Fonterra positioned as benchmark price setter in Australia

Last month, Murray Goulburn - Australia's largest dairy processor - said it would close manufacturing facilities in Edith Creek in northern Tasmania, and Rochester and Kiewa in northern Victoria.

Fonterra has positioned itself to become the key milk price setter across the Tasman after Australian dairy co-operative Murray Goulburn set its opening milk price for this season well short of that of its New Zealand competitor.

Murray Goulburn set its opening farmgate milk price for 2017/18 at A$4.70 per kg of milk solids, down from $4.95 a kg that it had set for 2016/17. The co-op expects the milk price to improve to between $5.20 and $5.40 per kg as the year progresses.

The forecast compares with Fonterra Australia's range of A$5.30 to A$5.70/kg.

At the same time, Victoria-based Murray Goulburn, which suffered a A$31.9 million loss in its first half, said it would undertake a comprehensive review to look at all aspects of its strategy, profit sharing and capital structure.

Last month, Murray Goulburn - Australia's largest dairy processor - said it would close manufacturing facilities in Edith Creek in northern Tasmania, and Rochester and Kiewa in northern Victoria, with the loss of 360 jobs.

Chief executive Ari Mervis said the review was a fundamental next step towards strengthening Murray Goulburn for the future.

"While the previous decisions resulting from the manufacturing footprint review, including the announcement of three site closures were necessary, I do not consider them alone to be sufficient to move the business forward," Mervis said in a statement to the ASX.

"Although global commodity prices have shown some recovery since this time last year, whole milk powder and particularly skim milk powder prices remain under 10-year averages. This has been somewhat offset by firmer butter and cheddar prices," he said.

ASB rural economist Nathan Penny said Fonterra could become the benchmark price setter in Australia in the long run.

"It is not the key price setter just yet, but it is positioning itself to do so," Penny said.

Penny said there appeared to be a "wedge" between the way Fonterra and Murray Goulburn went about their milk pricing.

"The wedge, and the fact that Murray Goulburn's milk price is quite a bit lower than Fonterra's, is going to reinforce Fonterra's case for being that benchmark price setter, at least in the short term," Penny said.

"The question will be whether Fonterra can translate this into a greater market share and get better returns out of that, and it's still very early days on that front," he said.

Murray Goulburn said GlobalDairyTrade auctions over the past two months, and current futures pricing, suggested some ongoing price volatility in global markets.

Mervis said the opening forecast was better than last year's but the co-operative's performance was below his expectations.

A further update on the strategic review is expected to be provided in August, he said.

The Australian dairy market was plunged into turmoil last year when Murray Goulburn slashed what Fonterra had maintained was an unrealistically high milk price - then A$5.60/kg.

Matt Watt, general manager milk supply at Fonterra Australia, said last month that Fonterra's long-standing deal with milk supplier Bonlac to either meet or exceed Murray Goulburn's milk price remained the same, but the co-op was now communicating more with Aussie farmers as to what they could expect.

"What we are doing is talking to our farmers about how we give them a better line of sight around the likely price outcomes, rather than relying on Murray Goulburn, so we are running our own race," he told the Herald.

Australia's competition watchdog, the ACCC, is taking milk processor Murray Goulburn to the Federal court, alleging it misled farmers on the milk prices they could expect to receive.

In 2015, Murray Goulburn launched a financial instrument, similar to Fonterra Shareholders Fund units.

Murray Goulburn's units, which were issued at A$2.10, debuted at A$2.18. The stock traded today at A$0.78, down 8c from its previous close.