Q: Why change the system?
A: The dairy crisis has exposed just how vulnerable the entire sector – and the lives of thousands of families – is to the decision making of a handful of people.
Trust has been badly damaged, making it hard for Australian dairying to rebound from the crisis.
A more transparent milk pricing system that allows for better risk management means farmers and processors alike can plan with confidence.
Q: Isn’t this a return to regulation?
A: Absolutely not. Farmers and processors alike will be free to set the prices. The only regulation would be around ensuring the market remains free and fair, just as there are regulations around the trading of shares on the ASX.
Q: What farmers and processors don’t want to change the current arrangement?
A: Milk Choices is all about choice and you can always choose not to participate! This concept simply offers an alternative for those seeking greater flexibility and risk management.
Q: Is there a risk farmers won’t be able to find a buyer for their milk?
A: Not really. The foundation processor will collect all milk. Farmers can lock in a price for as much of their milk as early as they like.
If the international commodity price collapses, processors are already able to slash the farmgate price – as we all saw in April/May 2016. This concept would simply help farmers manage risk by locking in the price for a portion of their milk earlier, reducing volatility.
Q: Won’t this lower the price for peak milk?
A: Most processors currently discount the price for milk supplied during the peak. An open market will make that extra milk more readily available for new and smaller processors, widening the usage options for peak milk.
In fact, the difference between the price of shoulder milk may decrease when milk is priced in line with its true value. In a submission to the ACCC, the UDV wrote:
“The current seasonal payments (payment differences above the spring milk prices) should reflect the value of processor product mixes and commodity prices. The benefit of moving from a plant utilisation of 55% to 100% is $0.70/KgMS and the current incentive paid to farmers for the period of April to July inclusively appears to be $2.00/KgMS.”
– UDV submission to the ACCC, May 9, 2017
Farmers can choose to sell that as far in advance as they like under this system to increase their price certainty or continue to sell their milk under current arrangements.
Q: How will milk quality issues be managed?
A: The milk will still be sent to the same independent laboratories for testing. Processors will still be able to stipulate quality standards and negotiate penalties for milk that fails to meet those standards.
Processors already trade millions of litres of milk between each other. This concept simply allows farmers to be directly involved.
Q: Will this make milk supply less certain for processors?
A: Milk Choices will allow processors to lock in supply specifically to cover their needs, improving the utilisation of stainless steel, encouraging innovation and enhancing profitability.
Q: Are farmers sophisticated enough to manage risk appropriately?
A: Most farmers are already exposed to the risk that the processor will adjust pricing during the season. If it does, all of a farmer’s milk income is affected.
This concept allows farmers to spread their risk across more than one processor and its product mix. It would also allow farmers to lock in as much of their milk price as they wish.
Farmers run sophisticated businesses and manage a wide range of risks, from their mortgage interest rates through to water trading. There is no reason why dairy farmers should not have the opportunity to manage price risk in the same way that grain, sugar and other producers already do.
Farmers who do not feel confident about participating in Milk Choices can always continue on with their current milk supply arrangements or give Milk Choices a go with a small amount of milk to see how it works.