Markets

Counting the cost

By Dairy News

“It’s just like they have pulled the mat out from under us.”

This is how Muckatah dairy farmer Peter Letcher describes the way he has been treated by his milk processor Fonterra.

When Fonterra dropped the milk price last year, his May and June milk income was slashed by $300 000 — his milk price overnight went from $7 /kgMS to just $1.81.

He sold 80 cows, his 2016–17 production suffered and is still suffering today, and he was lumbered with a FSAL (Fonterra loan) of $160 000 — a loan he is obviously still paying off.

He wishes he was supplying another milk company and if it wasn’t for the 2.5 years left on his growth incentive contract with Fonterra, he would have left the New Zealand-owned giant months ago.

“Fonterra is the only company in Australia that has taken money off their suppliers which indicates just how bad their management really is,” Mr Letcher said.

“I think Bonlac Supply Company has got a lot to answer for. I think management has been highly unprofessional and I would argue that the New Zealand hierarchy has used the Australian industry as puppets and they have no understanding of the Australian industry at all, and I am a Kiwi myself.”

Mr Letcher acknowledges the decision to grow his business was his own but while he can’t turn back time, he has been left questioning that decision.

“The company encouraged us through their growth incentive program to grow our business from 180 cows four years ago to the 700 we milk today. We took on a lot of debt and to drop the price the way they did has made it very difficult to trade our way out. I estimate it’s going to take our business five years to recover from what they have done.”

As a full autumn-calving herd, Mr Letcher’s business felt the full impact of the company’s decision.

“We were in the top one per cent of losses and we had money taken from us that we hadn’t even been paid and because of our calving pattern, we were definitely impacted more than other suppliers,” he said.

“In fact, we borrowed $250 000 a month before the price drop for the season ahead based on our milk income estimation and we would never have done that had we actually known things were going to turn out the way they did.

“We have been left gutted and angry and what makes it even worse is a week before the drop they were still publicly spruiking they would honour their price.”

Mt Letcher said the additional payment of 40 cents/kg MS was just smoke and mirrors by the company and did not even come close to recovering the losses his business has sustained.

Peter Letcher would happily take his milk supply to another processor except he is contracted for another 2.5 years.

“You can’t be angry at any supplier coming across to take advantage of the payment but if you look at it objectively, it is a grab for additional milk supply by Fonterra.

“They have made out that no average supplier would be worse off but that’s not true either. MG suppliers finished off the year at $5.53 and we were $5.13 and we also have the FSAL debt.

“You don’t have to be to smart to work out we would have been at least $300 000 better off to supply MG.”                             

Mr Letcher is no stranger to industry ups and downs. He has been involved since the 1980s but admits the past 12 months have made him question everything. “It’s the wrong time to get out because we will lose so much money, but my gut tells me when you hit the bottom there is only one way to go and that has to be up.

“I like what I do but that doesn’t make it any easier to accept,” he said.

Mr Letcher is part of the class action against Fonterra and made his feelings known to the company at a recent supplier meeting.

“I wasn’t happy then and I am still not today.”

A Fonterra spokesperson said the company did not comment on the individual circumstances of farmers for privacy reasons. "However, we acknowledge that the impact of our step down varied greatly between individual farmers and the decisions they made for their business — to dry off, cull, or sell cows, to take an optional FASL, borrow externally or self-fund.

“We took a number of steps last season to minimise the impact on autumn-calving farms, such as our $2.50 /kg MS autumn offset, and with the BSC we determined that an additional payment of 40c/kgMS paid on this season’s milk was the most equitable way to address MG’s forgiveness of their MSSP,” the spokesperson said.

Mr Letcher said if poor milk price continued into the future there would be no industry left in northern Victoria.

“At $5/ kg MS the industry shrinks, at $5.50 it shrinks slowly and at $6 it will start to grow.

“I personally know people who have left the industry altogether and just in close proximity to us 3000 cows have gone.”

Mr Letcher acknowledges water pricing has also been a huge player in decimating the industry.

“This is just my personal view, but I think we need an average temporary water price of around $100 and if that can’t be achieved we won’t have an industry left either.”

Mr Letcher said it was the high cost of water that initially pushed his calving pattern into total autumn.

“We grow perennial pasture and dry everything off over the summer months including pasture and cows,” he said.

“We have had some good periods of business growth and I do believe there is a future, but things certainly need to change and processors have a lot to answer for.”