Avoiding dairy at our peril

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By Strategic Partner Paul Arnold

Not long ago milk production was seen as the great white hope for Tasmania, and we were all set to be swept up in a wave of prosperity while well-meaning industry sources encouraged farmers to grow their herds, fill the factories and prepare for the ride.

Despite the positive outlook, you would have to be living under a rock to miss the dairy mess of the last 6 months, particularly since the Anzac Day long weekend, when it all turned sour. Recent positive announcements have restored some hope for 400 plus active dairy farmers and their rural communities, but the challenges will continue.

Tasmania’s dairy production is primarily focused across the north of the state to capitalise on the rich soils and the reliable rainfall. With the dairy industry adding over $1 billion to the Tasmanian economy, dairy farmers help sustain the wider economic activity of the northern areas. So why all the negativity? Some useful facts will help us understand the current situation.

The world produces over 735 billion litres of milk annually. Australia produces only 1.4 per cent (9.7 billion litres) of the global production, and Tasmania 0.1 per cent (0.8 billion litres). In the global sense, Tasmania is minute. We could double, triple or quadruple production and it would only be a billy full by global standards.

Europe, India and USA account for over 50 per cent of world milk production. If Europe or USA want to increase milk production, as they have done, then the market becomes saturated and we all suffer. If geo-political forces interfere with free trade, then the global market is over supplied very quickly. The key to milk value is domestic markets.

Most countries can consume their own milk products very comfortably, however, around 10 per cent of global milk production goes into the global dairy trade. As we can only consume 66 per cent of our milk as liquid milk, cheese or milk derivative products, Australia is impacted heavily by global supply and demand, and over supply leads to one thing, falling prices.

The $1 per litre milk fiasco mainly reflects poor management decisions of the major dairy processors. It impacts Tasmanian and Victorian milk producers more heavily, as the other states have little surplus milk that ends up in the global dairy trade of commodity products. Tasmania consumes around 55 million litres per year as liquid milk, only 6.9 per cent of our annual milk production. Even if we were to double milk prices and double consumption, we are still at the mercy of the global markets.

As Tasmania produces around 80 per cent more dairy than we can consume, the surplus ends up as butter and cheese sales in the mainland, and the rest is exported as cheese, butter, and milk powders, usually at standard global dairy prices.

Commendably, some companies are achieving premiums for value added dairy products however, the base component of any export sale seems to have a nexus with the prevailing global dairy prices. This is where Tasmania is over exposed.

The announcements made by dairy giant Murray Goulburn, following the Anzac Day weekend, was a large adjustment back to the reality of global dairy supply and demand – a reality that the company had been ignoring since its unit float earlier in the year. In one untidy series of announcements, Tasmania’s dairy farmers had around $100 million removed from their expected 2014/15 income. Fonterra Australia followed suit, and suppliers were soon travelling on an expected trajectory that was smashed overnight. The losses have also continued over into 2016/17 as well as a debt for overpayment in 2015/16.

There is little doubt that poor governance within Murray Goulburn and inherit conflict of interest by their partial float has destroyed trust in their ability to right the wrongs. Their partial float raised a miserable $500 million and has given them a hybrid co-operative internally conflicted by the need to service unit holders and their supplier owners. The resulting loss of trust and the enormous shock to dairy farmers has done serious damage to the reputation of both Murray Goulburn, Fonterra and the wider dairy industry image.

A plethora of announcements in recent times has left the dairymen confused and taking actions they may later regret. The loss of confidence, coupled with the worst of seasons has led to wholesale disillusionment. The failure of the government to respond via an ill-conceived loan scheme only adds to the limited blue sky for dairymen.

Although global milk supply has begun to ease, global dairy prices are trending up and the recent announcement by MoonLake Investments of direct export of liquid milk to China, highlights the possibilities for the future, industry challenges will continue. While MoonLake are only exporting a billy full (1-2 per cent of state production) at present, it does show the way forward for Tasmania’s milk.

Sadly, the present situation is that most of Tasmania’s surplus dairy exports end up on bulk commodity markets with no recognition of our premium quality milk. When this anomaly is addressed, Tasmania will again have the prospects of a great white hope. This reality makes dairy production a very noble and worthwhile cause, even after damaging corporate behaviour of the past 6 months.

Let good seasons roll on and more premium based dairy products from the rich pastures of Tasmania be realised.

Font Strategic Partner Paul Arnold supplied milk to Murray Goulburn until 30 June 2016, and now supplies Fonterra Australia.

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