Analysis FrieslandCampina
150 members left FrieslandCampina?
More and more large dairy farmers are saying goodbye to FrieslandCampina, but this year there is even talk of a record number of cancellations. However, in a response, dairy cooperative FrieslandCampina says that the '150' outlined has been taken out of context. Rightly so, ostrich politics, or is there something else going on?
About 150 dairy farmers are switching from FrieslandCampina to another processor. This is how a trade journal for the agricultural sector announces. "This seems out of context," says Sjoerd van Sprang, spokesperson at FrieslandCampina. He bases this on the figures of the Dutch Milk Foundation (DMF), which are a direct reflection of the switchers. It would mean that more dairy farmers will switch in 1 year this year than in 9 years (since the creation of DMF).
Why are large dairy farmers resigning?
Uit figures of the DMF it can be concluded that more and more larger dairy farmers are switching to another processor. That is something that can be the result of the measures introduced earlier, but also of the rules that are yet to come (plus the fear of what has not yet been said).
What happened at the largest processor in the Netherlands? In 2011, the processor managed to activate the members by stirring up the discussion about grazing. It was the first move in a series of changes. For example, the negative land price disappeared in 2013, because the residual product of cheese production had become profitable. It means that supplying water pays off again. Linking a value to lactose was part of this, although this can actually only be controlled via the age of cattle.
Unexpected twist
After that, things don't go as expected. The growth of the milk lake exceeds the wildest expectations. In 2016, the processor will therefore say goodbye to the quantum surcharge. Bad news for large dairy farmers, as evidenced by the milk price comparator† for just over half of 2017 it paid off to supply to another party. The pressure is also increasing the standstill at the beginning of 2017 and the likelihood of intervention in the beginning of 2018.
Measures that could be justified by an excellent result, but the performance bonus of 2018 leaves much to be desired. Many liters of milk have to be taken at a loss and there were also losses in China and negative developments in Pakistan. The sale of Riedel (2017) also does not help to strengthen the confidence of the members, because here it is almost possible to make a comparison with the sale of the part Ingredients by Vion† The argument 'focus on the milk' is good, but the events surrounding it give sales a different meaning.
breach of trust
The breach of trust is complete when FrieslandCampina announces to start working with a kind of A and B milk price, via the growth agreement. For the last 5 years it has been said that this was not going to happen. Pete Boer, the former CEO of the cooperative, even stated that it causes laziness. Ultimately, all milk has to be valued.
The growth agreement was announced in April 2018 and provides for a discount of €0,10 per kilo of milk equivalents. That is something that happens to dairy farmers who grew more than in line with the market, but only when the total milk pool exceeds the market growth. For 2019, the permitted growth is fixed at 1,5%. After 5 years, the levy will stop and the loss/profit of the extra liters will be distributed over the milk lake. In 2024, the average volume of the last 5 years will become the new reference.
Much more insecure
Despite the phosphate reduction measures, the majority of the members succeeded in improving milk production High grades to put down (2017). For those who participated in the temporary measures, the comparison year 2015 has been added. The volume of comparison is highest for this group.
The groups for which things have become more difficult and uncertain are the young entrepreneurs and companies in development. The financial consequences can be significant. The fact that Frans Keurentje (the current chairman of the cooperative) stated in October 2017 that someone who wants to milk more in 2018 must have phosphate rights for that, is considered extra acid to experience.
For those who wanted to buy rights first and only then want to increase the number of cattle, there seemed to be an option 5 (now option 6). This option provides that the rights (obtained before April 16) can be converted into liters. At first sight, an option that rewards the dairy farmers who put their affairs in order early. However, that's not what this option is for. "The extra option will be interesting for companies that have made fewer efficiency gains in business operations and have purchased a lot of phosphate rights," says Van Sprang.
2015 Rights Reference
The calculation is not forthcoming, but an explanation does come from the field. Dairy farmers indicate that this means that a reference volume is linked to the phosphate rights, which is derived from the production in 2015. These rights are added to the reference (for a discount) for non-land-bound companies (8,3%). In other words: those who have not realized a higher milk production per cow since 2015, and who have purchased many rights, are rewarded with this option. However, otherwise 2017 will turn out better. It also means that supplying milk on purchased allowances, intended to be able to keep more livestock, carries a risk of a discount from 2019 onwards.
Mutual exchange of growing space is not possible. When a company stops or does not fully milk its quota, this volume is distributed over the entire group. This means that the growth space in a year of many quitters can ultimately be higher than the established plus of 1,5%. Then the question is whether it is worth taking the gamble that the dairy farmer will not full-milk his quota in the coming years (as a result of quitters and the balance between rights and cows). Or is it wise to look elsewhere for security?
Role of starters and successors
It is not clear how the scheme deals with starters and successors. "That depends on the exact situation," says Van Sprang. If the discount is calculated over the entire milk volume, then it concerns differences from €1 to euros per 100 kilos of milk. The total volume is then thousands of euros.
Despite everything, it appears that dairy farmers say they are going to resign more easily than that they actually do so. However, it looks like that may change in 2018. In October, the members will be heard about the new and final proposal, but then the option to switch is closed again. For example, those who want to leave must submit the application before 1 September and then transfer on 1 March or later.
Decline in members
It is clear that the decline in the number of members will continue. As FrieslandCampina is by far the largest processor, this is not surprising. However, an attractive alternative has been added via A-ware. In 2017, 524 member dairy farmers (-4,4%), bringing the Dutch total to 11.898 members. However, the number of members only decreased by 211. It suggests that a large proportion stopped supplying milk, but did not switch. In Germany, the number of milk-supplying members decreased by 49 (-5,9%) and the number of members decreased by 50.
In any case, 2018 milk-supplying members will disappear in 47, thanks to the severance package. Another 30 applications are pending. These are the applications from before September 1, 2017. Only after that did the so-called growth agreement come out, which means that the number can increase further.
In addition, there are also companies that stop supplying milk. According to figures from Statistics Netherlands based on the Combined Statement, this is much more than in recent years. That may partly explain the decline in the number of dairy farms between 2016 and 2017. It will also affect the number in 2018.
Compensation through higher supply
Due to the increase in the milk supply per farm (since 2016), the decrease in the number of milk-supplying farms was reasonably compensated. If the number of 150 dairy farmers becomes reality, this will equal a production decrease of 1,3% (taking into account the average supply). This automatically brings the processing into better balance with the milk supply. How is it possible that more milk is processed every year than the members supply? Or is it mainly in the spring, when the peak in supply occurs? Would a discount for those months not suffice?
The dairy processor will not only discourage on the farmyard, but will also improve forecasting techniques in order to get a better grip on the milk supply. After all, 'suddenly' 10% more milk means that more has to be sold, but also that more money has to be paid out to the livestock farmers. This danger is mitigated by the €0,10 discount, but does it balance market demand? After all, the regulation states that in 2019 about 101,5% of the milk that is currently available can be marketed. This while it was announced at the beginning of this year that losses were also incurred in the first months of 2018.
Under a magnifying glass
FrieslandCampina can still count on a lot of support from its members due to past performance, but that does not alter the fact that distrust is growing with every measure. It remains to be seen whether the relatively large outflow has been taken out of context. The cooperative is under a magnifying glass, also with the dairy farmer. Due to the developments, the companies in development are almost forced to make a choice or to take on a lot of uncertainty.
Herman van den Pol
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