No time for short-term thinking

11 Jul, 2017 04:00 AM
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Tasmanian dairy farmer Matthew Gunningham was farming in the UK in 1994 when the milk market deregulated and says the eventual demise of co-operatives there was disastrous for farmers in the long term.
.. would you prefer a better price this year followed by a worse price forever ...
Tasmanian dairy farmer Matthew Gunningham was farming in the UK in 1994 when the milk market deregulated and says the eventual demise of co-operatives there was disastrous for farmers in the long term.

Farming is a long-term business - I am concerned that the recent announcement of opening milk prices has resulted in some very short-term thinking amongst some of my fellow milk producers.

A long-term business such as farming requires thinking on a similar timescale.

If we are thinking through a decision to change to a different milk processor, we must also consider the motivations of that processor and the longer-term consequences of that decision.

The majority of milk in Australia is processed by companies who are in business to make a profit by ensuring that they maximise gap between their revenue and their costs, one of these costs is milk purchased from farmers.

A well-managed and well-supported dairy co-operative has a different motive, they are in business to minimise the gap between revenue and costs, by paying the highest milk price possible, in order to return to the farmer the highest possible proportion of their sales revenue.

This difference between these motives is night and day.

This is highlighted by differences between the dairy industries in the United Kingdom and Ireland.

Ireland has a very good climate for low-cost milk production, Ireland exports 90 per cent of its milk due to a relatively low local population (4.6 million people), and Irish farmers have a high level of farmer ownership in the industry beyond the farm gate.

On the face of it, the UK has many advantages, an ideal climate for low-cost milk production and 65 million wealthy consumers right on their doorstep, much of the UK dairy production is consumed domestically, however, UK farmers have a low level of investment beyond the farm gate.

The high level of Irish farmer investment in their milk processors ensures that farmers capture the maximum proportion of their milk revenue, regardless of currencies and world commodity prices.

Other companies in Ireland wishing to procure milk must always pay as well or better than the co-operatives to secure supply.

The UK dairy industry does not have this benchmark and so the processors pay out a lower percentage of their total revenue to farmers. (See graph.)

As with many things, these differences may seem to be small to begin with, but over multiple businesses, over multiple years these small differences compound - the dairy industry in Ireland is vibrant and growing as farmers look for further opportunities to supply an increasing world population with high-quality dairy products from a low-cost base, on the other hand we see a UK industry that has been systematically crushed by multinational corporations who consistently pay milk prices that are lower.

I think we are at an important point for our industry: the new leadership team at Murray Goulburn have been given the task of fixing the issues that have beset the organisation over the recent past and charting a course to a long-term sustainable future - they actually need our support to do this.

The degree to which they achieve this, will affect all dairy farmers in Australia, not just MG suppliers, as it ensures that the benchmark milk price that all companies must pay to secure supply is a higher proportion of the revenue than these companies would naturally wish to pay, given their motivations as corporations serving the interests of their owners.

We are constantly told that farmers are price takers, this is only part of the story, as we have seen in the UK vs Ireland examples.

Farmer ownership beyond the farm gate determines how large a proportion of the returns from the market farmers actually see.

It is vital for our long-term prosperity, that farmers capture the highest proportion of the total revenue available.

This is why the most prosperous dairy industries around the world are all underpinned by well-managed and well-supported co-operatives - they ‘keep the other companies honest’, no matter how well intentioned these other companies may be on milk prices, their incentives and motivations cannot fail to pull them in another direction, gravity continues to operate no matter how much you wish you could fly!

A long-term business such as dairy farming requires long-term thinking, any decisions to change milk purchasers now, based on projected figures and only for the coming season is trying to solve a problem across two completely different time horizons using the same thinking, this does not work.

In the same way that most of us would consider a farmer selling his farm after a poor season in one location, to ‘try his luck’ in an alternative location as being ridiculously short-term focused.

I was farming in the UK in 1994 when the milk market deregulated and it took the dairy companies only two years of offering slightly above the going rate for milk to attract enough farmers away from the co-operative and weaken it to a point of irrelevance.

These companies have had the upper hand for the past 20 years and UK dairy farmers have been the losers compared to their contemporaries in neighbouring countries.

None of this is easy stuff, there is not a single quick solution, however with support from suppliers and a systematic approach to grinding away at the problems, the new leadership team have made a positive start at tackling some difficult issues, we are already on the path -- now is not the time to turn away.

I think it’s as simple as asking yourself: would you prefer a better price this year followed by a worse price forever or are you prepared to stay the course, recognising the natural motivations of the other industry players to pay less.

Now is the time to apply long-term thinking to ensure brighter future prospects for your own business and the industry as a whole.

Matthew Gunningham is a dairy farmer at Mawbanna, Tasmania.

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READER COMMENTS

Bazza
11/07/2017 12:50:07 PM, on Australian Dairyfarmer

Matthew makes some very good points . Unfortunately the reality for many farming people is the move to another processor may mean staying in business or the ability to employ someone . Perhaps even have a couple of days off for a change ! Co-op s seem to end up with many of the suppliers no one else wants . Especially ones who cannot get their milk quality right . MG sent out information recently that milk dumped due to antibiotic contamination last year could have produced over 200 tonnes of product .

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