Comparing farmgate milk prices in different countries

Farmgate milk price comparisons are often made between countries, but like most things in the dairy industry, they are not simple!  It’s a little more involved than adjusting for fat, protein and currency with the approach to pricing milk collected from farmers significantly different across the major producing and exporting regions. This often reflects farm production systems, the nature of the markets each industry services and the regulations that apply in each country.

New Zealand

New Zealand is the country most often compared to Australia when it comes to the dairy industry, and it’s obvious why that is. New Zealand is the closest major dairy exporting region and since the Closer Economic Relations agreement was signed in the early 1980’s there have effectively been no trade barriers between our two countries. With one of Australia’s largest dairy companies owned by NZ farmers, the markets are closely linked, and New Zealand accounts for over 40% of cheese and around 90% of butter imported and sold in the local market.

New Zealand’s milk production is heavily weighted toward the export of long shelf-life commodities and its milk production profile is highly seasonal, with a 13:1 peak to trough ratio. The major cooperative Fonterra accounts for around 80% of milk collected in New Zealand. As a result, it has a major influence on the market for raw milk and therefore farmgate prices.

Fonterra calculates its base milk price subject to the requirements of the Dairy Industry Restructuring Act (DIRA) which allowed for its establishment as a virtual monopoly in 2001. Each year the methodology of Fonterra’s “base milk price” calculation is assessed by the Commerce Commission as a requirement of DIRA, with competitor companies able to make submissions.

Fonterra’s milk price is determined using a formula that calculates the theoretical return on a set of commodity “reference” products – Whole Milk Powder (WMP), Skim Milk Powder (SMP), Butter, Anhydrous Milk Fat or Butter Oil (AMF) and Butter Milk Powder (BMP). The formula assumes that all milk solids collected by Fonterra are used only in those commodities, according to an assumed product mix. Net returns after manufacturing, sales and logistics costs and an allowance for returns on capital equates to the milk payment pool, expressed in $ kgMS.

Returns from all other products, including cheese and its co-products, other proteins, and cream, as well as downstream business earnings in consumer markets, contribute to group profits and are available for dividends.

In practice Fonterra announces a payout forecast before the season commences, with a wide range and a midpoint that determines the “advance rate” farmers are paid each month. It then updates the full-season forecast periodically throughout the season, narrowing the range as it progresses through its sales program. The advance rate starts the season in June at around 70% to 75% of the forecast, which prevails through to December, increasing through January to May. Farmers also receive “retro payments” in the July to December period related to the prior season “washup”.

While Fonterra offers an advance payout schedule based on its payout expectations, its forecast payout can go up and down throughout the season, depending on market conditions. In recent years, Fonterra has also offered its suppliers the opportunity to fix price on a defined volume prior to the season beginning.

While other New Zealand dairy processors are not subject to the same regulation of farmgate pricing, they tend to take a similar approach to Fonterra due to the regional competition for milk and a highly seasonal milk intake which allows processors to manage cash flow and market volatility. Some such as Open Country Dairy offer the option of four settlement periods, which improves cash flow to farmers to differentiate themselves and attract suppliers.

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United States

The US dairy industry is focused on its large domestic market, with 80% or more of the country’s milk production sold domestically. However, US cheese is being imported in larger volumes from time to time based on price for use in processing and in Quick Service Restaurant applications that require specific functionality such as pizza and burger cheese.

In the US, most milk is subject to Federal Milk Marketing Orders (FMMO) which determine the prices paid for different “classes” of milk, depending on end use. Class I price refers to fluid milk, Class II is milk used for “soft” products, think cottage cheese, yoghurt and dessert manufacture. Class III is related to milk for cheese and whey products manufacture and Class IV is for milk used in butter and dried milk products such as Non-Fat Dry Milk (NFDM) or SMP.

The USDA’s Agricultural Market Service determines class pricing through complicated formulas tied to values for four storable dairy commodity products: cheddar cheese, dry whey, NFDM and butter. Class IV uses NFDM and butter. Class III uses cheese, whey and butter. Class II is similar to Class IV, but with a 70 cent-per-hundredweight premium. Class I uses the average of Class III and Class IV plus 74 cents per hundredweight plus location differentials ranging from US$1.60 per hundredweight to US$6.00 per hundredweight.

Minimum farm gate milk prices – often referred to as the blend price – reflect Class prices weighted by the milk utilization in a specified geography or milk pool. USDA calculates and publishes those minimum prices each month.  Local supply and demand conditions often generate additional premiums paid over and above published minimums. Therefore, not all US dairy farmers have access to the same mix of Class prices that comprise the often quoted “all milk price, it depends on where they are located and who they supply, and their price can move up and down from month to month.

The USDA announces an advanced price by the 23rd of the prior month, but dairy farmers don’t know their final milk price for the month until after the milk is delivered. Class III and IV milk futures, traded on the Chicago Mercantile Exchange (CME) offer a forward indication and the opportunity to manage forward risk, with the US government’s Dairy Revenue Protection (Dairy-RP) program. The Dairy-RP is designed to insure against unexpected declines in quarterly revenue from milk sales relative to a guaranteed coverage level. The expected revenue is based on futures prices for milk and dairy commodities, and the amount of covered milk production elected by the dairy producer. The covered milk production is indexed to the state or region where the dairy producer is located.

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European Union

It’s even more difficult to generalise about milk pricing in the European Union, which covers a vast range of industries. Cooperatives remain central to the European dairy industry, and while there is a sizable domestic market for most countries, the largest dairy cooperatives are active exporters. Generally speaking, European farmers know their milk price just a month in advance, although there are some forward contracts offered – particularly for fresh milk supply.

The industry that is arguably the most similar to Australian conditions is Ireland, with grass-fed production systems although with a much greater exposure to export markets. Irish farmers receive retrospective milk prices, announced more than two weeks after the end of each month. Irish cooperative Tirlán is offering fixed milk price contract for a fixed volume of milk.

For Netherlands-based FrieslandCampina, the guaranteed price is estimated monthly based on benchmarking against the published milk prices of competing reference companies in the Netherlands, Belgium, Denmark and Germany. That price is announced in the last week of the month prior, and corrections to the milk price estimate can be made in subsequent months.

Arla is one of the largest European cooperatives with farmers in Denmark, Sweden, Germany, the UK, Belgium, the Netherlands and Luxembourg. It announces its monthly milk price just prior to, or in the first week of the month.

In France, where there is generally greater exposure to fresh products and cheese, prices over time are more stable. Some companies structure milk payments with a farm cost component plus a “market factor” which moves up and down with indicative product returns.

So farmgate prices move up and down from month-to-month in Europe, with limited notice to dairy farmers making it misleading to compare a single point in time, when a season average can be very different.

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How is Australia different?

The Australian dairy industry is unique, with minimum farmgate prices for each month published a month ahead of the start of each season. Australian dairy farmers have far more certainty than their competitors in terms of the minimum prices they will receive for up to 12 months ahead.

The Dairy Industry Code, overseen by the Australian Competition and Consumer Commission (ACCC), requires the publication of minimum prices by 1 June each year prior to the start of the season on 1 July. Once published minimum prices can go up within a season, but can only go down under “exceptional circumstances” which must have certain characteristics under the Code and “cannot be caused by decisions made by the processor” If prices are reduced, the processor is required under the Code to inform the ACCC and explain why the price reduction was unavoidable.

Australian farmgate milk pricing has evolved as the raw milk pool has shrunk, and more of the industry’s production has remained in the domestic market.  Over the last couple of years, increased processor competition for raw milk has meant prices announced at the beginning of each season are pushed higher, where historically and typically the “opening price” would be adjusted using “step-ups” as the season progressed. In just a couple of instances over the decades – and prior to the Dairy Code – farmgate milk prices were reduced when opening prices over-shot, and this was highly disruptive for dairy farmers.

While the market and product mix has changed significantly for the Australian dairy industry, a significant proportion of milk production remains subject to international competition  – both from imported product sold domestically and in international markets where around 30% of Australia’s milk production is still sold. So being able to respond to market developments and remain competitive remains important for the Australian dairy supply chain, as international markets still influence the value of our milk.

  • Read more here about how this works and why international markets still matter.
  • You can compare commodity milk values across major dairying regions here and longer term trends in farmgate prices here.

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