Fonterra set to take lead in setting Aussie milk price

ASB rural economist Nathan Penny. Picture/Supplied.

Fonterra looks set to become the key price setter in Australia for milk after its move last week to announce a forecast range for 2017/18 well ahead of the season's start on July 1.

The co-op has forecast an Australian farmgate milk price range of A$5.30 to A$5.70kg of milk solids for next season, about five weeks before it would normally advise farmers.

Fonterra had earlier met with its supply group Bonlac after Murray Goulburn - Australia's biggest dairy company - dissolved a controversial scheme that was aimed at clawing back milk payments from Aussie farmers.

The New Zealand co-op's response to Murray Goulburn's move was to add an additional payment of 40c per kg for next season and to reimburse interest charges on Fonterra's support loans package.

Fonterra had long complained that Murray Goulburn was paying unrealistically high milk prices at a time when world prices were depressed. The bubble burst in April last year when the Aussie co-op slashed its A$5.60 per kg milk price.

Australia is a significant market for Fonterra and it is the co-op's second biggest milk pool after New Zealand, representing close to 20 per cent of Australia's total milk supply.

Last month, the Australian Competition and Consumer Commission filed Federal Court proceedings against Murray Goulburn over last year's milk price announcements.

Matt Watt, general manager milk supply at Fonterra Australia, said Fonterra's long standing agreement with Bonlac to either meet or exceed Murray Goulburn's milk price remained the same, but that the co-op was now communicating more with 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.

"It's important that we show leadership in this industry, but how people interpret price setters will be up to them," Watt said.

Rabobank Australia dairy analyst Michael Harvey said the last 12 months had been difficult for farmers weatherwise and many were struggling to break even.

"There's been a loss of confidence in the supply chain and the way that it operates," Harvey said. "Hopefully things will start to rectify themselves," he said. "They (Fonterra) are certainly taking the initiative for next season, which will be encouraging for farmers," Harvey said.

ASB Bank rural economist Nathan Penny said Fonterra - the number two dairy company after Murray Goulburn in Australia - now had an opportunity to solidify its supply base and to translate that into a more sustainable and profitable business in Australia.

"From my point of view, it may be that Fonterra will become the new benchmark milk price rather than than Murray Goulburn," Penny said.

"The Australian dairy sector needs some leadership and needs some stability," he said.

The Australian season ends on June 30 and dairy production has been well down on last season's, which meant Fonterra needed to "recruit" more milk, he said.

"I think that the Australian dairy sector does need some leadership and needs some stability," Penny said. "They need someone to stand up because it has been a bit of a mess."