This is a post written purely for my fellow dairy farmers in light of the MG announcement today. After speaking with the people at MG, this is what I have learnt:
Why the price must fall
MG opened at $5.60/kgMS. Its lower than expected sales, the rising Australian dollar and the fall in the value of its larger than normal (which are routinely high anyway) inventories mean it has a shortfall of between $170 and $200 million. This means the price paid to farmers must fall.
How far the price must fall
Depending on how the last two months of this financial year pan out in terms of sales and exchange rates, Murray Goulburn will finish the season between $4.75 and $5.00.
But the price can’t fall that far in two months…
To do that, it would need to pay farmers virtually nothing for milk supplied in May and June. Some rough numbers sent to me by an industry analyst puts those figures at about 4.75 cents per litre. Clearly, that would be disastrous for many suppliers. It would also cripple MG because farmers would have little choice but to leave MG and supply any other processor that would take their milk.
…so, here’s what will happen
MG will pay farmers for milk supplied in May and June as if the price was $5.47 all along. In other words, the price for May milk will be $3.38 for fat and $7.42 for protein. For June’s milk, it will be $3.45 for fat and $7.59 for protein.
If MG’s sales and the currency fall in line with the worst case scenario and MG really should have paid farmers just $4.75 for the year, it will mean there is a shortfall of 47 cents for every kilogram of fat and $1.03 for every kilogram of protein.
This money will be deducted from the price paid to farmers evenly over the next three years. It means the milk price will be lower for each of the next three years than it otherwise would have been by about 15 cents for fat and 34 cents for protein.
But it’s NOT a debt carried by individual farmers
The money to be deducted over the next three years will simply come out of the milk price. If a farmer leaves MG and moves to a different supplier during the next three years, no debt will follow that farmer. If a farmer joins MG in the next three years, that farmer will have a lower milk price than they would have received in a normal year.
MG will not apply a loan against an individual supplier and will not respectively apply terms and conditions to suppliers.
About this post and me:
I am a former MG supplier who still holds some MG shares and currently supply Fonterra Australia. This post is not designed to do anything other than clarify confusion surrounding the situation because I am fearful for the mental health of my fellow farmers. This post has been checked by MG for accuracy.
The Milk Maid Marian 
As an de facto co op for many years with the benefits of retained earnings tax free for example mg should have been using this advantage for exactly this type of scenario that has been developing for over 12 months.
Poor management and as usual the farmers will pay plus interest
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Thank you for that post it was what I thought the situation was ,but why would a farmer stay let alone join MG .and if you are planing to expand and with MG the burdens even bigger
So if many leave is not the debt more greater among fewer
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Sad when a company can change contracted prices and predate them, then take what the consider overpayment on their terms. If this is allowed we will not have a dairy industry.
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UPDATE: Both Bega and WCB have announced they will maintain current pricing until the end of the financial year.
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The carry forward debt is reported to be $165 to $200 million. I wonder if there is any allowance for the $200 million that dropped off the share value yesterday?
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I wouldn’t think so, Nigel, because the share price losses are carried by shareholders rather than MG itself.
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Supplier shareholders? MG has been a defacto Co-op for a long time operating as a normal company while still enjoying the tax benefits of a Co-op such as tax free retained earnings which should be kept for a rainy day to even out prices for suppliers not for building dreams of ego driven CEO’s.
A valuable lesson is to not entrust your future to a board of directors who merely rubber stamp the ideas, or brain farts. Bonlac revisited unfortunately. Under current selling practices farmers are the fall guy every time.
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Mr halo should not be paid his wages and see how he likes it
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so why are the board members still there they should all be replaced,? they all get their money too easy, Toni Adams
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Have had a neighbour who has rung a few directors asking them to resign, at this stage they don’t agree they have done anything wrong that needs them to resign.
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Hi Marian
Whating with baited to see what other companies do but I think mg is open to a class action with accc support if they over payed that is their problem not there suppliers
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Just another angle regarding the Farmer Support Package, to claw back the $200M.
Reason for this is because they say they have overpaid us by $200M, as if it’s our fault, to protect the farm milk pool payment, which protects the distributable milk pool, which to some extent is now protecting the unit price and the dividend payments.
I see it the other way round and that’s the way it should be projected back to MG. It’s not MG lending farmers money to get through, in reality it’s farmers lending MG and unit holders money, so they won’t be impacted to any great extent. I don’t think it’s right money should or can be taken away from farmers because of the company’s mismanagement, which is yet to be established.
What I propose is, that farmers do accept the current situation and underpin MG’s value and that the farmer shareholders that remain will be issued extra units valued at $1kg/MS equal to the amount of milk solids that are deducted from their milk pay over 3 years and held in escrow until after the 3 years of this program.
This is the only fair and equitable way for farmers to be compensated for supporting the unit trust dividend payment structure and protecting milk flow.
There has to be a quid pro quo for farmers who are taking on all the risk of getting the company out of the shit.
If this is not acceptable to MG and unit holders then I suggest farmers should be advocating for MG to revise its profit forecast down to zero and dispense with dividend payments for the rest of this financial year.
Cheers
Bernhard
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It is my understanding that MG doesn’t have the assets to offer more shares
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Triggered my interest in this as many articles describe it as a farmer owned aust company.
Is mg now 38 owned by JD.com chineses company ?
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In light of Fonterras announcement about what they are doing to even things out for Autumn calvers, can we please have what Fonterras price means in plain English?! And maybe how this compares to MG? Also just heard from a rep from a different company that Coles and woolworths are contacting milk processors asking for a cheaper price for product seeing as the farmers are getting paid less. Makes me angry!
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