Murray Goulburn hit as farmers switch to other milk processors

Troubled milk processor Murray Goulburn has warned of a steep fall in its milk volumes as farmers switch to supplying rival processors or quit the industry.

A wet spring will slash its volumes by an estimated 20 per cent, it warned on Thursday. The decline has prompted the company to seek further cost reductions, with earnings now expected to fall short of an earlier forecast of $42 million for 2016/17.

Murray Goulburn is suffering as its suppliers flee to other milk processors. Credit: Jessica Shapiro

While other milk processors are forecasting an improved farmgate price as global markets stabilise, Murray Goulburn on Thursday cut its farmgate price for milk. However, the impact is likely to be muted as it has decided to suspend the need for farmers to repay advances made last year.

The processor's farmgate milk price is now expected to run at $4.70 per kilogram of milk solids, down from $4.88, the company said with the repayment of the clawback of prior payments, the milk supply support package, of 14c/kg of milk solids suspended until mid-2017.

Around half of the estimated 20 per cent decline in volumes is due to the wet spring, which has caused widespread flooding. The bulk of the balance is farmers opting to supply rival processors.

The processor has already been hit with a heavy loss of volumes of 350 million litres of milk, equal to around 10 per cent of its volumes. The bulk of that was due to farmers switching to other milk processors, with 80 million litres of the decline due to farmers quitting the industry.

"The rest of the industry is showing signs of recovery and other global market returns are moving in the opposite direction," Adam Jenkins, the president of United Dairyfarmers of Victoria, said of the cut imposed by Murray Goulburn.

The latest cut imposed by Murray Goulburn runs counter to the fact that Fonterra New Zealand has raised its 2016/17 forecast farmgate milk price by 50¢ to $5.25kg of milk solids, he said.

Dairy lobby group Farmer Power said the move was another example of "smoke and mirrors" by the dairy giant.

The vice-president of diary lobby group Farmer Power, Alex Robertson, said the Murray Goulburn news "wasn't going down real well" .

"They're trying to stop people leaving the company," he said. "They think farmers are stupid."

Mr Robertson said the market was lifting and there was "definitely a shortfall of milk" which "should see prices improve".

"Instead, they're giving us excuses why they can't improve," he said. "And weather isn't the only factor here."

Flagging its earnings shortfall, Murray Goulburn refused to give a specific forecast. It is part-way though implementing earlier cost reduction programs, it said, and will "continue to review options to enable this cost base to remain competitive".