Category Archives: Murray Goulburn

ACCC takes Helou, Hingle and MG to court but lets Fonterra off the hook

eleanor-roosevelt

Pic credit: The Solution News at TSNnews.com

Today, the ACCC announced that it is taking Murray Goulburn to the Federal Court for unconscionable conduct. It will also pursue MG’s former MD, Gary Helou, and CFO, Brad Hingle.

That’s a bit of a relief after Gary Helou told the Senate Inquiry in February that he had not been questioned by investigators. If there’s a villain in the whole dairy disaster we can all agree on, it is Gary Helou. I, for one, am glad he will have his day in court.

I am also relieved the ACCC has shown the wisdom of Job when dealing with MG. As the ACCC said in its statement:

“The ACCC has decided not to seek a pecuniary penalty against Murray Goulburn because, as a co-operative, any penalty imposed could directly impact on the affected farmers.”

On the other hand, many farmers will be disappointed the ACCC has chosen not to take any action against Fonterra. The watchdog explained that decision in a quote from ACCC chairman, Rod Sims:

“A major consideration for the ACCC in deciding not to take action was that Fonterra was more transparent about the risks and potential for a reduction in the farmgate milk price from quite early in the season,” Mr Sims said.

Rod Sims is right. Fonterra did say, more than once and from early on in the season, that the milk price was unsustainably high. Why, I was one of the farmers upset with Fonterra big banana, Theo Spierings, for broadcasting this via the newspapers eight months before the price collapse. That much, I do understand and, with the benefit of hindsight, Fonterra was doing the right thing.

Theo

Fonterra was in an impossible position. While, technically, Fonterra could have cut its price earlier and, therefore, less savagely, the reality was that it had little choice. It would have haemorrhaged supply to MG and, if the co-op had delivered on its promises, the Bonlac Supply Agreement would have forced Fonterra to match MG’s price – no matter how unrealistic – anyway.

What it does not excuse, however, is the way Fonterra responded once MG announced its price cut.

At first, Fonterra sat on its hands, apparently caught by surprise like the rest of us. Then announced a slashing of the milk price from $5.60 to $1.91kg MS – the equivalent to 14 or 15 cents per litre. It gave no notice – actually, it revised the price for May and June on May 5. There was no time for farmers to plan and we were all faced with a frenzy of late-night nightmarish decision making.

On top of that, the Fonterra response failed to consider the devastating effect it would have on farmers with autumn-calving herds. Fonterra moved the goalposts a week later to spread the pain more evenly across its farmer suppliers but, for those who’d been most responsive, it was too late. Cows had been culled and the decision to send milkers to market is absolutely final.

Even now, farmers who chose not to accept the low-interest loans Fonterra offered to partially fill the void are still paying a mandatory levy to fund the scheme.

The weeks of insanity in May and the pain it continues to wreak on farmers cost Fonterra Australia loyalty that took it decades to build, as Australian GM of Milk Supply, Matt Watt acknowledged in this excerpt of an email to suppliers just minutes ago:

  • “You will have seen today that the ACCC released its findings into their investigation into MG and Fonterra over last season’s step down. The ACCC advised that they have decided not to take action against Fonterra.”

  • “I know the last 12 months have been incredibly challenging for you and your families, your communities and our industry.

  • “We’ve listened to you, and we’ve learned a lot over the past year. What you’ve told us has informed the steps we’re taking to ensure a stronger dairy industry.

  • “As you know, we’re working with BSC Board on greater transparency on price and as mentioned earlier I look forward to sharing more on that at the upcoming cluster meetings. We’re also fully engaged in the Dairy Industry Code of Conduct.

  • “We understand it will take time to rebuild confidence, and this is something we are firmly committed to.”

Neither of the two big Australian processors covered themselves in glory a year ago.  At least we now have some prospect of justice, if not recompense, for all the farmers affected by the reckless behaviour of the man at MG’s helm that sent so many to the rocks.

It’s a sign – a good sign – that the dairy community will chart a better course and keep a closer watch in the years to come.

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Milk maid says thank you to her heroes: you!

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A heartfelt thank you from our family to yours

There may have been a few villains in the dairy disaster but a year on from the day Murray Goulburn made its infamous announcement, there are many more heroes.

Millions of them.

I remember my first trip to Melbourne after the story of our plight reached the city. A business acquaintance greeted me with: “Getting tricky buying a litre of milk these days, Marian.”. Lee had been to three shops before he could find branded milk.

Three shops. For a bottle of milk.

I remember my neighbours calling in to see if I really was alright after The Project went to air while I welled up with tears beside my husband. The tears spoke of the sense of despair, shock and downright frustration that being helpless in the face of careless callousness.

But not any more.

The sense of helplessness has passed, thanks to people like Lee and those, like Waleed Aly, who made our stories heard. Ordinary people took the extraordinary step of doing something Coles and Woolies never thought they would. They showed they cared with their wallets.

And that clear, genuine care drove action.

We farmers have been gifted something precious, a once in a lifetime chance to change things for the better. Thanks to all the ordinary people making an extraordinary statement with the simple, everyday purchase of milk, we have the attention of the nation’s watchdogs and the ear of its leaders. If we are clever enough, we can make sure this never happens again.

Now that’s something worth remembering on a day we’d otherwise rather forget. Thank you.

 

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What it will take to get this farmer growing

Confidence.jpg

The last two years – a drought and the infamous dairy debacle – have taken their toll and not just on my hip pocket. Unless there’s change, my cheque book is likely to grow cobwebs for up to a decade. Sounds melodramatic? Not really.

My reasoning is this: first, we need to recover the equity lost over the last two years.

Second, we need to catch up on the maintenance we couldn’t afford to do over the last two years.

Third, I want at least another $100,000 in equity as extra protection. Interest rates won’t always be this low and, when they rise, another shock of this magnitude could be devastating rather than debilitating.

It all adds up to roughly $300,000 in profit to make up before I have an appetite to invest in any project that takes more than a year to break even. And that will take me years and years to accomplish.

If other farmers have the same attitude, we will continue to see Australian milk production stagnate.

The problem with this is that the processors have been investing in hundreds of millions of dollars worth of new stainless steel that requires enough milk flow to make it efficient. Time and time again, they have said growth is the only way to return the maximum price to farmers.

Do we have the start of a vicious circle? I hope not to hear the processors blaming a low farm gate price on inadequate utilisation of bloated stainless steel created by a low farm gate milk price.

Making me even more risk averse is the lack of definitive action to prevent this happening all over again.

Both the big processors, MG and Fonterra, have pledged to be more transparent and that’s a good first shuffle. I say “first shuffle” because to call it a good first step would be overstating its importance. We need a game-changer.

MG has commissioned a price review that will consider farm gate price models from around the world. At the same time, the Bonlac Supply Company, which represents farmers supplying Fonterra, also announced it would present alternatives early this year. Will these be the game changers we need?

I suspect not. The game changer we need is one where risk is shared along the supply chain rather than simply shifted onto farmers.

After all, while the current system is a legacy of an industry dominated by strong co-operatives, it’s also a marvellous “magic pudding” business model for corporate processors.

Consider this recent ACCC submission by Warrnambool Cheese & Butter‘s new owners, Saputo:

In February, Saputo announced a quarterly profit of C$197.4 million. I’m not sure why it feels it is appropriate to make Australian farmers responsible for its inability to negotiate a better energy contract. But it does because it can.

It serves as a timely reminder that the push for farmer prosperity has to come from farmers.

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Helou tells the Senate he’s a hero

While he might not have used the word “hero” exactly, former Murray Goulburn managing director Gary Helou was in complete denial when he fronted the Senate inquiry today.

Helou told senators he had the right plan, a plan that had delivered for two-and-a-half years. “The strategy was working and we were getting the right results,” he railed. Only one “unforeseeable” thing had derailed MG’s plans. That thing?

Not the global dairy commodity prices that had been falling steadily for month after month or the inattention of the board to the reportedly growing alarm of senior management. It was a Chinese regulatory change regarding cross-border trade via e-commerce. I gather this is code for selling milk powder and UHT milk on the equivalent of eBay into China.

As Gary explained it, he and the board were aware of the falling global commodity prices but selling these dairy foods – which he described as “our biggest sellers” – had been mitigating those losses.

The Chinese seemed to be tightening up on that, err, “cross-border e-commerce” and MG made two ASX announcements in response to media reports, the first on April 12, followed by this update on April 18.

mgcasxapril18

Both announcements concluded that the regulation did “not have a material impact on MG’s business”. Totally in contradiction to everything Gary Helou said today.

Just four days later, MG entered a trading halt. When it emerged from that trading halt on April 27, here’s what the announcement said about those big sellers:

asxmgcapril27

MG was still saying the Chinese announcement had no material impact on MG’s business. So, where does the truth lie?

With MG facing at least one class action, the Senate inquiry and under investigation by both the ACCC and ASIC, farmers have been hopeful of finding answers to the debacle that cost some their livelihoods.

But asked twice by senators whether he had been questioned by authorities investigating if MG had misled investors, Gary Helou said “no”. Both times he paused for several seconds before answering that one very simple question and, incredibly, each time it was an unequivocal “no”.

This is one witness to the Senate Inquiry who raised more questions than were answered.

United Dairy Farmers of Victoria president, Adam Jenkins summed up the sense of disbelief that followed perfectly. If it was possible, the ACCC farmer consultation forums that roll into town over the next couple of weeks just got that bit more important to attend.

adamjenkinsheloutweet

 

 

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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!

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

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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.

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Raining on MG’s parade: the shrinking milk pool more serious than the big wet

bigwet

Here’s something new: wet weather in parts of Victoria now means farmers must be paid less for their milk.

MG came out with another adjustment to the milk price on Thursday. In a nutshell, the MSSP (aka the “Clawback”) has been put on ice. At the same time, the best price MG expects to be able to offer farmers this season (called the “closing price”) has been revised down by a little bit more than the “clawback of the clawback” returned to farmers’ pockets.

I must admit that while I was expecting the clawback of the clawback, I wasn’t expecting MG to revise down the forecast closing price because analysts are cautiously optimistic that the global market for milk is recovering. It’s supposed to be all up from here.

The problem is MG forecasts its milk intake to be 20 per cent lower this season and, after stuffing warehouses full of surplus product last year, it now doesn’t have enough product to sell. Conceding losing 350 million litres to retirements and competitors, MG blames the remainder of the loss on wet weather. The reality is that the weather is just one part of the equation. The main reason production is down is man-made and does not rate a mention by MG: the low milk price.

Low milk prices mean less milk production
The low milk price hits production in two important ways:

  1. Cows are sold, leaving fewer in the herd producing less milk per farm
  2. Cows are fed less grain and produce less milk per cow

Fewer cows in the dairy
The grim reality is that most Victorian dairy cows are worth more at the saleyards than in the dairy this year. Farmers culled their herds during last year’s drought and, now, many struggling to pay the bills have culled hard again.

Less milk-producing feed
The cows that remain in the herd are being fed less grain than last year, simply because it’s not viable. Here in Gippsland, we are paying $310 per tonne for supplementary feed. The rule of thumb is that a kilogram of grain returns a kilogram of extra milk.

Right now, my own farm is getting 26.9 cents per litre during Spring (while most MG suppliers will be getting even less), so we lose roughly 4 cents per litre with every extra kilo of grain. We just can’t afford to produce more milk beyond what’s needed to service our overheads and keep the cows healthy.

It’s not actually that wet for MG – at least, not everywhere
The other mystifying statement about the claim that wet weather is the cause of the loss of production is that, actually, large areas of MG’s supply area aren’t experiencing record wet conditions and some areas are having a bumper season.

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Source: Bureau of Meteorology

Yes, the south-west of the state, South Australia and parts of Tasmania are having a terribly wet season but Gippsland and the north are not, if you are to believe the Bureau of Meteorology.

Dairy Australia figures from last year show the production of each area:

Financial Year 2015/16
RDP Litres %
Dairy SA 514,039,216 5%
DairyTas 882,965,394 9%
DairyNSW 792,948,581 8%
GippsDairy 2,006,004,931 21%
Murray Dairy 2,267,951,005 24%
Sub-tropical Dairy 550,148,921 6%
Western Dairy 387,147,057 4%
WestVic 2,139,492,819 22%
Grand Total 9,540,697,924 100%

Of these, it’s only fair to remove DairyNSW, Sub-tropical Dairy and Western Dairy because these areas are either not collected by MG or have special pricing not affected by the announcement.

If you assume all of Dairy SA, DairyTas and WestVic are hit by the wet but GippsDairy and Murray Dairy are okay, the picture is not nearly so dire. In fact, the source of 55% of the litres in MG’s supply area isn’t too wet at all!

wetnotwet

So, yes, the wet is a problem – an especially big problem for farmers in the south-west who have my sympathies – but unlikely to be anywhere near as big a problem as last year’s drought, which affected pretty much the entire collection area.

If anything, the processor most affected by the weather may well be Warrnambool Cheese & Butter and it increased its milk price to $5.00 per kgMS in late September. The MG milk price (without the now suspended MSSP) is now $4.60 per kgMS and the forecast is for $4.70 by the end of the season. Ouch.

The bottom line
It all boils down to this: low milk prices lead to lower milk production – even in a reasonable season – and make it even harder for farmers to cope with difficult seasons.
What Thursday’s announcement from MG reveals is that farmers now face a vicious cycle, given the expected loss of 20 per cent of the co-op’s milk supply since last season.

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The challenge for MG’s board now is to stop another closely-related vicious cycle from spiralling out of control, as it did for its once-great competitor co-op, Bonlac. That would be a dreadful outcome for our entire industry.

mgviciouscycle

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