15 February 2012

Chairman’s Letter to Members

Dear DFMC Members,

DFMC Board and Management would like to extend you a warm welcome to 2012.

This year has started off with the perennial climatic challenges for our farmers. Southern Queensland and Northern NSW suppliers are currently experiencing extreme weather conditions with wide spread flooding, however it looks like at this stage that tanker runs haven’t been overly impacted with nearly all milk picked up. The Lion Farm Services team coupled with the DFMC Regional Manager have been very proactive in ensuring suppliers are well informed as to the events around them and this comes with our full appreciation. The liaison with the milk pickup companies appears to have been excellent; it takes a lot of communication and co-ordination to handle these weather crises.

As most of you are aware, the DFMC Board has seen the introduction of 3 new Board members in Andrew Burnett (SEQ), Scott Sieben (Nth Vic/Riv) and John Bywater (DFMC’s second Independent Director). There have been several Board meetings and teleconferences around milk policy, the UDP matter and future AFDs and the MSA. All 3 directors have hit the ground running and have settled in well to this challenging new position. There has been a new director induction session.

Most of you will be aware that in recent days Lion (formally called National Foods) recently wrote down their business by $1 billion, this is on top of a ½ billion dollars write down in the previous financial year. Whilst I cannot comment on the internal financial decisions of Lion, such a result must be partly due to the retail milk wars of $1 for 1 litre of milk. DFMC has been vocal that the milk wars will hurt the dairy supply chain. Lion’s key management have been in discussions with DFMC regarding their financial performance and the Board will do all that is possible to ensure government and the retail giants understand that this Milk War is financially unstainable for the dairy industry and unless there is a change, there is a distinct possibility that some consumers in some regions might not gain access to fresh drinking milk. This tactic by Coles has been an example of heavy handed bullying by those with the market power to do so.

At the 2011 AGM members approved the introduction of the Share Acquisition Levy. This new initiative is to ensure our members that you have a financially strong Co-operative to achieve the best commercial outcome for milk off take on your behalf.

The program commenced on the 1st of January, however for those suppliers who are required to acquire additional capital in the Co-operative, you will see the introduction of this levy for the first time via your February’s milk statement. Deductions will continue until you reach your “contribution cap” and previous correspondence to suppliers participating in this scheme has already outlined what that amount equates to.

The deduction of a ¼ cent on all milk supplied will be located on the second page of your milk statement under “authorised deductions” and again on page 4 in the summary section.

The levy will be imposed on 240 suppliers and will generate an additional $1.4 million capital to DFMC over the next 2 to 3 years. This scheme to a degree is aimed at balancing the monies paid out to farmers who are leaving.

If you have any questions or concerns regarding the program, please do not hesitate to contact our Executive Officer Greg Griffith or one of his Regional Managers or your local DFMC Director. Contact details for all can be found on this website under "Contact DFMC".

Included with your milk statement is our new DFMC monthly newsletter. DFMC has partnered with Jon Houser from XCheque to assist DFMC in the preparation of this document that I trust you will find valuable and interesting to read. The newsletter will focus on dairy matters of Regional, National and Global significance, but more importantly on how that it affect you at the farmgate.

Included in the Newsletter will be the Regional AFD graphs. Each region will be represented, and the graph will show the Regional AFD line, the forecasted production and the actual production up to now.. These graphs will provide our suppliers of trend lines and with a better understanding as to how the region is tracking in relation to the commercial needs of the processor and the probability of having excess or T2 milk in the region. It does not allow for the pro rata effect of other farmers not meeting contracts, something that, as well, might have a trend, based on the previous months pro rata adjustment, but cannot be predicted.

In a separate mail out, you would have received your 2012 DFMC diary and New Holland calendar.

New Holland has been a wonderful partner and sponsor of DFMC and like you they have a terrific product offering. Members who purchase a New Holland product will receive a rebate and this is on top of any deal you are able to negotiate directly with the sales rep. For more information on the rebate scheme and the New Holland 3D super deal, please visit our website www.dfmc.org.au/new_holland or talk with your local New Holland Sales Rep.

DFMC suppliers in the SEQ and Central Regions are experiencing significant decrease in the allocations for 2011/12. For the 2012/13 financial year, DFMC are still in negotiations with Lion on their commercial needs; Initial discussions show a downward demand in all regions, however we hope to be in a position to release the regional AFD and individual allocations in the coming months. It is a major concern to DFMC and to our suppliers that Lion commercial needs are decreasing over and above the switch of the major retailer contracts. This manifests into more T2 milk and is one of the major factors in the MSA discussions.

It should be noted that your income estimates for this financial year is done on your individual farm supply basis. .It assumes the Regional AFD is exceeded and that excess milk on your farm is paid at the monthly T2 price. However the individual income spread sheet does not allow for the pro rata adjustment resulting from other farmers not meeting contract or from re- allocating the contract volumes from ceased suppliers.

Take NSW as an example. In NSW the milk price for T2 milk has been a little over 22cpl (excluding incentives) from September to February, however that excess milk price jumps to over 50cpl (plus incentives) from March onwards. For suppliers on a flat contract and receiving 47.18cpl for their contracted milk, this excess milk price will be a welcome sight. However if some of that excess milk from individual farms is adjusted as pro rata milk to make up for the shortfall of other suppliers (who do not meet contracts) then it will be at the FP base price (47.18cpl) and not the winter T2 price (50cpl+). Excess milk paid as T1 either through pro rata (or if the whole region was below AFD) is paid at the T1 milk price of the relevant VP or FP contract.

This occurred last year in the Southern regions and does affect individual suppliers. It is an anomaly in the FP model, flattening the milk price, because in negotiating the regional prices on a competitive basis the prices are determined on a monthly skew or variable pattern for both T1 and T2. T1 price has always been higher than T2 but flattening (and lowering) T1 has meant that T2 at times exceeds it.

This means that excess T2 milk from farmers that might be pro rata adjusted could in some regions (as in NSW) receive the lower T1 flat price rather than slightly higher net T2 price which would be on the income estimates. Conversely in spring/summer months pro rata T2 milk has been paid at the higher T1 price and is not on the income estimates.

This is an anomaly that is a mix of value (milk prices) policy (FP/VP) and supply signal. It is confusing the supply signal of, for example, winter milk needed in NSW and the current payment structure will not drive that milk. This is where supply management models have to be flexible and this is a matter that the DFMC must address. It is a difficult one, it cannot be that we only have pro rata T1 milk values when it suits us; as always there are pros and cons.

Please take the time to study the AFD graph in our newsletters and whilst DFMC would like to give a predication as to the amount of milk NSW suppliers will provide in March, with the wet conditions currently been experienced by our Northern NSW suppliers, we are not that brave to do so. It could well be that considerable excess T2 milk from individual farms is at the pro rata T1 milk price. SEQ, which is also having weather impacts, and FNQ have T2 prices below the FP T1 milk price.

I am pleased to announce that the sale of the SA Cheese manufacturing sites from Lion to UDP has been completed with the handover occurring on the 2nd of February. This is a god outcome for the SA dairy industry.

These factories at Jervois and Murray Bridge are major users of the milk supplied by DFMC members, and DFMC has been in negotiations with both UDP and Lion regarding our supplier’s milk supplying those factories beyond June 2012.

Those negotiations are progressing well, as all parties are working hard to ensure a long-term arrangement is in place. UDP want assured milk supply and DFMC can offer that. Your Board will keep our members informed of representation on your behalf of in this evolving landscape.

Yours sincerely on behalf of the DFMC Board