Sunday, May 22, 2016

When milk is cheaper than water, something's wrong

The next time a well-heeled retiree complains to me about the budget's superannuation changes and "retrospectivity"...

Let me tell you about real retrospectivity.

Until a few weeks ago Australia's 6000 or so dairy farmers were paid around $5.60 per kilo of milk solids. Each kilo cost roughly $5 to make, leaving them with a small profit. The milk itself isn't solid, but the solids in it are measured in order to make the payment.

Then on April 27 their biggest customer (for many, their only customer) the sharemarket-listed Murray Goulburn slashed what it was prepared to pay from $5.60 to somewhere between $4.75 and $5. It wanted them to sell to it at a loss.

And it got worse. Here's the (ungrammatical) way Murray Goulburn put it in a missive to farmers: "Due to the timing of the reduction of the milk price from $5.60 kgms to a range of $4.75 to $5 kgms, this wimay 2ll result in suppliers having being (sic) paid more for their milk over the whole year."

It was making the cut retrospective, decreeing that it had started 11 months ago at the start of the financial year, even though it had been paying the farmers at the higher rate right up until then.

It meant the farmers who supplied Murray Goulburn, and the farmers who supplied its rival Fonterra, which followed a week later, suddenly owed it huge licks of money: money they had already been paid and spent.

Estimates put the instantly created debt at $120,000 per Murray Goulburn farmer. Within hours their bank managers started ringing, sometimes at night, reassessing the future of their farms. Some walked off and sent their cows to the abattoirs. Others had not a clue how they would survive. Some of Murray Goulburn's drivers are reportedly too scared to enter farms, frightened of what they might find.

Meanwhile at our supermarkets, milk is cheaper than water. We pay less than we've paid in decades, and our Prime Minister doesn't want to talk about it.

Here's Malcolm Turnbull on Monday, in the only comment I can find. While in Perth making an announcement about shipbuilding, he was asked whether Murray Goulburn and its competitor were thugs.

"The Australian Competition and Consumer Commission is dealing with the issues," he replied.

"We're in the course of strengthening Section 46 to ensure large companies treat smaller ones and smaller suppliers more equitably, but I'm not going to go beyond that. This is something the ACCC has in hand. Can I just say this is such an exciting announcement for Australia's future, these are jobs, this is defence, this is the technology that builds our future and I'd look forward to some questions on that."

What's happening to milk is what happened to iron ore. In both cases Gina Rinehart was involved (she was buying into dairy farms just before the milk price collapsed) and in both cases there was talk of a never-ending boom fuelled by China. The world's biggest economic powerhouse was going to keep demanding ever-increasing quantities of iron to build new buildings and ever-increasing quantities of milk as its citizens became richer and adopted western diets.

But, as it had with iron ore, China cultivated other suppliers in order to flood the market. Murray Goulburn's problem was that it had hired an evangelist. Gary Helou turned what had been a farmers co-operative into a public company and told the farmers to put in even more cows because the price was heading to $6. As a symbol of his faith in the future he drove a Mercedes-Benz and spent the company's money on an industrial scale, parting with $6 million to break an agreement to move into a specially built headquarters because he preferred to work nearer the centre of Melbourne.

When the board faced reality and sacked him, he walked away with more than $10 million. Murray Goulburn is legally entitled to demand back the money it has paid farmers. It runs the risk of going broke if it doesn't. The farmers are talking about a milk levy, but it wouldn't help. Increasing the price of a commodity there's too much of usually sends sales down, not up. Some of the states are offering emergency assistance loans, which will push the farmers further into debt.

We are limited in what we can do. Buying milk and cheese on the scale needed to help wouldn't be possible. Boycotting Murray Goulburn products would make things even worse. Our politicians want to talk about anything else. Enjoy your breakfast.

In The Age and Sydney Morning Herald