Understanding the milk pricing structure, milk solid prices, the ratio of fat and protein, and how to apply it against your production curve and dairy farming business was the focus of two seminars in May.
The innovative seminars were run by GippsDairy at Drouin and Sale in south-eastern Victoria, and specifically aimed at women in the dairy industry.
Speakers were farm business consultant Gerard Murphy, GDM Agricultural Consulting, and Dairy Australia analyst John Droppert.
Participants worked through examples to understand how to differentiate between price per litre and price per milk solids in processors’ contracts.
They worked through spreadsheets to understand how butterfat, protein and productivity incentives were calculated.
Gerard Murphy warned about the many vagaries between processors contracts that require a deep analysis.
“It’s important to understand if you calculate your input costs based on litres, but the contracts you’re being offered are based on milk solids (MS),” he said.
“It’s also important to understand if the prices quoted in your contract are ex-GST or inclusive of GST. This varies between processors.
“And some processors quote prices that don’t include deducting levies, while others do deduct levies, or some levies, before offering their final price.”
Gerard recommended getting independent advice about processors’ contracts from your lawyer and accountant.
He discussed how and when milk quality is a bonus or penalty, how weather and input costs can affect milk income, and seasonal risk.
“Conditions can vary by processor,” Gerard said.
“The contract can include detail about how you’ll be paid for quality, but if you don’t get to that quota you are penalised for it.”
He listed examples against decline of milk quality.
“If you have a large number of cows calving in a very short time, that decreases your milk quality,” Gerard said.
“If you have a very wet farm, you might be better off if you are with a processor who tests for quality twice a month, rather than three times a month.
“Also be aware of what penalties apply in any given month. Some processors pay a $/kg MS bonus while others charge a percentage penalty against your milk price.”
Gerard also discussed productivity payments.
“If you dry off for a month, that affects your annual payment,” he said.
“A low spring, high autumn price can create seasonal risk. If you’re an irrigator and receive a low water allocation in autumn, that affects your pasture production, and therefore milk production and the payment you receive.
“If the milk price is heavily loaded to autumn production, and irrigation is turned off by the supplier — or you aren’t an irrigator and there’s no autumn break rainfall — pasture growth slows, you need to buy feed, you may need to offload cows.
“This is about managing risk. Don’t compare your business to your neighbours or other family members. That’s comparing apples and oranges.”
Dairy farms ranged in equity from long-term and consolidated ownership to highly leveraged and high-risk.
“You need to do an evaluation on your figures and your farm’s production only,” Gerard said.
Gerard recommended a good risk management tool was to look at milk supply based on the farm’s production curve, not full production.
“Locking in the price for a portion of milk production allows flexibility when it comes to making decisions around supply,” he said.
“These decisions are about risk mitigation.
“If you have a spring calving herd, you might be working to have 80 per cent of milk production by the end of January.
“As well as calving pattern, other variations that impact on how that’s achieved include pasture and feed supplies.
“Lower milk production results from low water allocations, drought, lack of timely rainfall, and deciding to dry off during late summer rather than autumn.
“You might make decisions about cutting back on the amount of feed that’s available and this affects whether the herd continues to milk at peak production for the rest of the season.
“When you calculate the milk price you need to achieve, you also need to look at other costs of production — including the cost of labour to produce grass, the cost of feed, fertiliser, depreciation and changes in inventory.
“A break-even milk price is to be cash neutral after all production, living, debt and capital costs.”
Gerard said another risk mitigation tool was to forward contract input costs in good seasons, to offset against poor weather conditions or a declining milk price.
Sarah O’Brien, chair of GippsDairy, farms at Denison in the Macalister Irrigation District. She said irrigation enabled them to make strategic decisions about the season and water allocation.
“We make sure we irrigate our good performing paddocks in the autumn, and sacrifice our poor performing paddocks,” Sarah said.
Participating in the seminar at Sale gave her some key takeaways.
“I think dissecting the milk prices and understanding how the processor company has come to those figures is really empowering stuff,” she said.
“It helps me to check and re-check how they’ve done their job and what goes into the back end of the milk our farm is producing each month and what we’re being paid for.
“Understanding what goes into milk price allows us to make decisions on our farms about our businesses and where we’re heading on-farm.”
Sarah grew her herd numbers in the past year and expects to retain that number and focus on volume going into the next season, given uncertainty about milk prices in the mid-term and conjecture that the milk price will drop.
“We got up to 350 this season, more cows than we’ve traditionally milked,” she said.
“We’re looking to do the same this coming season.
“It has definitely paid off. Those extra cows are what has driven profit on our farm.
“It puts a lot of pressure on the farm to grow more grass, but we’re really happy with the results from this year.
“We’ll do our numbers when the milk price comes out and see if it’s going to have the same effect for us next year.”
Sarah said she would also look at taking advantage of forward contracting fertiliser and feed.
“We’ll be doing a lot of that work in the next couple of weeks as well,” she said.
“When we know the milk price, we’ll do some budgets and get some real figures.
“With a possible decline in milk price, we can pre-pay some of our input costs against this year’s earnings and alleviate some of that pressure — which is a real option for farmers.
“There are businesses that are happy to support farmers in that way, and we can leverage two years of costs.
“Feed budgeting is something we’ll definitely be considering as well. It’s a bit hard on an irrigation property, but we’re getting pretty good at understanding how weird weather events impact our farm.”
The seminar included insights from John Droppert into the global demand for dairy and where Australia was situated in that space.
Cheese makes up the largest portion of products derived from milk processing in Australia — 43 per cent followed by drinking milk at 30 per cent, then butter and butter blends at 18 per cent.
John identified that cheese production was also the highest risk in the Australian market place, given it was most threatened by the growth in imports.
“Cheese, particularly importing food service cheese, has grown steadily since 1983 and significantly in the past 10 years,” he said.
“More butter and butter blends are being imported too.”
John said the impact of imported dairy products on local processors included consumer decisions around cost and availability.
“Everyone is trying to maximise the milk supply we have,” he said.
“The last couple of years have been challenging for processors.”
John said processors that don’t see value in investing in infrastructure and brands will struggle.
One of the risks milk processors faced was contracting for too much milk supply, in a shrinking domestic supply and consumer market.
Export opportunities for Australian dairy products were growing in southern Asia, including South Korea, Vietnam and Japan.
Other opportunities included the growing demand for cream cheese, which could be supplied frozen to the hospitality and overseas markets.
“Having John Droppert from Dairy Australia at this seminar, to help us understand the global dairy market and the pressures that processors are under too, helps dairy farmers see the bigger picture in how milk prices are put together,” Sarah said.
Based on feedback about the seminars and interest in other regions, Dairy Australia may be able to roll out further seminars in other milk districts in the 2025 financial year.