August 27th 2016


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Articles from this issue:

COVER STORY Online census fiasco a cautionary tale

CANBERRA OBSERVED Tony Abbott: regrets, he's had a few, and those few he mentions

VICTORIA Volunteers put head on CFA, Cash pursues federal remedy

RURAL AFFAIRS Crisis in dairy industry escalates to new level

SOCIETY AND POLITICS Gays and lesbians can have happy marriages

SOCIETY AND RELIGION The science is in: God is good (for our children)

LAW AND SOCIETY Messing with marriage will hit constitutional bump

GENDER POLITICS Croome's blackmail gamble

TAIWANESE POLITICS Tsai remains in control after her first 100 days

MUSIC An industry that serves everyone bar the maker

CINEMA Villains under coercion: Suicide Squad

BOOK REVIEW A lose-lose country

BOOK REVIEW Grown in the 'burbs: a self-sufficiency plot

U.S. POLITICS The Good Ship Lollypop must be on the slipway

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RURAL AFFAIRS
Crisis in dairy industry escalates to new level


by Patrick J. Byrne

News Weekly, August 27, 2016

A perfect storm has hit the dairy industry – deregulation of dairy and water, falling export prices, drought, the Murray-Darling Basin Plan, duopoly supermarket price wars, debt and issues of corporate governance.

$10 million milkman: Gary Helou

In Victoria, a rural tragedy is unfolding as herds of cattle are going from dairy farms to saleyards to abattoirs.

While nature and global markets are beyond the control of farmers and processors, some of the factors behind the crisis are man made, and similar problems are facing other industries across the Murray-Darling Basin.

In 2000, the dairy industry was deregulated under National Competition Policy, against the real wishes of most farmers who knew that, as one small producer in a big industry, they have no bargaining power for the price of their milk.

The price for Australian processed milk – like butter and powdered milk – is set by global supply and demand. Victoria accounts for 85 per cent of dairy exports, worth about $2.3 billion, and the Murray Goulburn Cooperative produces much of the export product.

Before deregulation the price for fresh milk was set in each state, but since deregulation, the two supermarkets controlling most of the grocery market have ultimately set the price.

In 2007, Coles imported a British team to revamp its business and expand market share. It is believed that chief executive Ian McLeod could qualify for a $38 million bonus at the end of his term. He became one of the highest paid executives in the country, pulling $14.8 million in 2011–12.[1]

As part of the market-share war, Coles and Woolies slashed the price of home-brand milk to $1 a litre, sparking strong farmer protests and a Senate inquiry in 2011.

Deregulation stripped dairy farmers of any mechanism to gain a fair price for their product in the fact of the supermarket duopoly.

The price war hit farmers supplying fresh product to Australian consumers just as they were coming out of the worst drought in a century.

The long drought had other disastrous consequences. Believing the climate change rhetoric, many federal and state politicians came to believe that the Murray-Darling Basin was effectively in a permanent drought. The dams would never fill again. The Basin’s environment was set to collapse.

Well it did rain again in 2010–11, and the dams did fill. But before this happened, the federal government had passed a new Water Act in 2007. It committed governments to buying back about 40 per cent of the irrigation water across the Basin for environmental flows as part of a $10 billion Basin package.

The subsequent Murray-Darling Basin Plan to enact the water buyback was also enshrined in federal legislation in 2012.

Prior to this, National Competition Policy had seen the separation of permanent water right from land title, making water a tradable commodity. So after the long drought, many Basin dairy farmers sought to pay off farm debt by selling their permanent water right to the federal government for the government’s new environmental flow plans. Farmers believed they could still make a living buying temporary water each year for their farms.

However the huge government buyback of water had knock-on consequences. The huge reservoirs across the Basin, which once held about half their water for irrigation, now stored broadly 70 per cent of their water for the environment and only 30 per cent for farmers. This meant that when a short two-three year drought hit the Basin (like the one that has just ended), the soaring price of water would leave many farmers facing ruin.

Temporary water traded at $25 per megalitre in 2012, $70 per megalitre in 2013, $130 in 2014, and $220 per megalitre last year. At times it was around $300 per megalitre. One megalitre equals an Olympic swimming pool.[2]

Farmers and speculators who sold water made handsome returns. Farmers who bought water took on potentially crippling debts.

The problem for dairy farmers is that they need water constantly for their cows and their pastures, which take about five years to mature. They cannot suddenly stop using water.

Today, farmers have taken another hit – a huge fall in the farm-gate price for milk. It follows falling prices of global dairy products.

A series of dairy contamination scares in 2008 and 2013 had opened up the market for dairy imports into China and sustained global dairy prices for a time. However, in July 2014, Russia banned dairy imports from the West, in retaliation for sanctions by the West over the suspected Russian involvement in the downing of a passenger plane over Ukraine. Suddenly, there was a global oversupply of dairy product.

Then by early 2015, China added to the oversupply with a domestic milk glut. Farmers were slaughtering cows and the price of dairy was falling. China went as far as to temporarily ban some dairy imports.

In May 2015, the European Union decided to lift production caps on European dairy farmers. For the first time in three generations European dairy farmers could produce as much milk as they liked, and it flowed abundantly onto world markets.

The combined effect of these events has been falling prices for global dairy products since late 2013.

To compound these problems, processor Murray Goulburn had promised farmers a sustained price of $6 per kilogram of milk solids. But recently, with falling revenue, it had to slash the farm-gate price to $5.60.

Fonterra – which had long promised suppliers that it would always match Murray Goulburn’s farm-gate price – cut the farm-gate price to $5 for the rest of this year.

Adding salt to open farmer wounds, Murray Goulburn, a farmer-owned cooperative, had been persuaded by its chief executive, Gary Helou, to partially list on the Australian Stock Exchange (ASX) mid-last year. It aimed to raise new $500 million to repay existing borrowings and for new equipment.

However, the deal also involved turning Murray Goulburn’s members “from owners and members of a democratic community of purpose, into suppliers and investors whose share value is linked to the price of a litre of milk,” explains Tim Mazzarol, Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy, at the University of Western Australia.[3]

Even in the face of falling global dairy prices, Helou is said to have told dairy farmers that the price of $6 could be sustained.

According to Professor Mazzarol, as Murray Goulburn product sales fell, it appears that part of the $500 million raised on the ASX was used to prop up the farm-gate price. This was unsustainable.

Not only has the farm-gate price fallen but, in the aftermath of the share price collapse, the average debt owed by Murray Goulburn dairy farmers is estimated to be between $100,000 and $120,000, which has to be repaid to the company over the next three years.[4]

Helou has resigned as CEO, having made $10 million while at the helm of Murray Goulburn.[5]

Helou was formerly managing director of SunRice, a NSW rice-growers’ cooperative, where he supported a $600 million bid by Spanish group Ebro Foods for SunRice. He resigned from the company after rice growers voted against the sale.

The fallout from the Murray Goulburn and Fonterra price disasters is likely to affect the whole dairy industry. Australia wide, the industry is worth $3.8 billion at the farm gate and $13.4 billion as processed product.[6]

The bulk of dairy farms are still capital-intensive family farms. Since deregulation, the number of registered dairy farms has fallen from 12,896 producing 10.8 billion litres (1999–2000), to 6,128 producing 9.7 billion litres (2014–15), according to Dairy Australia.[7]

Many regional communities depend on the dairy industry.

Federal Agriculture Minister Barnaby Joyce has announced concessional loans to dairy farmers, but loans alone won’t save them. Few are accessing the loans because they don’t see a future.

There are many issues facing the Basin’s dairy industry. The policy induced aspects of the crisis need to be fixed.

It is a warning. Similar policy-induced crises are facing many other rural industries in the Murray-Darling Basin. They need to be fixed also, or the dairy industry will be just the first to go.

References:

[1] The Australian, September 27, 2012.

[2] Johnny Kahlbetzer, of Twynam Agricultural Group, “Milked-dry: government meddling is the problem for milk industry, not the solution”, Online Opinion, May 26, 2016.

[3] Tim Mazzarol,Murray Goulburn saga has roots in deregulation”, The Conversation,May 25, 2016.

[4] Tim Mazzarol,Murray Goulburn saga has roots in deregulation”, The Conversation,May 25, 2016.

[5] “Former Murray Goulburn boss Gary Helou paid $10 million as farmers struggle”, Herald Sun, May 17, 2016.

 [6] Tim Mazzarol ,“The role ofco-operative enterprise in Australian agribusiness”, The Conversation, January 19, 2014

 [7] Dairy Australia “Cows and farms”; Dairy Australia, “Production and milk”.




























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