WA milk contracts analysed

22 Aug, 2018 09:16 AM
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Busselton, WA, rural consultant Steve Hossen making a point during his presentation to the recent WAFarmers' annual dairy conference.
He predicted the payment difference between processors under different scenarios would increase ...
Busselton, WA, rural consultant Steve Hossen making a point during his presentation to the recent WAFarmers' annual dairy conference.

FACTORS that make some Western Australian dairyfarmers “better suited” to supply milk to one processor over another will become increasingly important as the State’s industry undergoes significant change.

That was the view Busselton, WA, rural consultant Steve Hossen put to farmers, processors and service industry representatives at the WAFarmers’ annual dairy conference at Busselton recently.

Despite potential controversy and a risk one or more of the State’s three main processors might boycott the conference if he directly compared farmgate prices they paid suppliers, Mr Hossen presented not-previously-released findings of a report prepared for WAFarmers dairy council.

He also included his thoughts on the implications for farmers as the WA dairy industry transitions from a volume-constrained drinking milk market to a “mixed market” of drinking milk and some secondary processing of commodities with longer shelf-life to balance seasonal production peaks and troughs.

The “gap” in potential farm income between a mis-matched producer and processor compared with a “better suited” producer-processor relationship could exceed $100,000 a year, or four cents a litre on a farm producing 2.5 million litres, Mr Hossen said his modelling showed.

He said that gap would only widen as the industry, led by Brownes Dairy reopening its Brunswick cheese factory and planning for a whey powder plant at its Balcatta site, underwent “partial transition to a mixed market”, which offers better prospects for growth.

Some farmers will remain higher-cost drinking milk producers receiving higher payment for their milk – particularly over summer, while others will supply a percentage of their production as lower-cost but also lower-return milk for commodities, Mr Hossen said.

He predicted the payment difference between processors under different scenarios would increase as the industry moves more into the “mixed” strategy.

Mr Hossen said both farmers and processors had “skin in the game” and could be winners or losers, depending on how their relationships were aligned.

“Producer liaison will become extremely important for processors,” he said.

“It costs more for a drinking milk flat production curve under either strategy, so unless processors are prepared to maintain a significant incentive to farmers for summer milk, they won’t get it.

“A volume-constrained drinking milk producer may be paid more in future, but may ultimately be less profitable than the less volume-constrained, lower-cost mixed market producer.”

Because of the scope of variable factors affecting farmgate prices and opposition to a direct comparison, Mr Hossen said he “built” an imaginary dairy farm as his “standard model” to review payment systems.

It was based on 2.5 million litres average annual milk production with average “seasonality” of 27 per cent more milk produced in October – when processors pay lowest prices – than in February – when they pay highest prices.

Mr Hossen used October payments as his “base rate”.

His “standard model” production included average milk components of 4 per cent fat and 3.2 per cent protein and average quality specified in total bacteria and somatic cell count (SCC) numbers.

Mr Hossen said he compared the effect of variations to his standard model under each of the payment systems of Brownes, Parmalat-owned Harvey Fresh and Lion Dairy and Drinks.

Variations modelled included accounting for “summer” milk incentives introduced by Brownes and Harvey Fresh in new supplier contracts this year, increasing production volume by 1 million litres and decreasing by half, a 0.2 per cent rise and fall in fat and protein and doubling bacteria and SCC counts.

Mr Hossen also factored in discounts of between 1 cent/litre and 2.5 cent/litre deducted from payments by processors for milk pickups on the South Coast, compared with the West Coast.

He said his findings showed each processor paid more for summer milk than winter milk and in terms of seasonality, there was no effective difference between them.

“Brownes pay higher in peak price but lower in the shoulder periods (either side of peak), the others (Lion and Harvey Fresh) pay lower in peak but higher in the shoulders,” he said.

“Most processors value the efficiency that comes from fewer pickups of larger producers, so scale has an impact.

“There are (also) minimum component levels that every processor needs in their milk but some processors value extra components vastly differently from others.”

Figures Mr Hossen presented to the conference showed volume changes did not affect the Brownes price, but Harvey Fresh paid significantly more than Lion for extra milk and penalised farmers only slightly more than Lion if they fell short of their supply target.

Mr Hossen’s data showed Brownes paid close to twice as much as Harvey Fresh for higher fat and protein content but its penalty was not much more than Harvey Fresh’s if fat and protein slipped, while Lion valued component changes up or down significantly less than its two competitors.

None of the processors wanted poor quality milk, Mr Hossen said, and each penalised consistent poor quality heavily while handling isolated quality issues well.

“There is no other region in the world that I can find producing 300 million litres of milk (a year) with a flat supply curve and our level of quality,” he said.

“I think we can make the claim to having the highest quality milk in the world.”

It cost more to have milk collected from the South Coast than it did from the West Coast and “all other things being equal”, South Coast dairyfarmers were better off supplying Harvey Fresh, Mr Hossen said.

“My conclusions, therefore, are that larger, lower-component milk suppliers are more suited to supplying Lion.

“Higher-component smaller suppliers are best suited to supplying Brownes and higher-component South Coast farmers are better suited to supplying Parmalat.

“Suppliers have a choice to make based on their compatibility with processors," he said.

“Farm analysis proves WA is efficient as a drinking milk producer.

“But we are undergoing quite a big system change and if we are going to land that effectively and not just leave us with underutilised capital or farmers who have produced milk that doesn’t have a productive home, there’s a lot for us to learn in that space."

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