Fonterra follows Murray Goulburn in slashing price it pays farmers for milk

The world's biggest dairy exporter, Fonterra, says it could have done more to warn farmers after it slashed their milk payments for the first time since the financial crisis.

The cut – from $5.60 to $5 a kilogram – comes with just two months remaining of the 2015-16 season and threatens to plunge many farmers into the red.

The New Zealand company will attempt to cushion the blow, offering loans of up to 60 cents a kilogram. But Fonterra's Australian managing director Judith Swales said it was still a "horrendous situation for everyone concerned".

The cut comes a week after Australia's biggest milk processor and price setter Murray Goulburn reduced farmer payments from $5.60 to $4.75-5 a kilogram in the wake of a steep profit downgrade.

Fonterra's Judith Swales: no one knows velocity better than Judith. Whatever that means.Credit: Josh Robenstone

Ms Swales said although Fonterra had been warning its suppliers to be cautious and conservative with budgets this season, it could have done more.

"What the most important thing is here, for the whole industry, is around the price signals and having a more transparent model as to what is impacting the milk price," Ms Swales said.

"If I reflect, I would say maybe we should have driven that harder this season.

"We are well placed as a global leader in dairy to tap into the signals that are coming from the market. That is one thing we will be looking to do better next season. We will try to give all farmers clearer signals about what is happening."

Benchmark obligations

Fonterra could not cut the price sooner because it was obliged under its Bonlac supply agreement to meet the benchmark price. In other words, it couldn't move unless Murray Goulburn did.

And Murray Goulburn finally cut its farmers' milk cheques last week, from $5.60 to $4.75-$5 a kilogram, after it said it would struggle to meet even half of its net profit forecast outlined in its prospectus for its partial float on the ASX last year.

The co-operative has been accused of artificially elevating the farm gate price to satisfy investors in its non-voting listed trust because the dividend is tied to the farmers' milk payments.

Whatever the case, the profit and farm gate cut led to Murray Goulburn's managing director Gary Helou and chief financial officer Brad Hingle leaving the company and farmers fuming.

A group of about 600 farmers, calling itself Farmer Power, has already called for an independent review of the Australian dairy industry.

The group's president Chris Gleeson said the "collapsing fortunes" of Murray Goulburn was not isolated to that co-operative and warned it could lead to the entire collapse of Australia's dairy export industry.

Industry collapse

"Australian milk production has decreased substantially over the last ten years, and is now set to contract faster than before," he said, adding dairy herds were being slaughtered and some farmers were switching to beef cattle or leaving the industry.

"Dairy exports have decreased from 50 per cent of milk production [worth around $5 billion per annum] to around 25 per cent, so this newest cull could result in the complete collapse of Australia's export industry."

He said in the past two years Farmer Power had warned the federal government about the "critical state of the industry, including the particular problems looming for Murray Goulburn".

"It would be easy for the present crisis to be blamed on particular agencies: governments, peak bodies, manufacturers, or the farmers themselves. This is not helpful.

"What is now needed is a united front. All stakeholders in the Australian dairy industry are requested to support the call for an urgent independent review of the industry, and to contribute constructively … to develop a sound platform for rebuilding domestic milk production."