Fonterra has set its opening organic milk price prediction for the 2016-17 season at $9.20 a kilogram of milksolids – a 60% rise on the $5.65 a kilogram of milksolids it expected to pay this season.
Manawatu organic dairy farmer Mark Flipp said he regularly hosted visits by conventional farmers considering switching but that could increase now.
At $5.65 a kilogram he was not profitable, Flipp said.
Organic Aotearoa New Zealand’s 2016 report said a study done on North Island pastoral and organic dairy farms from 2003 to 2009 by the Agricultural Research Group found there was little difference in financial performance.
Organic farms had lower output but their operating expenses were only 79% of conventional farms. It said organic milk and dairy product sales climbed by 50% in 2014.
“I guess we’ll be looking at paying some tax again.” Flipp said.
He was not surprised at the sharp price rise because the world was not awash with organic milk.
“There is no real big surprise it has gone where it has,” Flipp said.
Organic milk suppliers have previously been paid a premium over the farmgate price for conventional milk. It was $1.75/kg MS last season and had previously been about $1.50/kg MS.
Organic milk represented less than 1% of 1.584 billion kg MS of milk handled by Fonterra in 2014 but the co-operative’s 2020 organic strategy had a target of growing it by 600,000kg MS a year.
Paul Grave, Fonterra’s Waikato head of corporate affairs, said the forecast payout reflected growing international demand and prices.
“Organic milk prices are high because consumers’ appetite for organic milk products is growing faster than supply.”
Grave said sales of organic milk products were profitable and stable and margins earned were similar to some of its highest-earning consumer and food service products.
All shareholders in the co-operative would benefit through dividend payments from the value being added by sales of organic milk products.
He expected more farmers to convert to organics because of the higher returns but said it took three years to convert, it was a costly investment and a different way to farm.
But rapidly growing international demand and static supply because of the cost and time to convert led Grave to predict prices for organic milk products were likely to stay high for the foreseeable future.
Fonterra had 50-60 organic farmers.
Unlike prices for conventional milk products, growing world demand meant prices for organic milk products had been stable since 2013-14.
“This is a really profitable business unit for Fonterra,” Grave said.
Flipp thought the growing gap between conventional and organic milk could encourage others to switch and said the change was not as difficult as people thought.
“It is still the same but with a few less things you can use.”
There was also a paper trail required to ensure production complied with organic protocols but he said it was not a difficult switch.
“The change isn’t that huge.”
Flipp made the switch in 2008 and today milks 600 cows at Oroua Downs.
Fonterra’s move reflected findings in the NZ Organic Market Report which found exports of organic products had increased 11% since 2012 and 45% since 2009 with sales of organic wine a feature.
It also found domestic sales of organic liquid milk increased sharply, capturing 5.8% of the total white milk category in the first six months of last year.
But the average size of organic farms was shrinking, from 346ha in 2012 to 192ha in 2015 with the area of land under organic livestock production more than halving since 2012, a 55% decline.
MORE: Read about Mark Flipp’s organic farm in the May issue of Dairy Exporter.
