’s the Australian Dairy Industry had large milk production bases in Victoria, New South Wales, Queensland and Western Australia. Victoria had a broad spread of the production in regions such as Gippsland, Western & Northern & North Eastern Victoria. Meanwhile states such as New South Wales, Queensland and Western Australia had centralised production bases, often in suitable climatic regions located in close proximity to capital and large urban cities.

Tasmania and South Australia had small production industries, and in the early 1990’s, the Tasmanian industry was declining until there was a significant influx of NZ Dairy Farmers chasing cheaper farms. This resurrected milk production in this state.

In the early 1980’s, Victoria produced enough milk to supply the entire domestic requirements of the population of Australia, but due to legislation, interstate milk companies were restricted in taking supply from Victorian Dairy Farmers. Victoria was oversupplied and milk remained at ‘break even’ prices as low as 19 cents/litre. The Victorian Dairy Farmers and their representative bodies pushed for federal deregulation of the Australian Milk Industry in the hope of sharing in the higher value milk prices received in other states.

In the late 1990’s/early 2000’s deregulation of the Australian Milk Industry was enacted and changed the milk production landscape forever. In states like Queensland and New South Wales where dairy farmers were being paid contract milk prices above 40 cents/litre the contracts ceased and prices fell for periods below 25 cents/litre. In Victoria dairy farmers had no contracts and prices did not lift remaining as low as 19 cents/litre.

Deregulating the milk market allowed the large retailers to dictate the milk price, and effectively level prices across Australia. The effects of this change are still being felt today. The low prices in the states of Queensland and New South Wales and difficult climatic conditions increase milk production costs in the marginal climatic regions of these states. Smaller privately owned dairy farms are still closing down, and the production base becomes lower and more widespread, increasing pick-up costs to milk companies and ultimately the dairy farmer.

Today some milk contracts exist for dairy farmers as Australian milk companies strive to secure milk supply. The payment structures differ between companies and these structures are hindering dairy farmers from trading profitably.

The droughts of 2002 and 2005 have brought on more massive changes to the milk production base of all states. The high cost to produce milk and the unacceptably low milk prices of approximately $4.50-5.10/kg milk solids have meant that Australian dairy farmers have been cash flow negative many times since 2002.

In 2002 one established dairy farmer of 20 years with no on farm debt lost up to 25% equity in a single trading year when operating costs took a significant lift. In addition, the availability and price of irrigation water in marginal climatic regions has meant that milk production in these regions is constantly relocating to better climatic regions where farms are significantly more expensive.

Changes to Australian milk production are not finished yet as more dairy farms are forced to return to dryland and alternate management systems to survive physically and financially. The Australian dairy industry is set for yet further contraction in milk production and expansion is out of the question until dairy farmers can regularly make significant trading profits. This will not occur while water resources are scarce, milk prices are too low, and operating and capital costs too high.

In the last 10 years the varied and inhospitable Australian climate, and deregulation of the Australian milk market, has caused a significant decline in supplier numbers from reportedly 39,000 to less than 12,000, and likewise milk supply. Australia is still the world’s third largest dairy exporter. Production is though now 60:40 local versus export.

The Australian dairy industry has significant differences to NZ:

  • The regional differences are more marked
  • There is competition for milk supply, with both regional and seasonal pricing
  • Co-ops and investor owned companies coexist. Major ones and being:
    • National Foods
    • Dairy Farmers
    • Parmalat
    • Murray Goulburn Co-operative Co.
  • Farm asset are values sometimes less than half NZ values
  • Attitudes are that debt will be paid off, and farming is for, and makes, profits
  • What Australians note most about the movement of NZ farmers or processors to Australia is their arrogance. Ex NZ farmers expect to apply their ‘superior’ farming systems in Australia. This does not work. Many change and adapt, but significant numbers don’t and fail

Compare Australian and NZ commodity milk prices over time in NZD or USD – To Do.

Fonterra in Australia:

  • Fonterra firstly bought into Bonlac, a major milk Co-operative operating in the south of the East Coast of Australia, and later failed in a take-over bid for National Foods - a major milk company operating in the Central and Northern East coast of Australia
  • Is effective in competing for milk supply but Fonterra effectively bought into a high-risk milk market with little or 'no' guarantee of being supplied.
  • Not being shareholder suppliers of Fonterra makes little difference – payout is inadequate in either case
  • Fonterra appears to have performed well in Australia to date
  • The return on capital is not clear
  • The Australian market place is dictated by supermarkets (Coles and Safeway/Woolworths) and milk processors such as Fonterra have little apparent control of wholesale price(s) and therefore realistically unable to adjust wholesale price(s) to cover increasing operating and capital costs.
  • Fonterra appear to have maintained and possibly increased supplier numbers, and have regularly offered leading opening milk pay-out prices to suppliers in face of competition from other milk processors. Fonterra is the largest processor in Tasmania and therefore sets the milk solids price in that state.
  • In Australia in July, Murray Goulburn was offering an opening price of approx. $5.10/Kg of milk solids, with the promise of step up payments during the year. Fonterra was offering about the same price. At the time, Fonterra in NZ was currently paying a higher milk price, but only since the recently announced increased milk price.