AUSTRALIAN dairy farmers are being paid too much for their milk, says the boss of the world's biggest milk exporter, Fonterra.
Most dairy processors in Australia, including Fonterra, are paying farmers an average of $5.60 a kilogram for milk solids. But the New Zealand dairy giant's chief executive Theo Spierings, said this was too high and did not reflect a collapse of global prices for key dairy commodities.
"What you cannot do is pay money that you have not earned," Mr Spierings said.
"We need to have an honest debate about what is being earned in the market. There will be different views but at a certain point in time people will land at a certain number...because [the farm-gate price] is not so difficult to calculate".
Dairy companies have matched Australia's biggest milk processor, Murray Goulburn, which set the opening price for the current season in June.
The farm gate price forms a key part of Murray Goulburn's non-voting unit trust - which floated last month - because it is tied to its dividend. If the farmgate price falls to 2012-13 levels, the yield would fall from 7.4 per cent to as low as 3.5 per cent, according to its prospectus.
Mr Spierings said he could calculate a more accurate farm-gate price based on Australia's dairy exports, which is 50-60 per cent of total production.
"We know those export prices so I can calculate based on the mix of exports that [farm-gate] price," Mr Spierings said. "And that is not on the level of $5.60."
But he stopped short of saying what he believed the price should be, saying next week's global dairy trade auction could alter his calculation.
In New Zealand - where Fonterra has a monopoly and up to 95 per cent of its total milk production is exported - the farm-gate price has plummeted from an average of $NZ8.65 ($7.81) to $NZ3.85 in the past two seasons.
Mr Spierings said the method on how Australian farmers were paid needed to change so it wasn't based just on the farm-gate price and matched other processors.
"It's loyalty and skin in the game that can lead to an upside. You can call it a dividend, or whatever, a bonus per kilogram milk solids," he said. "But we need to have the conversation now about what the endgame looks like. What is the value being created, what's the size of the cake? Then we need to have a good debate with farmers ... about how are we going to share, how are we going to cut the cake?"
Part of Fonterra's strategy to deliver value to farmers has been slashing 500 jobs, or about 3.3 per cent of its global workforce. Most of these jobs have been support roles in procurement, finance, human resources, information services and legal departments.
Mr Spierings said the redundancies weren't part of a company restructure but a "mindset shift", which could lead to more people being employed at Fonterra in the end.