Confidence was high as farmers took advantage of record prices and soaring demand to expand their operations and produce more milk.
Back in 2013, a plan to grow Tasmania’s dairy industry to produce more than 1.1 billion litres of milk a year and boost farmgate incomes by $160 million was developed by DairyTas.
The aim was to meet the increasing demand for milk by processors, which had invested more than $185 million upgrading their processing facilities across the state.
The Into Dairy expansion program began and farmers were quick to respond.
Last year they produced a record 886 million litres, a jump of more than 10 per cent compared with the previous season.
Just like other agricultural commodities however, the Tasmanian dairy industry is not immune to global market volatility.
In the past three weeks that reality has hit local farmers hard, bringing crippling milk-price cuts from the state’s two major processors Murray Goulburn and Fonterra.
Murray Goulburn was the first to cut prices, slashing the rate it pays suppliers from $5.60 a kilogram of milk solids to between $5 and $4.75.
Fallout from the company’s poor financial performance saw managing director Gary Helou and chief financial officer Brad Hingle step down from their positions.
A week later Fonterra, which through an industry agreement is required to match the minimum benchmark milk price set by Murray Goulburn, also made the decision to cut prices from $5.60 to $5.
Rabobank Dairy analyst Michael Harvey said the rising value of the Australian dollar was also a factor.
“The factories are facing a severe glut [of milk] on the market and it has finally caught up with us despite their strategy to de-commoditising [products],” he said.
Under the so called claw- back clauses that both companies have in their milk supply agreements, they are able to retrospectively apply milk price reductions to farmers across the whole season.
This means farmers who had budgeted carefully and worked hard all year producing milk, may end up actually owing the companies money.
Many of the state’s 440 dairy farmers have been left wondering how they will weather the current price storm and some are questioning their future in dairying.
One of those is Jude Charleston who farms with her husband Shane and brother-in-law Craig on their family property at Wilmot. After struggling though a very difficult season caused by the extremely dry conditions, the family, who are Fonterra suppliers, have been left devastated.
“It was the biggest shock,” she said. “I just said to Shane, ‘We’re stuffed, how are we going to get through this’.
“We were only just scraping through anyway because of the drought. I really don’t know what we’re going to do.”
Last week Shane was forced to take a job in Queensland to help keep the family farm afloat. In a desperate effort to cut costs in the wake of the price fall, they have also had to put off their employees, including Shane’s son Sean.
“Having to tell him we couldn’t have him here anymore was so hard, even though he understands the situation, it’s still heartbreaking,” Mrs Charleston said.
The Charlestons, like many other farmers, had to feed their cows more over the summer because of the extreme dry.
Mrs Charleston said that had they found out sooner that Fonterra were planning such major price cuts, they could have been prepared.
“I think that’s the most frustrating part,” she said.
“We went out and bought extra feed so we could keep milking the cows right through to the end of the season. If they had told us earlier, we would have made very different business decisions and probably dried them off in February.”
Although in the Australian domestic market demand for dairy products remains strong, both companies are blaming their exposure to the deflated global trade for the need to cut prices.
During the past couple of years, demand, particularly from China, one of the globe’s biggest dairy product buyers, has slowed.
This has combined with the continuing trade embargo on European dairy imports into Russia to change the supply and demand balance of the international dairy market.
As a result, global dairy commodities have fallen by more than 60 per cent in the past two years and this season reached their lowest levels in 14 years. Increased milk production in many dairy producing regions, including Europe and the United States, is seeing the current milk product oversupply continue.
While farmers understand the risks of global dairy price volatility, they say it is the way both companies have applied the latest pay cuts retrospectively, that has made the situation so devastating.
Chief executive Theo Spierings, of New Zealand-based Fonterra, made the company’s position quite clear in a blunt statement to Australian farmers this week.
“What we are doing is drive (sic) every cent of money we can out of Australia, back to New Zealand shareholders in this extremely low milk price environment,” he said.
Farmers now face a nervous wait as both companies prepare to announce their opening milk prices for next season.
If prices are much less than $5 a kilogram of milk solids, it will be below the cost of production and some farmers may have no choice but to exit the industry.
Source: DailyTelegraph
