The MG fallout for Fonterra

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The trump card held by Fonterra milk recruiters has long been a promise to match or better the price offered by Victoria’s biggest processor. What could possibly go wrong?

Indeed, the so-called “Bonlac Milk Supply Agency Agreement” has worked well for a long time. But it all unraveled last season when the biggest processor, Murray Goulburn Co-operative, started to behave at odds with the deteriorating global price.

Aunty MG, which had always worn a demure twin set and behaved with utter decorum, pawned the family silver, took off in a turbo-charged red convertible driven at break-neck speed by the sweet-talking new boy in town while tossing money at admirers like confetti. Fonterra was dragged along, screaming for Aunty to slow the hell down but nonetheless tethered to the rear bumper.

The wreckage of the crash has been messy for all involved. The Bonlac Supply Company chairman, Tony Marwood, writes in the BSC’s annual report that:

“…clearly we cannot have a benchmark mechanism in place against a processor that is under performing and also facing significant headwinds and an uncertain future.”

Ouch!

BSC and Fonterra, he wrote, are working on a new benchmark that it will reveal early next year.

In the meantime, a group of suppliers has written to Fonterra Australia, saying the processor has failed to honour its agreement to match MG’s price. The dispute revolves around the question of whether MG’s closing milk price was $5.53 or just $4.80 per kilogram of milk solids (kgMS).

Confusingly, as you might remember, MG dropped its price last April but then added money back in the form of a “Milk Supply Support Package”. This MSSP, MG stressed, was not a loan to individual suppliers but a “socialised debt” that would come off the milk price. Since then, MG has paused the MSSP in a bid to stem milk losses. In a nutshell, it means that MG announced an official closing milk price of $4.80 per kilogram of but actually paid “an average cash price in FY16 of $5.53 per kgms“with the MSSP included.

I asked Fonterra Australia’s Matthew Watt to explain his company’s position.

MMM: Excluding any loans or the $2.50 offset paid this financial year for milk supplied last financial year, what was Fonterra’s closing price?
MW: Fonterra’s average milk price for the 2016 financial year was ultimately $5.13 per kgMS, which was 33 cents higher than the benchmark price set by MG.

MMM: What was paid to Murray Goulburn suppliers last financial year?
MW: Murray Goulburn has clearly stated in its public announcements and 2016 Annual Report that its final farmgate milk price for the 2016 financial year is $4.80kgMS. The advance to suppliers under Murray Goulburn’s Milk Supply Support Package does not form part of the benchmark price, and neither does any Murray Goulburn dividend payment.

MMM: How is the term “bundled return” in section 10.1 of the Fonterra Australia Milk Supply Handbook defined?
MW: The Bundled return (following the payment of BSC shares out in 2014) is defined as the average farmgate price paid by the largest processor in Victoria

MMM: MG has suspended the repayment of the MSSP. If MG does not require suppliers to repay the MSSP, doesn’t that mean last year’s price was effectively the “cash price” of $5.53 and how will Fonterra respond if the MSSP is not recouped?
MW: Fonterra has an obligation under the BSC contract to match MG’s benchmark milk price. MG has clearly stated that its final farm gate milk price for FY2016 was $4.80. Based on MG’s announcements, the MSSP operates independently from the FY2016 milk price.  We are not in a position to speculate what MG may do in the future with regards to its MSSP repayment schedule.

Thank you very much, Matt, for answering Milk Maid Marian’s questions!

6 thoughts on “The MG fallout for Fonterra

  1. As we have come to expect, another excellent article from Marian. And further proof that all is fair in love and war and business

  2. The questions required are:
    How much does Fonterra pay Bonlac Supplier Group?
    What happens to that money?
    Are the former Nestle suppliers governed by the Bonlac Supplier Group or are they independent Fonterra Australia?
    Why is the Bonlac Supplier Group necessary?
    How much money has the BSG been paid since they purchased Bonlac/Fonterra?

  3. Good article and this is something that should be clearly on the radar of the Senate Inquiry into the dairy industry. As should the lesser known relationship between the GDT, Fonterra and MGC.

  4. Reblogged this on The Milk Maid Marian and commented:

    Murray Goulburn has shocked the share market today by announcing it will close three factories and “forgive” the MSSP. The news may be just as important for Fonterra suppliers as its own. While Fonterra deliberates on how it will respond, I thought I’d repost this Q&A from November, which makes very interesting reading in light of today’s announcement.

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