Fonterra

Could this have been the wake-up call Aussie dairy needed?

/ dairymilkmaid / 1 Comment

bulllores

When the two biggest processors of Australia’s milk, Murray Goulburn and Fonterra, squandered the goodwill of farmers earlier this year, there was a sense they could do as they wished. They made the rules and broke them, too.

One executive told me there was no risk of supply loss following the drastic price cuts, saying, “After all, where would they (farmer suppliers) go?”.

How things have changed. Both the big processors have watched milk supply evaporate and, with the dawning realisation that something had to be done to avoid the death spiral outlined here and detailed by MG’s own advisors, Grant Samuel, both have responded.

After suspending the MSSP while reducing the forecast close by about the same amount a week earlier, MG made amends with a step-up the day before its AGM.

In his AGM address, MG chairman Phil Tracy acknowledged farmers’ pain and offered an apology of sorts.

“While as a Board, we did what we could with the information that we had at the time, we know that the outcomes of that period have been devastating for suppliers and for that we are deeply sorry.” – Phil Tracy, MG Chairman

Like MG, Fonterra Australia has announced it is reviewing the way farmers are paid for milk in order to avoid a repeat of the May debacle. Farmers whose milk production peaked in May and June were initially singled out for a thumping, causing many to sell off cows, only for Fonterra to back-track days later and spread the pain of its price cut more evenly among suppliers.

Despite poaching 200 million litres of milk from MG, Fonterra Australia’s supply remained fragile, due to the tricky season, the low milk price and the damage done in May to autumn-calving regions. Hours after MG announced its step-up, Fonterra came out with its own, much larger (and incredibly welcome), price increase.

The size of the step-up challenged the oft-held belief that Fonterra only pays the price it needs to in order to prevent supply loss to MG. With profitability restored, perhaps Fonterra has indeed extended its co-operative spirit to this side of the Tasman. On the other hand, Fonterra’s announcement provided a hint that perhaps it was essential to fill under-utilised stainless steel:

“The last six months have been challenging for all of you, and we know that spring is critical to optimise production.” – Matt Watt, Fonterra Australia

No matter what the motivation, it’s enormously heartening to see the two biggest processors act and act so positively. Maybe this is the wake-up call Australian dairy had to have. It might even help to rekindle the traditional sense of partnership between farmer and factory that had been on the wane for so long.

What’s certain is that farmers – and their supply of milk – can no longer be taken for granted. Loyalties have been stretched or broken and farmers who have now experienced how easy and rewarding it can be to shift their supply may well be tempted to do so again.

In return, expect processors to lock in a broader range of “desirable” supply with more special deals and contracts. Be careful what you sign. I’m tipping the unfair contract law that came into force quietly this weekend will be more important for dairy farmers than legislators could have imagined.

Fonterra, farmers and that fat profit

/ dairymilkmaid / 3 Comments

fonterraprofit

Fonterra rocked its Australian farmers last May with a price drop following Murray Goulburn’s own shock price announcement. I think it was fair to say nobody was surprised there was a drop – Fonterra had been signalling one for months – but the savagery of its execution left many farmers aghast and distraught.

Salt was added to the wound three weeks later when Fonterra chief executive Theo Spierings reportedly said:

“What we are doing is drive (sic) every cent of money which we can out of Australia back to New Zealand shareholders in this extremely low milk price environment,” he said.

“That is what we are doing everyday. And Australian business this year will be at a plus.”

Yesterday, the wound was opened afresh with Fonterra’s annual results headlined by a profit of $834 million after tax, including a healthy profit from the Australian division. With all this in mind, Milk Maid Marian asked Fonterra’s GM Australian Milk Supply, Matt Watt, some rather blunt questions. To his enormous credit, Matt had the following answers for us in less than 24 hours.

MMM: Fonterra Australia is very good at assessing farmer sentiment with its regular forums and Mood Meter surveys. How did the pricing changes announced in May affect the sentiment of farmers supplying Fonterra Australia?

MW: On the back of the shock and challenge that the price revision in May had to our farmers, we have seen a significant drop in farmer sentiment measures – that’s absolutely reflective of the discussions I’ve had over the phone and in person with our farmers and as has been fed back via our field team, BSC board and supplier forum.

MMM: How has sentiment changed since?
MW: Since opening price, we have seen a slight increase in sentiment. Importantly, the aspect that does rate positively is our field team interaction and support – we are proud of the work that the team does and, despite the surrounding circumstances, they continue to find ways to help our farmers through this period.

MMM: How much money did Fonterra Australia save by slashing the milk price in May and June?
MW: The milk price revision in May reduced our losses by around $40M which, on its own, enabled the Australian Ingredients business to get to around a break even position.

MMM: Given the reshaping of the Australian business was already well underway, why was it considered necessary to make the radical price cut?
MW: There has been significant effort and investment in the turnaround – we’ve divested loss-making businesses and non-core assets, such as our yoghurt and dairy desserts business, our Bega shares and our stake in Dairy Technical Services.

We reduced our working capital and our headcount, and undertook a program to drive efficiency throughout our business. However, the simple truth is, we were paying a milk price that was not being returned by the market, and that was impacting our profitability.

Our results today show improvement for the Australian business, which has contributed to the strong result for the Co-op, however, our turnaround is not complete and we need to continue to invest – our new, more efficient warehouse investment and further expansion of cheese capacity at Wynyard are examples of investments that have been made recently. Without a profitable business we compromise our ability to invest, risk devaluing the business, and risk our ability to provide sustainable returns right back to the farm gate.

MMM: What, if anything, do you regret about the decisions made in May?
MW: Whilst I can’t personally feel the impact on every single farm and the business and family circumstances, I am acutely aware of the massive impact that this decision had. In hindsight I often reflect as to how we could have more overtly communicated the disconnect between the Australian farm gate price and returns available in the market.

Having said that, the attempts that we did make about Australia not being immune to global challenges and that the milk price did not reflect what was being earned in the market had a discernible, negative impact on our supplier sentiment. We were accused of talking down the market.

MMM: How does Fonterra justify such harsh cuts while making a profit?
MW: While the milk price revision was regrettable, it is important that both our farmers and Fonterra have a model that ensures sustainable profitability.

The reality is that Australian milk price last year was not reflective of the global dairy commodity prices and around the world, all dairy farmers have experienced low farmgatge milk price. Our business is owned by farmers, and they have $1 billion of equity invested here. Last year these farmers received $3.90 per kgMS (NZD) in milk price plus a 40c per kgMS dividend on the back of the profit result. This takes them to $4.30 per kgMS (NZD) vs a final farm gate milk price of $5.13 (AUD) here in Australia.

MMM: Where have the 200 million extra litres come from?
MW: The new milk has largely come from MG farmers moving to supply Fonterra.

MMM: The presentation also says Fonterra Au’s outlook is to continue efforts to fill Darnum and notes that Stanhope will be online in 2017. How many more litres will be needed?
MW: The additional milk that we have brought on goes part way to meeting these needs. However, we continue to expect to see market opportunities continue to emerge, meaning that we will want to continue to grow volume, particularly in Northern Victoria.

MMM: The presentation says Fonterra Australia has gone from “Disconnect between milk price and reality” to “Market connected milk price”, yet Fonterra Australia is still bound by the Bonlac Supply Agreement to match or better the price of Australia’s largest processor. What are Fonterra plans in respect to that agreement?
MW: Our opening price and forecast close of $5.00 per kgMS reflects market conditions, but also is well above MG, the benchmark milk price. We remain committed to meeting our obligations under the BSC agreement, which is why, in 8 out of the last 10 years, we have paid a higher price than the BSC minimum commitment.

Thank you very much to Matt Watt, Fonterra’s GM Australian Milk Supply, for answering Milk Maid Marian’s questions.

Why I welcomed Four Corners to our dairy

/ dairymilkmaid / 18 Comments

I’m looking forward to watching Four Corners tonight with all the enthusiasm of a patient awaiting the lancing of a boil. Will it be fun? No. Will it be good for me? I guess so.

It’s almost four months since Murray Goulburn called a trading halt, followed by the infamous “clawbacks” of both MG and Fonterra that rocked the dairy community.

In a state of confusion and panic, farmers called out for help. Ordinary Australians did what they could, ditching cheap unbranded milk in a show of solidarity with farmers that continues to hearten.

Four months on, panic has given way to a sense of aimlessness and loss. Helou and Tracy’s vision had offered a shining path towards security and prosperity but now Gary the Great has vanished and nobody has filled the role of white knight. Leadership is lacking at the time we need it most.

We farmers have a fleeting once-in-a-lifetime chance to fix things. Politicians want to know how they can help but we don’t seem to be able to articulate a coherent answer other than to cry for something, anything, to dull the pain.

Meanwhile, there’s a puerile optimism amongst some elites, reckoning that every casualty improves the prospects of the survivors. It’s a sentiment that disgusts me and simply doesn’t stack up.

Floods of milk generated by the powerhouses of Europe, NZ and the USA sink or float the export market – not the farm next door. We’ve already lost thousands of Aussie dairy farmers since deregulation. More of the same won’t solve our problems.

The first step towards a cure is to work out exactly what ails us and, at the moment, all we’re doing is bandaiding a festering sore. If there’s anybody who can sniff out and lance a boil, it’s Four Corners.

That’s why we welcomed Deb Whitmont and her team to our farm. Sure, I’ll be cringing on the couch but Four Corners’ Milked Dry might just reveal the bitter pill we need to swallow.

 

 

 

 

 

Theo was too right…

/ dairymilkmaid / 3 Comments

keep-calm-let-s-cut-the-cake-and-eat-it

Here’s an unpalatable truth: when Fonterra head Theo Spierings said the milk price was unsustainable back in August last year, he was right. He also said the way milk prices are set needs to change. Correct again. Then he started talking about the need for, “a good debate with farmers … about how are we going to share – how are we going to cut the cake.”.  That’s what really matters right now.

At the time, Fonterra Australia head, Judith Swales responded to Milk Maid Marian’s request to clarify what Theo had meant by “sharing the cake” and said:

“We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.”

It’s hard to disagree with that sentiment. The problem is that we’ve learnt one more lesson in the last couple of months: if you’re stranded on a desert island with a hungry gorilla and a small cake, you’re in very big trouble indeed.

This post is not intended as an attack on Fonterra. After all, things are no better at Murray Goulburn. The reality is when there are thousands of small businesses selling a highly perishable product to a handful of large corporates and multinationals, the playing field is anything but even.

Just 12 months before Theo was talking about cake, the majority owner of Warrnambool Cheese and Butter, Lino Saputo, was quoted as wondering:

“…what will it take for the dairy farmers to be optimistic about the dairy industry and investing in their farms and what kinds of programs can we put in place that will assist them.”

At the time, I summarised my answer as “reliable profitability”. I posted the charts below showing just how far dairy farmers’ terms of trade had slipped and the wild fluctuations in profitability.

DairyTermsTrade

DairyBusinessProfit

“Productivity in the Australian Dairy Sector”, ABARES, September 2014

There’s one more factor I missed: confidence.

Writing for the latest edition of The Australian Dairyfarmer magazine, Dairy Australia managing director Ian Halliday notes that :

“In 2015, confidence among dairy farmers was at 75 per cent. In February this year, confidence had fallen to 65 per cent reflecting the dry seasonal conditions and also what milk prices were looking like for 2016-17 when considering the global price outlook.”

“Following the sudden milk price cuts in late April, which affected up to 65 per cent of all dairy farmers, we conducted another survey to get an understanding of changes in farmer confidence. This sample, although smaller, indicated confidence nationally had droppedd to 45 per cent.”

I’m willing to bet that confidence has fallen to historic lows after the Murray Goulburn opening price announcement.

What’s needed now is:

  • Transparency
  • Risk management strategies to deal with volatility
  • A more level playing field that provides farmers with real choices when dealing with processors.

These are the ingredients of reliable profitability and, without it, we’ll be continually wrestling the gorillas for the crumbs of a perpetually shrinking cake.

The haves and have nots of Australian dairy

/ dairymilkmaid / 10 Comments

CowTongue

I’ve had requests from farmers, investors, the media and even politicians for an explanation of how milk prices work (or don’t). I’m going to start with the factors that affect the price a dairy farmer in Australia’s south-eastern states receives.

  1. Who buys Old Macdonald’s milk?

The opening prices of most of the processors are in:

ACM $5.30
Bega $5.00
Lion (variable option) $5.00
NDP $5.00
Warrnambool Cheese & Butter $4.80
Fonterra $4.73
Longwarry $4.60
Burra Foods $4.40 to $4.60
Murray Goulburn $4.31
ADFC To be advised

It’s a massive spread of prices, with the top almost 25 per cent higher than the bottom. And it doesn’t stop there. The pricing systems are incredibly complex, with the prices no more than weighted averages. I know of a farmer supplying MG, for instance, who will receive just $3.79kg MS for his milk. I’ll explain that later in this post.

But, why, you ask, doesn’t Old Macdonald simply choose the buyer with the highest price?

It’s easy to change factories. You just call, make an appointment, fill in some forms and voila, a new sign hangs on the gate! But the reality is that there are lots of other factors in play:

  • Not all processors collect milk in every region. ACM, for example, does not collect milk from Milk Maid Marian’s district.
  • Many farmers are tied up with debts to their current processor or incentives for flat milk supply that would see them penalised tens of thousands of dollars for leaving.
  • Some farmers are contractually bound to the processor as part of share acquisition or “Next Gen” programs.
  • Then, there’s the waiting list. Processors tell me that since the opening prices were announced, there are hundreds of millions of litres of milk on waiting lists for new homes right now. The processors will cherry-pick those that suit their ideal profiles. In fact, many processors already have too much milk and have simply closed their books.

2. The breed of cows and what they’re fed
As a rule of thumb, if you’re not familiar with this industry pricing, you can convert prices expressed in kilograms of milk solids (kg MS) into cents per litre (cpl) by dividing by 13. So, $5.30 per kg of milk solids equates to 41 cents per litre and $4.31 equates to 33 cents.

It’s a formula that works pretty well for the 80% of Australian dairy cows that are the classic black-and-white Holsteins.

But not if your cows are Jerseys. Around 11% of Australian dairy cows are Jerseys, which produce around 30% less milk than Holstein Friesians but a lot more fat for every litre. According to ADHIS statistics, HF cows’ milk contains an average 3.83% butterfat and 3.24% protein, while Jersey milk is creamier at 4.76 % fat and 3.67 % protein. This means that returns from Jerseys appear higher than those of HF in terms of cpl and lower in terms of dollars per kg MS.

3. When the cows give the most milk
Every cow produces no milk for two months until she calves, then her milk production increases steeply for a couple of months before tapering off again. We call this her “lactation curve” and when you add together all the herd members’ curves, you get a farm’s “milk supply curve”.

It makes sense to have the herd’s milk production peak when there is the most grass in the paddocks. Inevitably, that’s in Spring. Of course, if all herds peaked in Spring, it would cause big trouble for the processors. The entire Australian dairy milk supply is getting less and less seasonal over time because the processors offer more money for “off peak” milk.

Here’s an excerpt from my own farm’s income estimate to show you just how much the price changes over the year with Fonterra.

FonterraTotal

For MG suppliers, the shift can be far more dramatic if suppliers elect to provide “flat milk” but I would need to dedicate a blog post to explaining this aspect of its system.

The differences in payment systems mean that even if a farm receives the average milk price from one processor, it might not from another.

4. Compulsory charges and levies
Most processors have compulsory charges that come off the headline price. These are not trivial and amount to tens of thousands of dollars. In my farm’s case, we pay a transport levy that amounts to 35 cents for every kilogram of milk solids we sell. On top of these, there are Dairy Australia and Dairy Food Safety Victoria levies.

5. Bonuses for the big and beautiful
If you think you’re across all that, don’t forget there are productivity incentives that favour larger farms and MG still has a growth incentive for farms supplying more milk than the year before. These can be very significant. There are also quality bonuses (and/or penalties) with different processors having different benchmarks.

6. Clawbacks
As you might already know, both MG and Fonterra dramatically dropped their prices for May and June to bring back the overall price. They have both come up with “support packages” for suppliers. Farmers are now beginning to pay for those. Fonterra suppliers are on interest-only this year and principal repayments will begin in the next financial year. MG suppliers are paying off their packages in the form of an artificially-lowered milk price already.

7. Special deals
Farmers were outraged back in 2012 when it was revealed that even the co-op was offering special deals for the really big farms. Nobody can say for sure how common these are today.

The bottom line is that every farmer needs to get an individual income estimate from processors to be sure what their milk price really is and what it would be if they supplied a different factory. Not all milk is created equal.

Which dairy farmers will survive?

/ dairymilkmaid / 16 Comments
Damocles

The Sword of Damocles. Pic credit: Moritz Aust

I was digging a post hole today when my phone binged a message in my pocket. And binged again and again and again and again.

I paused to check the messages, still with the post hole digger under my shoulder and stared in shock at the Murray Goulburn announcement.

As the biggest milk processor, MG tends to set the benchmark price and, in the new financial year, it will be $4.31 per kilogram of milk solids or about 33 cents per litre. After you take off the compulsory fees the processor charges for milk collection, it’s around 30 cents. Even less again for the many Gippsland farmers whose cows calve in Spring in line with Mother Nature.

It costs a farmer like me about:

  • 40 cents to produce a litre of milk when the season is good and nothing goes bust and the bank is happy with interest-only; or
  • 42 cents to make milk and maintain the farm; or
  • 45 cents to breathe and grow.

On top of the drought we’ve just endured, this fresh set of bad news will finish many farmers off. Not just the inefficient producers, either. Far from it.

Those coasting along with little debt will emerge at the end of the year with the fewest scars. In fact, it will be the youngest, most ambitious farmers who heeded the calls for growth from Murray Goulburn, Fonterra and the banks just 18 months earlier and invested accordingly who are the most vulnerable.

We stand to lose the innovators, the future leaders of our industry. They are also those who were in line to buy the properties of retiring farmers.

I am not a Murray Goulburn supplier but the opening price announcement left me reeling. The phone rang. In a daze I answered it but found I simply could not speak.

Words fail me and with Fonterra yet to announce the price it will pay us for our own milk, the sword of Damocles hangs low. Fonterra’s behaviour over the last few weeks has been inconceivable. Will it be able to rebuild any trust tomorrow?

Plain English guide to the dairy concessional loans in Victoria

/ dairymilkmaid / 3 Comments

Victoria

Like just about everything else involving the dairy debacle, the facts surrounding the Commonwealth concessional loans for dairy farmers and their roll-out in Victoria has been clouded in confusion.
A big thank you to the office of Minister for Agriculture and Regional Development, Jaala Pulford, for answering Milk Maid Marian’s questions.

  1.        Who can apply?

The Commonwealth Government has indicated the loans will be available to farm businesses that supplied milk to Murray Goulburn and/or Fonterra in 2015-16. Evidence of a milk supply contract and/or statement in 2015-16  to Murray Goulburn and/ or Fonterra will be required to prove eligibility.  The Victorian Government has sought changes to eligibility requirements to enable suppliers of other processors to access the scheme. Changes have also been sought to ensure share farmers and young farmers can access loan arrangements. The Commonwealth has not made the requested changes.

  1.       $30 million is available while the Federal government is in caretaker mode. This won’t cover many farms. Why must the rest wait until after October?

The Commonwealth Government’s Dairy Support package includes $55 million in Dairy Recovery Concessional Loans until 31 October 2016.  The Commonwealth has offered loan amounts of $30 million to Victoria; $10 million to New South Wales; $10 million to Tasmania; $5 million to South Australia.

Victoria has sought advice from the Commonwealth on loans available after 31 October 2016 arguing that Victoria’s allocation of the total $550 million pool should reflect that 70% of Australian dairy farms are located here. The Commonwealth have not provided advice on future allocations.

  1.        How much can individual farmers access? Originally, media reported that half a farmer’s debt up to $1 million  could be borrowed but recent media reports indicate a cap of $200,000.

The Commonwealth Government has determined loan amounts will be up to 50 per cent of total eligible debt to a maximum of $1 million. Eligible debt means debt that has been established upon commercial interest rates, terms and conditions and/ or debt to a dairy processor.

  1.        What is the interest rate and is it fixed or variable?

The interest rate is variable and set by the Commonwealth Government.  As at 1 June 2016 the rate is 2.71 per cent.

The Commonwealth Government variable interest rate will be calculated based on the average of the daily 10 year Commonwealth bond rate over a specified six month period. The concessional interest rate will be reviewed and revised if necessary in accordance with material changes to the Commonwealth 10 year bond rate, where a material change is taken to be a movement of 10 basis points (0.1 per cent). The rate will be published on Rural Finance’s website.

Victoria has sought changes to the scheme so that farmers can access lower interest rates available under the Natural Disaster Relief and Recovery Concessional Loans scheme. This scheme provided rates of 1.67% to storm affected farmers in the Sunraysia in 2014. The Commonwealth has not made the requested changes.

  1.        What if banks hold land titles as security for loans and don’t want to relinquish it to Rural Finance?

Based on previous experience with other Commonwealth Government Concessional Loans scheme, this scenario is rare.

  1.        Many farmers are reluctant to apply for drought loans because the process and criteria are too difficult. Have you been able to make it simpler for farmers to apply for these concessional dairy loans? If so, how will they be different and are the criteria publicly available?

The Commonwealth Government determines the eligibility and requirements for the Dairy Recovery Concessional Loans. Victoria has sought a number of changes to improve eligibility criteria but the Commonwealth has not made the requested changes.

  1.        Minister Pulford quoted as saying only 70 farms will access the loans. What is the basis for that figure?

The estimate is based on the experience of other previous and current Commonwealth Government concessional loans schemes in Victoria. The figure assumes full subscription and the average loan amount of previous comparable schemes being around $450,000.

NOTE from Milk Maid Marian: At the time of writing, Rural Finance was taking registrations of interest for the concessional loans. Call 1800 260 425.

Who wants to sue who and who will pay?

/ dairymilkmaid / 13 Comments

DevondaleTwirl

One of the first things farmers asked about the Murray Goulburn and Fonterra announcements was: “Can they really do this? Is it legal?”.

The lawyers have duly arrived.

I know of three firms circling Murray Goulburn right now. While Slater & Gordon was the first to announce it was opening an investigation into a class action against MG, it has not yet confirmed whether it will proceed.

Last week, a so-called “maverick” lawyer, Mark Elliott, reportedly filed a class action against MG on behalf of unit holders who had bought shares in the listed part of MG.

At the same time, another lawyer, David Burstyner of Adley Burstyner working together with Harwood Andrews, is building a list of farmers affected by the sudden milk price collapse who might be interested in one or more of the three legal strategies:

  • a “group claim” against a range of processors to recover financial loss;
  • steps to change and take back control of MG management, and;
  • an urgent court order stopping the claw back.

The big question on farmers’ lips is: if MG gets sued, won’t farmers ultimately pay the price?

The stakes are high because MG farmers face a double whammy:

  1. Now more than ever, farmers are acutely aware that when processors don’t do well, the answer is to slash the price paid to farmers.
  2. Every farmer who supplies milk to MG must own MG shares, so its falling share price is robbing many retirement nest eggs. Some are even facing margin calls on loans they took out to buy more shares.

The targets
The Elliott class action is targeting the MG unit trust and its directors. The good news is that the trust and directors should already have insurance that deals with such a claim.

There’s likely, however, to be an excess they will have to pay, which the lawyers call “deductibles”, which means the insured party has to cover part of the loss out of its own resources as “self insurance”.

On top of that, director’s insurance is no silver bullet. This type of insurance is complex and it’s quite possible that out of court settlements won’t be covered.

The proposed action from David Burstyner could target any of the processors who stepped down: MG, Fonterra, Lion and NDP. Mr Burstyner expects to know in the next few weeks. If launched, class actions usually play out over several years, so buckle yourselves in.

Will it help farmers?
Because there’s likely to be plenty of coverage of the Elliott class action for unit holders, I’m concentrating on the Adley Burstyner proposal for farmers and its potential impact on MG, the hybrid co-op.

Speaking with Milk Maid Marian on the weekend, Mr Burstyner said his firm is investigating an injunction to halt the milk price drops.

“An injunction is difficult to secure but the situation is urgent,” he said. “We are prepared to try if it is achievable, but it depends on what we learn from farmers”.

He also plans a “group claim” against processor(s) funded by a litigation funder, which roughly works on what some people call a no win no fee arrangement (see more at http://www.adleyburstyner.com.au/group-claim-faq). This arrangement minimises the risk to participating farmers but, as a guide, around 30% of the proceeds after costs is likely to go to funders. Mr Burstyner said the participation of thousands of farmers is necessary but that it’s possible because more than 3000 supply MG and Fonterra alone.

At the same time, Mr Burstyner said he hopes there will be no need for “all-out war” and that a class action could be avoided with the processors reaching a settlement with farmers that could also improve the way milk prices are set in future.

MG, however, is not a normal company. The fundamental ways it interacts with farmers must be put to co-op members and voted on rather than hastily negotiated on the court house steps.

But what if “all-out war” is the only option? Mr Burstyner acknowledged the possibility of short-term pain for the processor (which may carry through to its supplier shareholders) but the long-term benefit would be a “clean up” of the industry.

Asked why farmer shareholders could not simply reshape their co-operative by voting on special resolutions rather than litigation, Mr Burstyner strongly agreed that strategies along those lines could be very useful, saying, “Although MG is no longer the cooperative it was prior to July 2015, we would like to assist farmers with the solutions which could be possible in the newly formed corporatised structure, using farmers’ significant rights as shareholders which we think could really improve their position.”.

In notes he offered to Milk Maid Marian, Mr Burstyner clarified his point:

o    Murray Goulburn Co-operative Co Limited ACN 004 277 089 is an unlisted public company. It is controlled by its shareholders who for present purposes are the farmers. MG is no longer the same cooperative structure it was before July 2015.

o    Shareholders with more than 5% of votes can call a meeting or ask the company to call one.

o    They can sack the board and appoint alternatives by ordinary resolution.

o    There is a 2-month notice requirement for certain resolutions, for example, sacking board members.

o    The Company (under new management) may even be able to bring a claim against former Directors for not satisfying their director’s duties.

Mr Burstyner is keen to hear from farmers who would like to be kept updated on these three types of potential legal action (in the short term an injunction or challenging management, or the long term solution of a class action to recover financial loss and bring about systemic changes).

You can register your interest at http://www.adleyburstyner.com.au/farmers-farm-gate-milk-price-action.

Mr Burstyner stressed that he has no interest in any legal strategies if farmers don’t want them. Without interest from significant numbers of farmers, Adley Burstyner and Harwood Andrews will close their file.

Important: this post is general commentary only, please seek legal advice before considering any action.

 

 

MG and Fonterra on how to prevent this happening again

/ dairymilkmaid / 14 Comments

DuskRainbowDark

If there is a silver lining to the cloud over dairy farmers’ heads at the moment, I hope that it is change. So, with this in mind, I asked the two big processors at the heart of the storm, Murray Goulburn and Fonterra, to answer one simple question in 250 words or less:

“What needs to be done to make sure this never happens again?”

A big thank you to MG acting CEO David Mallinson and Fonterra Supply Manager, Matt Watt, for their answers below.

Murray Goulburn acting CEO, David Mallinson:

“Our co-operative structure remains fundamentally important because it enables us to act with a sole and unwavering purpose – paying the strongest farmgate milk price possible. Optimising milk intake to deliver the most profitable products rightly belongs at the heart of every decision we make.”

“In the short-to-medium term, we will remain susceptible to fluctuations in global commodity markets while our shift to value-add output continues. Rigorous planning is required to support suppliers during periods of downturn, given the intrinsic influence of commodity markets on the overall milk price.

“To ensure suppliers can sustainably manage their farm businesses, the Board is committed to providing clear farmgate milk pricing notifications across each season. We will implement a mechanism that provides regular and accurate full year forecast guidance but includes an opening price designed to absorb the sort of downturn seen in FY16. 

“The Board and management is united in its drive to ensure MG has the right strategy, executes it well and provides suppliers with consistent, reliable farmgate milk price notifications.”

Fonterra Australia General Manager, Australian Milk Supply, Matt Watt

There are a number of factors that have led to this “perfect storm” for dairy, so the answer is complex.”

“First and foremost, the industry needs a transparent milk price that is reflective of market realities. Farmers can manage their businesses through low prices and volatility, but only if they have timely, clear, and accurate information about milk price based on market signals so that they can make decisions to help manage volatility. Further, having a market-based milk price will facilitate innovation in pricing and risk management practices. For example a “one size fits all” pricing system, like those that our industry has seen in the past, may not be the best fit going forward. The industry needs to identify new ways to factor market volatility into price, to manage risk and bolster confidence during a downturn.

“In addition, we need to ensure:

  • A closer link between on-farm production and the realities of the market – our industry cannot continue to promote growth of the industry at a time when there is an oversupply of dairy globally. Our industry needs to listen to the market and adjust production to meet demand.
  • Improved efficiencies across the industry so that everyone can benefit – we need to find newer and greater ways of doing more with less, from the farm right through to the factory.”

 

Why the system is broken

/ dairymilkmaid / 17 Comments

The interaction between processors and farmers is bizarre to outsiders. The way it works is this:

Out of a handful of processors in the district, you ask one to collect your milk, although, if you’re unlucky and live somewhere a little remote, you might not actually have a choice at all. We’ll call this processor “your” processor for convenience.

Whichever processor you choose, they tell you what they will pay for your milk on July 1 – sometimes after July 1. This “opening price” is meant to be the lowest anticipated price, the one you can budget on. The only other time the price has fallen below the opening price in the last couple of decades was during the global financial crisis and even then we had a couple of months’ notice.

The price generally goes up along the way from there, though, unless you are one of the very few farmers who gets a fixed price, nothing is actually guaranteed after that.

It all depends on the exchange rate, global commodity prices, the performance of the biggest processor in the market and the success of “your” processor’s particular product mix.

What’s the performance of the biggest processor in the market and the success of your processor’s particular product mix got to do with the amount farmers are paid, you ask? Everything.

And it’s a system that used to work brilliantly. Once upon a time – not too long ago for those sporting the odd grey hair – there were not one but two major dairy co-operatives in the southern states: Bonlac and Murray Goulburn.

Every cent of profit the two co-operatives earned was returned to their farmer-shareholders and, because their whole reason for being was to maximise profits for their farmers, they effectively set a base for the farm-gate milk price.

Neither co-op could get too lazy or arrogant because there was strong competition from the other. Then, disaster struck, as reported by The Age:

“Crucially, Bonlac is processing only 1.6 billion litres of milk. Over the past 10 years, its share of Victorian milk production has declined from about 40 per cent in 1992 to 16 per cent in 2002.”

“Bonlac’s milk plants are running at only 75 per cent of manufacturing capacity. Particularly underused are the factories at Darnum in West Gippsland and Stanhope in northern Victoria.

“Debt, the result of an ambitious expansion into value-adding branded products in the 1990s, is still crippling the company, despite asset sales creating paper profits in the last couple of years, and the repayment of $185 million of debt.”

Now, in the midst of an ambitious expansion into value-adding branded products on the back of a partial listing, MG is in turmoil. Its MD and CFO have resigned and the milk price has collapsed, triggering ASIC and ACCC investigations, at least one class action and a share price meltdown.

Bonlac is long gone and, in the eyes of many farmers, MG has lost the title of reliable pacemaker. The system is broken.

It’s no longer acceptable for dairy leaders to tell farmers to concentrate on their farm businesses and blindly follow their calls for growth. It’s time we actively forged a new era for Australian dairying.