Management

A tough goodbye, but change welcomed

By Dairy News

WHEN MARK Billing was putting cups on cows on a Sunday morning in early July, he felt different.

“I was thinking we are not worrying about volumes, or what Fonterra is going to do next,” he said.

“We have signed a contract that guarantees the opening price …a fairly simple contract which was easy to comprehend, but the best thing was the guaranteed minimum price.”

It had been exactly a week since the milk from his family’s 450-cow herd had started being processed by Australian Consolidated Milk, when Dairy News visited the western Victorian farm.

The move to a new milk processor ended a 100-year association with the company that became Fonterra.

Mark said he felt “a bit strange” when the Fonterra tanker left his Larpent dairy farm for the last time.

This move followed four generations supplying the company that made the long-standing local butter brand Western Star.

Mark said comprehending the fact it “isn’t our brand anymore” was tough. “That’s a little bit strange, but again that’s more of a heart thing than a head thing,” he said.

Changing milk processor was drawing a “line in the sand” according to Mark and his wife Sam.

“We are a lot happier,” Sam said.

“We were able to make the decision, for the first time in our business lives, about who we were going to supply.

“Previously, that decision had always been made due to coming through the generations for farming. We just followed on.

“Now there’s a line in the sand. We said, ‘Right that’s it, we are making a decision about how we are running the business from now on.’ ”

The Billings were not alone in swapping milk processors at the end of last season.

Dairy Australia, in its Situation and Outlook report released in June, said about 25 per cent of the 1000 farmers it surveyed had indicated they had changed processors.

This statistic has only been recorded since 2015 when 10 per cent of farmers swapped processors, but prior to this it has been estimated only three to four per cent changed the signs on their front gate each year.

The Billing family from Larpent are one of many dairy farm businesses which has moved processors this season. Pictured are Biddy, 11, Bella, 9, Henry 7, Tom, 14, Mark and Sam.

There may have been a rush to sign contracts and complete agreements before the start of the new season on July 1, but Sam and Mark insisted the idea of moving processors was first floated three years ago.

“Without a shadow of a doubt, the May 2016 issue was probably the real motivator about actively looking at other companies,” Sam said,referring to the Dairy crisis which was triggered by an unexpected drop in the farm gate milk price.

“But prior to that, we had started to become more aware of what was happening within different companies.

“We have now moved from blindly supplying one particular company that we had for nearly 100 years, to one where we are able to run this business like a business.”

Sam said they had seen some significant increases in their input costs in recent years and found they were not keeping pace with these costs by being loyal to their previous supplier.

“We really struggled in the 2016–17 year with the clawback, but following on from that, we sat back and realised that for the first time, we were unencumbered by who we could supply and that was when we actively started looking,” Sam said.

“Previously, there had always been a reason to stay (shares, sentiment, involvement with the processor at a board level), and that’s what kept us for so long.”

Mark said they “nearly left” Fonterra last year, but at the end of the 2017–18 season staying with the processor seemed like the best financial option.

“Begrudgingly we stayed and as it turned out, we were not better off financially, but you never know these things at the start,” he said.

“We really would have been better off moving earlier.”

Mark said the decision what to do this season was “pretty much a no-brainer”.

“The money that was on the table from a range of processors was pretty good,” he said.

“There is still a petty tight margin with our costs. The milk price is great, but our costs are pretty significant too.

“So, we sat down and did seven income estimations all up and laboured over our production profile with each of them, right down to a month-by-month basis and there were two that came up reasonably well for us.”

Settling on ACM, Mark and Sam said they liked the business’ model, structure and the fact it wasn’t reliant on export markets.

Mark said he especially liked selling to a domestically focused processor which was Australian owned. He, as part of the Fonterra forum — a group of farmers which advised Fonterra — had become more concerned about Fonterra’s global performance and how its move into China had been “consistently backfiring and putting huge pressure on their balance sheet”.

Fonterra Australia managing director René Dedoncker responded by saying the “fundamentals” of the business were strong, pointing to the global demand for dairy and committed to its future in Australia.

“Our credit rating agencies have publicly recognised the strength of the co-op’s underlying business and that’s why we continue to have an A-band credit rating,” he said.

“Notwithstanding, our global performance is not where it needs to be and the co-op is doing everything it can to turn that performance around and is undergoing a full strategy review. For example, we have unwound the Darnum joint venture with Beingmate, giving us back 100 per cent ownership of the site.”

Mr Dedoncker said Fonterra continued to “pay a competitive milk price” but admitted “we still need to work hard to rebuild trust with our farmers as the events of 2016 still weigh heavily on their minds”.

For the Billings, looking ahead they are optimistic, but admit there is a long way to go. Financial pressures from the May 2016 farm gate milk price drop still linger and stress had been compounded due to the extended dry season.

These concerns took a toll on Mark.

“I went through a really bad patch in February-March, I crashed big time,” he said.

“It was the culmination of everything. What happened three years ago, current issues on farm, the juggling of industry roles I had at the time, the weather, the bills and everything. It only really lasted four to five weeks and then I felt normal, if that is the right word.

“It is amazing when you start to talk about it with people you discover how widespread it is.

“We don’t farm in northern Victoria and we don’t know how the hell we would go up there, it is bad enough here. But now we have this milk price and if we can take it through to next year, and the grain guys have a good year, we will be able to stabilise our inputs and get a good season.”

The Billings are adjusting their business to ensure their farming system suits the variable seasons. This includes changing their pasture base to ensure longevity from pastures.

“We are pretty much going back to all diploids,” Mark said.

“Considering the seasons that are now being thrown at us, we are adjusting our feed base to these seasons and growing as much feed as we can. That’s always been the aim but more so now. I feel a lot better than I did back in February.”

The Billings are also looking to be less reliant on milk income. Now they are 90 per cent focused on milk, but are hoping to move this to 70 per cent by joining later calving cows to beef as well as selling registered Holstein bulls.

Financially, the family believes this time next year it would have caught up from 2016.

Happy to have changed milk factories, Mark and Sam said the true relief was still to come.

“I think at the end of the day it doesn’t matter how good the season is, if you have hundreds of thousands outstanding with people around town and the bank and all that sort of stuff, you are never going to be hugely positive,” Sam said.

“You have to get on top of that financial aspect to appreciate how necessarily good it is sometimes too. We had a really great calving year this year, but we are not going to see the benefits of that for another couple years and we are still dealing with the issues from what is left over from a few years ago.

“That won’t happen until we can get back to even footing, where the income generated is really only being spent on costs accrued in that particular year.”