The downtrend in international dairy prices is mainly being driven by the economic slowdown in China, a major importer of dairy products. Under pressure, the Australian government has introduced an emergency relief package, including a measure worth $555 million Australian dollars ($411 million).
In late April, Murray Goulburn slashed its prices to dairy farmers from A$5.6 to between A$4.75 and A$5.00 per kilogram of milk solids for the entire fiscal year from July 2015 through June 2016. In response, roughly 500 dairy farmers protested in Melbourne in late May. During the demonstrations, they called for fair treatment– out of fear of bankruptcy.
As the reasons behind the decision, Murray Goulburn cited sluggish sales of milk powder for the Chinese market and the Australian dollar’s recent rally that is hurting export earnings.
On April 27, the company revised down its net profit forecast for the year ending this month, from its February estimate of A$63 million to between A$39 million to A$42 million. At the same time, the company also announced that then-CEO Gary Helou and then-CFO Brad Hingle would step down, because of weak earnings.
Market leader
Murray Goulburn is a cooperative body made up of 2,600 dairy farmers, making it the biggest in size in the nation’s dairy industry.
For fiscal 2015, Murray Goulburn handled 3.6 billion liters of milk, which accounts for 37% of total milk production in Australia. The second-largest player, the Australian arm of New Zealand’s Fonterra Co-operative Group, has a 17% share. Last July, Murray Goulburn listed its unit trust on the Australian Securities Exchange and raised A$500 million.
Murray Goulburn has been focusing on developing high-value-added products for Asian markets, where the middle class is growing. However, global imbalances in supply and demand have dealt a heavy blow to the company.
After European nations slapped economic sanctions on Russia, it suspended dairy imports from those countries. Excess dairy products then flowed into China, but as the Chinese economy has slowed, its consumers have been cutting back on purchases. The GDT Price Index, an international price index of dairy products, is over 50% lower than it was three years ago.
A question of timing
It is not unusual to see a correction in prices paid to suppliers, given that it occurs to account for changes in market conditions. In that sense, the move is not exceptional.
This time, however, the timing of the announcement came late in the season, which is leaving dairy farmers perplexed. The revised price applies to supplies for the year ending this month, reversing previously determined prices dating back to July of last year. Affected dairy farmers are thus bearing the difference between the values by deducting it from their income for the two months through June.
In late May, Murray Goulburn unveiled a support program that allows suppliers to receive the cash equivalent of $5.49 per kilogram of milk solids. Instead, the cooperative will make up for the loss by reducing its payments to suppliers over the next three financial years, starting next month. According to local news reports, the program will likely push down dairy farmers’ annual income by A$12,000 on average per farmer.
Milk powder produced in Australia and New Zealand is popular with Chinese consumers because they are seen as being of high quality and safe.
Tourists are known to pack as many milk powder products as possible into their suitcases, or they ask export agents to ship them. Despite this popularity, due to falling dairy prices, producers do not feel like they are benefiting from this reputation.
Australian farmers’ profitability threshold is seen to be A$5.0 to A$5.5 per kilogram of milk solids. Distressed dairy farmers are reportedly trying to offload dairy cows. Local media are calling for patience, saying farmers should wait four to six weeks before resorting to such a drastic measure.
Barnaby Joyce, minister for Agriculture and Water Resources, recently announced a support package for dairy farmers, including loans with an interest rate of 2.66% and opportunities to receive financial counseling. In reaction to this, dairy farmers, frustrated by measures they see as insufficient, are participating in demonstrations that are spreading outside Melbourne.
Source: AsianReview