Dairy price crash ‘clearly avoidable’

Last year’s dairy crisis was an avoidable catastrophe, two of Australia’s dairy industry leaders told The Australian’s Global Food Forum in Melbourne.

Fonterra chief executive Rene DeDoncker. Picture: Stuart McEvoy

Last year’s dairy crisis was an avoidable catastrophe, two of Australia’s dairy industry leaders told The Australian’s Global Food Forum in Melbourne.

Rene Dedoncker, Australian head of the world’s biggest dairy company, Fonterra, said the crisis was caused by “out of control” pricing by Victorian processor Murray Goulburn, and its former chief executive, Gary Helou.

Mr Helou told last year’s forum that a $6 a kilogram farmgate milk price was achievable just two days before Murray Goulburn was placed in a trading halt. The company later issued a profit downgrade that ultimately led to his resignation in April.

But Mr Dedoncker said Mr Helou’s “aspirational” milk price had created a price bubble and the subsequent crash.

“We had an industry and a price mechanism that worked well for a decade, but for the last two years it didn’t,” Mr Dedoncker said. “When MG went out of control, it hurt us as well because we were hitched to their wagon; it was an avoidable (crisis) but that doesn’t mean that the dairy industry doesn’t have a future.”

Fonterra said it had lost hundreds of millions of dollars over the past two years, paying Australian dairy farmers too much for their milk at a time when bans were placed on sales to Russia following the Malaysian Airlines flight MH17 crash, and the world was awash with surplus milk powder.

“It was tough,” Mr Dedoncker said.

But Bega Cheese executive chairman Barry Irvin said Fonterra, while it had been warning for months that the farmgate milk price being set by Murray Goulburn was too high, had to accept some blame for the crisis as well.

Fonterra mirrored MG’s dramatic milk price crash last April, which saw both companies also try to claw back milk cheque “overpayments” from loyal farmer- suppliers for the previous 10 months, creating financial havoc and sending many farmers bankrupt.

“It was clearly avoidable because not every (processing) company did it; only two players elected to cut their milk price retrospectively while the rest of us decided not to because (my view is) that long-term relationships are important and that you need to value enormously the trust farmers put in you.”

Mr Irvin, who last year at the height of the crisis called the act­ions of MG and Fonterra “immoral”, said keeping the farmgate milk price high for May and June until the 2016-17 season price could be recalibrated, may have cost Bega Cheese some profit.

But he said it was self-evident that a listed company like Bega Cheese could weather the impact of two months of losses more than its individual farmers who supply Australia’s fifth biggest processor with their milk daily.

“It was disappointing that the industry got to that point; we were all in hot competition for milk and didn’t want to lose our supply, so global milk prices were no longer reflected in the farmgate milk process,” Mr Irvin said.

“It doesn’t mean the prices we are paying are good now; but it does show that we understand the value and impact of our actions in a fragile supply chain.”

But Mr Dedoncker and Mr Irvin told the forum that last year’s price crash did not damage the upbeat long-term prognosis for Australia’s $4 billion dairy industry.

Both agreed outlooks for the domestic milk market and dairy exports which account for about 35 per cent of total dairy production, are bright, especially as both companies have picked up 10-15 per cent extra milk supply as disgruntled dairy farmers quit supplying MG.

Mr Irvin said he had “absolute confidence” in the future global demand for dairy at solid prices.

“We have got to give farmers confidence around what they are doing on their farms, as well as make sure they can deliver a competitive product; increasing energy costs of 15-20 per cent a year are adding another complication right up the supply chain.”