Milk price cuts hit Oz suppliers

Fonterra last week lowered its price by A60c but is offering an interest-bearing loan of up to A60c/kgMS to its suppliers to the Bonlac Supply Company.

The co-op's Australian suppliers will now get A$5/kgMS for milk.

Managing director Fonterra Oceania Judith Swales says the price change reflects the reality of the supply and demand imbalance affecting global dairy commodity prices, compounded by the recent strength of the Australian dollar.

"The reduction in the farmgate milk price is the last thing farmers want to hear, however it is unlikely to come as a surprise."

Australia exports about 40% of its milk, so farmers there are not as badly affected as New Zealand farmers, who export 95% of their milk.

"With around 40% of Australia's milk exported, our ongoing message has been that Australia is not immune to the global dairy challenges, that the milk price did not reflect current reality and that farmers need to budget conservatively," says Swales.

"Fonterra is committed to... more transparency on milk price so that farmers have a clear line of sight to budget, plan and respond."

The Australian dairy industry was rattled this month when its largest co-op Murray Goulburn signalled a big cut in its milk payout. Managing director Gary Helou and chief financial officer Brad Hingle quit, so did two board members.

MG has dropped its 2016 farmgate milk price to between A$4.75 and A$5/kgMS, down from the A$5.60 forecast at the end of February.

The company attributed the change to the higher-than-expected Australian dollar and weak exports of adult milk powder to China.

Bonlac Supply Company (BSC) chairman Tony Marwood says while Fonterra's price reduction would be tough for suppliers, Fonterra has acted responsibly throughout the season.

"We know Fonterra has done all it can to send the right price signals and keep suppliers informed. While today's news will be difficult, it's good to see Fonterra showing its commitment to its Australian suppliers with the short term support and, importantly, longer term commitment to paying market returns.

"Fonterra will continue to meet the minimum benchmark milk price, as per the BSC agreement. From next season this will be exclusive of the deductions Murray Goulburn is using to recover repayments from its farmer support package, equating to a minimum of 0.20 – 0.27c/kgMS for three years.

"This is especially important because it is likely a low milk price environment will continue next season and it gives farmers greater clarity on a market milk price," said Marwood.

Swales says Fonterra will support farmers despite the challenges the milk price cut will cause.

"We have the right strategy and a clear, sustainable plan. Work is underway to rebuild our Stanhope cheese plant with 50% extra capacity and we are growing our nutritionals business with Bellamy's and Beingmate."

"Our priority is ensuring a long-term sustainable business for Fonterra and for our farmers who supply us."