The world and your customers are watching Coles. Will you deliver?

I have sat in on many meetings since the Coles/ Murray Goulburn 10 year deal was announced and there are a lot of wise people in the dairy industry very concerned that Murray Goulburn has bitten of more than they chew by getting into bed with Coles. I hope they are wrong

Dairy Farmers Milk Supply Cooperative Chairman recently said in an open letter to farmer suppliers

The Coles media assault says that Coles want to look after Australian dairy farmers, that they want farmers to have security of tenure, that there will be an increase in milk prices and a premium over current regional milk pricing, and that they expect milk to be sourced locally for  MG contracts.

Macquarie Equity analysts inform that there has been a reduction in wholesale price into Coles so there are real questions as to the transparency of it all; what will be the price set and the price premium. It is a question of what is the money and where will it come from. Let us not forget that Coles also said that $1 milk would not hurt farmers. Coles has the media story, will their new partners deliver? In truth it is a test for Coles to deliver.

Many are saying that the Australian dairy industry is entering the perfect storm. Milk’s heartland Victoria is under extreme pressure from dry conditions, and no real break in the weather is predicted before mid-June and the weather is turning cold, a dire combination that means there will be a shortage of grass to feed cows. On top of this 4% of Australia’s milk supply has rumoured to have gone into receivership

Milk supply in NSW is predicted to drop below 1 billion litres for the first time ever

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Source Dairy Australia

Large processors supplying the domestic market are hurting

It is in this market that Lion has no return on capital in the milk division, low EBIT margins and has written off approximately two billion dollars.

Fonterra is realigning their Australian business, changing its consumer brands as the retail price war in milk begins to bite into its profits. EBIT from its Australian consumer brands fell 31 per cent.

Fonterra Chief Executive Theo Spierings said that “there’s a new reality in Australia,” and that Fonterra is facing “aggressive competition” in milk supply and, with a retail price war in Australia; it has to ensure its supply chain is cost-effective.

Fonterra currently has 21 brands in Australia, which has room for a maximum four or five, he said. It was too soon to say what plants or jobs losses may result, though Mr Spierings noted the company has a wide variety of yoghurt brands and also faces pressure in the milk market.

On a positive note the Global Trade Weighted Index for all dairy all around the world has gone sharply upward.

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This is likely to mean that the tanker after tanker load of milk that is currently coming up from Victoria to fill the milk shortfall in NSW and Queensland will stay in Victoria for export

Seasonal conditions have been part of the perennial challenge and there is no doubt adverse climatic conditions are harder to handle in our dairy businesses that ever before. This goes for all of agriculture, there is simply less room for failure.

The fact that dairy is tougher than ever is evidenced by the tough climatic events causing farmers to exit the industry. We are running out of reserve, both in terms of cash but also equity, and the ability (and incentive) to borrow.

The national industry is not growing; the pincer of cost and revenue is tightening. When tough times such as floods and dry spells occur, low levels of farmer confidence result in some questioning why they would battle on again for this uncertain future. For this reason among others, the assurance of better terms for longer term is an imperative for farmer confidence and viability. said the DFMC Chairman

Tomorrow I am attending yet another review with a very large regional business that relies on our region prospering. What heartens me is there are many people big and small out there who care about our farmers and they are working side by side with us on the solutions

Yes indeed Coles you do appear to have trumped Woolworths with your latest media story, but no-one is forgetting you lied when you said that $1 milk would not hurt farmers. In fact its got to the point where it is hurting consumers and the country as a whole

The world and your customers are watching Coles.  Will you deliver?

Frontbenders or backbenders – Being flexible in an inflexible market place

Contortionists according to wiki “have unusual natural flexibility, which is then enhanced through acrobatic training, or they put themselves through intense, vigorous and painful training to gain this flexibility”.

Contorsionists

So how does this relate to dairy farming? Quite a bit in fact! Cows and farmers are living things that ideally should be able to operate in a flexible environment to achieve the best outcomes for their health and wellbeing. However more and more they are both finding themselves operating in a totally inflexible market place and quite a bit of intense vigorous and painful training is going on to help them bend and weave and duck to cope

Let me explain

Dairying systems in Australia are probably as diverse as they get and they depend on a combination of factors which include the best options for the cows, the milk market you supply, where your business is located, and your soil and the types of pastures you can grow, the amount of rain, the temperature range, your access to grains and other bought in feed. I could go on forever.

This diversity of production systems also means a diversity of calving patterns. These include batch calving, seasonal calving, split calving and year round calving

The most common is seasonal production where cows calve during the peak period of pasture availability. This system is used by nearly two-thirds of Australian dairy farms and is most prominent in Tasmania, Victoria and South Australia.

Graeme Nicoll who farms in Victoria and writes the excellent blog Montrose Dairy has written a great post about the ins and outs of his seasonal calving pattern here

Milk Production

Most of Australia’s milk production is concentrated in Victoria with the second biggest milk production state being NSW

The second most common production system is year round production. Under this system, calving is spread throughout the year, which means that milk production is stable during the year (or as close as it can be.) This production system is most prominent in areas like ours which supply fresh milk for domestic production.

Clover Hill Dairies pregnant cows

Hello welcome to my world

We supply two different milk processors (Parmalat and Lion via Dairy Farmers Milk Supply Coop) who both process and supply drinking milk for the Australian domestic market. This means they need a consistent supply of high quality fresh milk close to their processing plants which are invariably located either in or as close to the major capital cities as possible

Producing milk consistently all year round is not as easy as it might sound. It fact it’s damned tricky. Milk production is essentially the conversion of pasture to milk.

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The paddock in front of my house was planted with ryegrass and oats 3 weeks ago and its not growing near as fast as it should be

The milking herd

Hopefully we will get a nice drop of rain, a bit of warm weather and it will look like this again shortly

So pasture is the Holy Grail and the best pasture is available in spring and early summer so logically cows produce more milk during this time of the year.

Current Seaon

As you can see milk production goes up significantly in Australia in Sept – December

To encourage farmers who supply the domestic market to balance this and achieve a “flat supply curve” i.e. less milk in spring and more milk in the autumn/winter we are paid a higher price for autumn/winter milk for the milk we supply Parmalat

Lion/Dairy Farmers Milk Supply Coop. on the other hand have a two tier system (as Malcolm Fraser said “life wasn’t meant to be easy”)

Tier 1 milk prices are paid on milk supply volumes representing an allocation of what Lion (formerly National Foods) have estimated is their fresh drinking milk requirements (“anticipated full demand” or AFD). That is you are essentially allocated a milk quota

To discourage you (and believe me it’s very discouraging) farmers who supply milk in excess of these contracted Tier 1 volumes attract Tier 2 prices.( which in the main are half the price you get for Tier 1)

For farmers, the pressures arise because they must make investment decisions about the size and composition of their herds and their infrastructure investments more than nine months in advance. Those decisions necessitate a longer term investment horizon and exposure to ongoing fixed costs. Consequently, farmers look to the processors to provide guaranteed cash flows over the farmers’ investment horizons. However, the processors are not able to commit to supply arrangements with farmers until the processors have finalised their contracts for house/private brand volumes with the supermarkets.

The processors are exposed to the risk of significant loss when their milk supply arrangements with farmers extend beyond the term of their house brand contracts. In  2011, Lion claim changes in the configuration of demand for fresh white milk caused them to lose approximately $20 million on its fresh white milk contracts. On top of this Lion lost the Woolworths house/private label supply contract which was a whopping 20% of its milk intake and they have subsequently written down their business by $1 billion, this is on top of a ½ billion dollars write down in the previous financial year. Scary stuff

Milk producers like us contracted to Lion (through direct supply contracts or milk supply co-operative DFMC) currently suffer from the combined effects of a rationalization of Lion’s processing requirements in dairy products (other than fresh milk) and the loss of private label volumes.

Our business is doing the very best it can to listen to the market place and we are focused on changing with the world. We are not unique in this respect.

We have outsourced expertise to help us manage risk and adopt new technology and farming strategies that improve efficiency.

We have found novel ways to grow the businesses and have built strong natural resource management partnerships and have undertaken extensive Landcare projects to adapt to climate variability and build carbon in the soil

We have innovatively grown our business in a peri urban environment where 90% of the prime agricultural land is now owned by lifestyle farmers without large injections of capital through procuring lease land

We are actively working to secure markets for our products by working with the processing sector and supplying the companies that best fit our farming system. That is DFMC/Lion on the home farm and Parmalat on the lease farm.

We are also thinking of hiring a full time physio/chiropractor because the constant balancing act ain’t getting any easier

Juggling act

Till death us do part

The trials and tribulations of the last 18 months have left us questioning our resolve to get up every day to help feed the world. See previous post

2011 started with a supermarket price war instigated by Coles that used “free” milk as a customer traffic driver with a laughable promise by Coles that this would not affect farmers

In March we had the 1 in 50 year flood and the heartbreak that brings including being utterly powerless to save one of our most adorable cows when she was swept into the floodwaters and found herself stuck in a drain with no chance of survival.

Dolman CL SIMOLA

Simola (pictured with Emma) lost her life in the March 2011 flood

Then all the Dairy Farmers (who supply National Foods) suppliers in our region felt the impact of the milk price wars with a 30% drop in their allocated quotas as well as a drop in farm gate milk price

Always looking for the opportunity we rose to the challenge and managed after much haggling to convince Dairy Farmers to allow us to bring both our Dairy Farmers contracts to the Clover Hill farm. In the first instance this required a $170,000 investment in a new milk vat. We were then able to grow our business, keep the staff we had and employ one more by supplying Parmalat from our Lemon Grove Farm.

This also required the purchase of 100 more cows and the need to grow enough pasture to graze 6 cows to the hectare which is almost three times the industry average. This is very doable in paradise but along came the 1 in 25 year flood with us now finding ourselves 4 weeks behind with pasture sowing and feeding our cows twice a day on bought in feed with the help of the mixer wagon which adds two hours to Michael’s day .

Michael uses the mixer wagon to supplement the milking cows feed when pasture levels are low

We have pushed the boundaries in the last twelve months at all levels and it isn’t just the landscape feeling the pressure. Every night Michael comes in and spends two hours with his knees elevated wrapped in ice doing his best to give everyone who walks in the door that big smile he is so famous for and it breaks my heart to see him in so much pain from the rigors of his job

On Friday some-one on twitter shared this article with me and this breakout piece so resonated with me.

Why don’t farmers retire?

“Agriculture is notorious for having a skewed age structure,” says Dr Matt Lobley, of the Centre for Rural Policy Research, University of Exeter.

“Unlike any other profession, there is not much separation between what somebody does for a living and their whole personality.

“They can literally go outside and walk around the farm and see the products of their labours written into the landscape – in the shape of the walls, the hedges and in the fields.

“It can be very difficult to face up to that time when they have to let go either partially, or fully.

“These farmers are also socially embedded into their communities, and they have an intimate knowledge of the land.

“They understand micro-climates of individual fields – which are the last to warm up, where you get frost pockets or flooding. That knowledge is often under-estimated, even by the farmers themselves.”

My family is proud to farm. We are committed to supplying affordable, nutritious, ethically produced milk to over 50,000 Australian everyday but we cant do it for free

In the words of Louise Fresco “Food is as important as energy, as security, as the environment. Everything is linked together.”

All Australians must value food at its true value and be prepared to pay for it.  Yet we continue to ignore this at our peril and we are denying these young people a future as part of the noblest profession and this wont happen either Julia if we don’t have the farmers to fuel the agribusiness sector.

Stand up Australia and be counted. May I suggest we all start with a signature on this petition to send to the Victorian Government to try & stop the National Centre for Farmer Health from closing. http://www.change.org/petitions/state-government-of-victoria-stop-the-national-centre-for-farmer-health-from-closing