So I was sitting in the car listening to the radio and all the chatter was about the current crisis in the diary industry which people seem to be suggesting is the result of corporate bastardry on behalf of groups like Fonterra. At the outset I have to state that I know nothing about primary production other than it looks hard and uncertain but then no more uncertain working in manufacturing in Australia. .
I know nothing about the current situation but I have always thought if you dont understand a problem directly try and look for something you are familiar with and work sideways. In doing so you might be able to lift the veil of your own confusion. So, I thought milk is a commodity maybe it is traded somewhere and that would give me some data upon which to start to make sense of what was happening. Part of everyone’s shtick was that the current situation could not be foreseen and I wondered how that could be. A bit of a look around found the chart below which is the CME Class 111 milk – it is undoubtedly not a match to what the local product is but it tells an interesting story.
To my untrained eye it looks as if this commodity has been stuffed since late 2014. However, the usual caveats apply when dealing with analogues so I though I might be able to find some sort of global index that would give me an idea of the really big picture and as always Google obliged with the Global Dairy Trade Chart Focus March 2015
It looks to me as if the entire global dairy industry has been struggling since 2014. Therefore the proposition that these events could not be foreseen is somewhat disingenuous and is more reflective of incompetence than anything else. Then I remembered that the last person to ask about what was happening to prices in their industry was executives within that industry. The influence of Dunning-Kruger runs deep with Australian management and how anyone in a decision making position could offer up the reasoning that the current collapse in prices blind sided everyone is beyond me.
This then raises the question of whether I have cleared up my own confusion and the answer is not really. If anyone knows anything let me know.
I am not an expert on dairy however in my current role as a rural financial counsellor in Qld, we have had exposure to dairy producers and a crash education from a number of angles in recent times. From talking to suppliers and one of the other processors (not Murray Gouldburn or Fonterra) it would appear that the executive management were aware of the global downturn well before this year (as your charts highlighted) but were playing a power struggle game to keep suppliers and also based on some conviction that world prices would turn back around and go gangbusters. Also listing part of the equity on the ASX might have had something to do with staying positive for one of them.
Anyway the media is full of commentary as usual when these things happen, some of it is probably right, some probably not. One thing for sure is there is serious fear up here in the minds of Qld suppliers about the possible flow on effect to them – which they have experienced before from the deregulation that occurred in 2000 which reduced the number of dairy producers significantly.
And if there is any doubt about how it is affecting the southern state suppliers already, here is another depressing indicator – we had a meeting as we sometimes do this week with DHS (Centrelink) who administer a farm household allowance to rural producers (of any enterprise) in financial difficulty. This particular program has been going on for a couple of years – since the dairy issues in the last month the DHS people that administer that particular program down south have been flooded with so many extra applications that they may have to share the load with the case officers up here to get them processed or the delays will be way to long.
Budgets we assist with for dairy farmers up here show that a 2 to 3 cent drop in milk price received on-farm would be enough to bring many producers back to b-even or worse – whereas a 5 cent drop could force many small dairies to close. A very large amount of Qld’s milk produced is from small dairies. So there is a lot of nervousness about the next round of contracts – at least one processor sets the price at the end of June – others at the end of December. So by July the first indication of possible flow-on effects may eventuate. And the other possibility is that the concerns may be overestimated too.
Hi Chris,
As a trader you can open a position and then decide at any time that the move was wrong and close out without a devastating loss.
Running a family agricultural enterprise which may have been several or even many generations in the making is a totally different kettle of fish. A period of 12 to 18 months to them is merely a blip in the long term plan but a drop of 50% or more in revenue in that amount of time cannot be budgeted for.
Going back 50 or 60 years when agriculture was the major part of our economy the industry was well supported by both major political parties. Over time that support has waned hugely and totally the opposite is the case.
Maybe Australian management in the dairy industry are more well versed in the findings of the Dunning-Kruger study than we give them credit for. By the time that the tabloid media starts to circle the dairy industry, the industry’s PR machine would have already concocted the “perfect storm” scenario as a rational explanation for an otherwise ignorant public – much like Rhonda (the media manager) at the Nation Building Authority.