What You Need To Know About The Dairy Crisis

Yes, MH17 does have something to do with it.

29/08/2016 3:01 PM AEST | Updated 29/08/2016 3:02 PM AEST
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The situation is dire (there's no avoiding that) but it's not over yet.

Australia's dairy crisis has been making headlines for months and now the Federal Government are in talks with dairy milk giants to find a solution to the slashes taken to milk prices leaving many Aussie farmers selling their cattle to abattoirs or selling up completely.

While the names Murray Goulburn and Fonterra have been at the centre of the crisis, many Australians aren't entirely aware of the details of the unfortunate series of events, the aftermath (including retrospective payments of milk prices for farmers) and what the future holds for the nation's dairy industry.

The Huffington Post Australia asked the President of Australian Dairy Farmers (the biggest representative for the industry) David Basham all the stupid questions so you don't have to.

So what exactly happened to cause a slashing to milk prices?

Here is how the dairy industry works. There's about ten major milk processors in Australia (with hundreds of smaller processors). At the beginning of every financial year, milk processors announce their milk prices (the price by milk solids) and then the amount they expect it to increase by the end of that year.

In July 2015, Murray Goulburn announced their price was $5.60 per kilogram of milk solids and they expected prices to increase to $6 by June 2016, which they obviously told farmers.

However the year before, Russian-backed rebels shot down Malaysia flight MH17 killing almost 300 people. The European Union to retaliated and implemented sanctions against Russia.

Vladamir Putin retaliated by banning all imports from the EU, including dairy products.

This is important because the EU is the world's biggest dairy product exporter (which had recently grown because of deregulation in the European dairy sector) and Russia is its biggest customer.

Russia also banned imports from Australia, with Russia also being a massive customer to our dairy industry.

So one of the biggest dairy importers globally, and a significant importer of the Australian dairy market shut the door, leaving the dairy product market flooded with too much product. This dropped the price of milk.

"Effectively the demand for dairy products dropped dramatically," Basham told HuffPost Australia.

"So that then impacted Murray Goulburn in particular, because they kept promising and trying to meet that $6 price.

"Right through to the end of February, they were still telling farmers they would pay them $6."

In February, Murray Goulburn announced the milk price would stay at $5.60, which was manageable said Basham. But by April, the company decided it couldn't afford to pay $5.60 for the year, dropping the annual milk price below $5.

Meanwhile, Fonterra was intertwined in the financial wreckage because the company promised to match the highest milk price of their biggest competitor in the industry, which was Murray Goulburn.

The move would force dairy farmers to remove more than 10 percent off their milk prices for the entire year, in just two months.

Imagine having to pay back ten percent of your annual wage in two months on top of your regular expenses? That's essentially what happened.

"Murray Goulburn and then Fonterra recognised that wasn't actually achievable for the farmers to even exist," Basham told HuffPost Australia.

"So they set up loans schemes within their businesses to prop the farmer up and have them pay the money back over the next three years."

It was a case of the perfect storm, Basham said.

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Dairy farmers protest for the Federal Government to address the dairy crisis in May.

What has this left dairy farmers with?

A huge amount of debt. But the outcome for Murray Goulburn dairy farmers over Fonterra dairy farmers is different.

The price for milk for Murray Goulburn farmers is effectively $4.31, said Basham. Every farmer with the processor is paying back the company's collective debt. So farmers will receive a lower proportion of the milk price going forward for the next three years, Basham said.

"Murray Goulburn is actually the one holding the debt," Basham told HuffPost Australia.

The debt from each Fonterra farmer is a personal debt, not a collective debt held by the company. Fonterra have deferred the payment from any farmer for 12 months. However they are charging new and old farmers interest on the personal debt.

"Because they are personalising the debt to the farmer themselves they also gave the opportunity to the farmers to pay that debt out if they wished and finance elsewhere," Basham said.

"Some have certainly chosen to do that. But they have also been charged interest on the money they've already paid back."

To be clear on what the farmers are paying back, it's the money both companies effectively lent them for those last two months of the financial year.

"The price was going to go too far down, it would have actually sent farmers under straight away because they wouldn't have been able to manage paying their bills," Basham said.

Why can't dairy farmers just move to another milk processor?

The reason dairy farmers can't just pay back their debt and jump ship to another processor is because their isn't really another ship to jump to. Every other major processor in Australia has reached their capacity of supply, Basham said. The processors can't take on any more dairy products, as they don't have enough demand from the local market.

The only processor in the industry that can take on more dairy farmers is Murray Goulburn. So you see the problem here.

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Dairy farmers protest in Melbourne in May, months before the dairy crisis became more extreme.

So what is the dairy industry going to look like over the next few years and can regular Aussies do anything to help?

Well the Federal Government has stepped in to deliver a $579 million support package for farmers, which was announced by Deputy Prime Minister Barnaby Joyce during the election but still hasn't reached the majority of dairy farmers in need.

The process is taking so long because the funds are provided to state governments to hand out, and the administrators working with state governments vary in efficiency and resourcing. Many dairy farmers in Victoria, South Australia and Tasmania are waiting on support packages.

But essentially, dairy farmers will still need to repay the debt owed to Murray Goulburn and Fonterra.

Fortunately, there's a rise in demand for Australian dairy products in the Asian market, while the European dairy surplus is gradually improving.

"We've also seen a big shift to branded products [in Australia] which add higher margins into the chain, which should flow on to higher return to the farmers and particularly through to the farmers of Murray Goulburn," Basham told HuffPost Australia.

"That effectively ends up going into the shareholders or majority farmers in milk prices. You hope to see that happen."

So regular Aussie should buy local branded Australian dairy products.

What else could the Federal Government do to help?

Along with the support package, Basham said more needs to be done to ensure dairy farmers have more transparency about milk prices (and the market) from processors in the industry.

Agriculture Minister Joyce this week announced the Australian Competition and Consumer Commission (ACCC) will launch an investigation into the dairy sector which will effectively help improve future transparency in the market.

The Deputy PM will also continue to push major supermarket retailers to abandon discounted milk prices.

Basham said establishing new strong free trade agreements with the Middle East, Europe and the UK -- post Brexit -- will be essential to building a stable market.

"If we can spread where we send Australian dairy products, it removes some of that risk," Basham said.

"We need to continue as a country to developing good trading arrangements with other countries and we need to keep in front of our competitors in that space.

"Our domestic market isn't growing any more than the population, so if we're going to have our industry survive and grow we need an external market and we need for that to be robust to have some value."

Essentially the dairy market needs some stability to keep dairy farmers, well, dairy farmers.

"Farmers are self-assessing and they're self-assessing on the back of hearing how hard it is.

"We actually need to get past that, and make sure farmers do get out there and supply because there is some significant value in there for some businesses, and we need to convince them that they need to go through the process."

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