December 2, 2019


Farmers of troubled Australian dairy sector not too worried of foreign ownership



Australian Coalition member of parliaments met with representatives of dairy producers and processors in a closed-door session following a $600 million offer made by China's Mengniu to to acquire the already foreign-owned Lion Dairy processing business, The Guardian reported.

The meeting in Canberra came five days after submissions closed on the final draft of the Australian dairy industry mandatory code of conduct. The development has roused concerns over the presence of multinational corporations in the dairy sector.

The code of conduct, which was recommended by the Australian Competition and Consumer Commission, aims to bring back confidence and trust in a struggling industry after the collapse and international sale of Australia's largest processor, Murray Goulburn.

A devastating cut in milk prices by Murray Goulburn in 2016, which was followed by other processors, led to farmers receiving just 10c a litre for the final few months of their annual contracts. For this reason, farmers are less worried about foreign ownership.

Just last month, the federal government approved the $1.5 billion sale to Mengniu of the infant formula maker Bellamy's.

Rabobank figures from June show about 77% of Australia's dairy processing capacity is foreign-owned, but that is hardly an issue with some farmers. Excluding the involvement of foreign ownership in in the Australian dairy sector would in fact leave the country with fewer processors, according to dairy farmer Graham Forbes.

Meanwhile, Australian Agriculture Minister Bridget McKenzie is under pressure to support a mandatory minimum price for milk.

Farmers' difficulties are further exacerbated by a drought which has left those in the irrigation-reliant districts of northern Victoria and inland New South Wales unable to pay for feed.

Milk prices have rebounded to a record high, driven by scarcity of supply, but prices for grain and other feed are also at record levels. Margins remain very slight, said Forbes, who is also the president of the producers group Dairy Connect. They will only get tighter until the drought breaks.

A code of conduct was also criticised as it could not protect farmers from being locked into exclusive supply agreements and against processors unilaterally varying milk supply agreements.

"The current draft of the mandatory code for dairy is deficient in a number of ways," said Dairy Connect's chief executive, Shaughn Morgan. "It's so deficient that if it was to stay as it currently is, we would say it should not be introduced."

Minister McKenzie and the National party are under mounting pressure from the dairy industry to support a mandatory minimum price for milk to ensure farmers are paid at least the cost of production.

The Coalition voted against a recent private member's bill from Pauline Hanson, whose One Nation party has gained a foothold in safe seats held by the LNP in Queensland and the National party in northern New South Wales, to establish a mandatory minimum price. Labor and the Greens supported the legislation, which fell one vote short in the Senate.

The Nationals have argued against the floor price proposal on the grounds that Australia's trade partners would see it as a subsidy, and that it would not work in practical terms without reestablishing a quota system and undoing 20 years of deregulation.

The Nationals have focused on lobbying the major supermarkets, which earlier this year halted their nine-year stretch of selling milk for $1 a litre. Homebrand milk now sells for $1.20 a litre.

The ACCC found that an imbalance of power between processors and farmers, rather than $1 milk, was to blame for low prices to farmers.

But the Nationals have remained focused on supermarkets, with Queensland senator Susan McDonald calling last month for Coles and Woolworths to appear before a Senate committee.

McDonald said the code of conduct would be introduced with changes to remedy the farmers' concerns about the power of processors by January 1.

Rabobank's senior dairy analyst, Michael Harvey, said the effect of $1 milk on farmgate milk prices had been "overemphasised" but it undoubtedly affected farmer morale.

Harvey said the Mengniu purchase of Lion could result in more investment in the industry, as Mengniu is likely to attempt to expand the export market. Exports account for about a third of the dairy market in Australia, down from two-thirds when the industry was regulated in 2000.

Harvey said exports have fallen because the size of the industry has shrunk since deregulation. The drought and the fallout from Murray Goulburn has led to another spate of farm exits and left a lot of excess production capacity.

There was an 8.4% reduction in the number of dairy farm licences issued in Victoria alone in 2018-19; 320 farmers left the industry in 12 months. Most were based in the flatland irrigation district of northern Victoria, around Echuca and Shepparton. The number of dairy farms nationwide has fallen by more than 2,700 in the past 10 years.

"There is a lot of excess stainless steel that would like more milk going through it," Harvey said. "So that's the first challenge for all dairy companies: stabilise the milk pool and try and support growth on farm and a recovery so you're not just competing to grow your milk pool by pinching it off another company."

Demand has pushed the milk solids price above $7 a kilo, a record for southern Australia, and made processors more likely to negotiate favourable contracts.

- The Guardian