Murray Goulburn

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.

 

What The Project didn’t have time for me to say

/ dairymilkmaid / 15 Comments

TheProject

The Project delivered a powerful story last night about the turmoil we face that included footage of Wayne recounting my unvarnished reaction to the price drop.

I’m upset and I’m anxious about the future but I’m okay.

The price drop felt like the last straw. We’ve been battling a horrid drought that has already drained much of my emotional reserves over the last year. To hear that we would now have to face this on top of what’s pretty much guaranteed to be a rotten milk price next financial year was just overwhelming. The light at the end of the tunnel suddenly became very dim.

But Wayne and I are a strong unit and we’re not giving up on anything.

We will get through this. We are luckier than many others and I am inexpressibly grateful to the people around me, especially Wayne.

I’m grateful to the generous dear people who have rung out of the blue just to ask “how’re you going?” over the last few weeks. I’m grateful to the strangers who have been moved to write notes of encouragement for farmers on Facebook forums. I’m grateful to the journalists who have helped share our stories.

What you didn’t hear me tell The Project was that we are resilient and we do this because we love it. That hasn’t changed.

What I do hope is that from this seismic shock will come seismic change. There has to be a better way both for our little family and the thousands of other farming families across the country. We cannot let the opportunity to reshape the future slip through our fingers now.

 

Straight-talking UDV president Adam Jenkins on milk price cuts

/ dairymilkmaid / 5 Comments

In the confusion that’s followed the cuts to milk prices, I asked the president of the United Dairyfarmers of Victoria, Adam Jenkins, how the UDV was responding.

Adam had some very clear messages for milk processors, politicians and bankers. A big thank-you to Catherine Jenkins for filming Adam’s answers to my questions in their calf shed on a very windy day.

This video is the first in a short series addressing the milk price crisis.

 

 

Despair, anger, disbelief.

/ dairymilkmaid / 8 Comments

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Lots of dairy farmers are naturally cynical and, let’s face it, we’re never entirely happy with the weather forecast. But we are optimists at heart because things will always be better next season.

Not this season.

I have never seen my fellow dairy farmers so subdued as they were at a meeting last night. Dinner at the local pub was laid on – a rarity that normally guarantees a festive mood – but somehow it felt like more like a last supper. Nor have I seen such anger online.

Partly, I think, it comes down to being battle-weary. Around here, it’s been a disastrous season. Dry-land farmers have not been able to grow grass and the La Nina we were hoping for still hasn’t arrived. By now, we should be building a wedge of grass to get the cows through winter. Instead, paddocks are eaten to the boards while farmers wait for resown paddocks to fire up.

The conventional wisdom is to apply nitrogen now while the soil’s still warm enough to grow grass. Many farmers at last night’s meeting had not applied any urea yet despite its unusually attractive cost this year because the soil is still too dry.

We can buy in more fodder or sell more cows. Fodder is getting hard to find and expensive, too. Many of us have already culled hard. The options are narrowing. We need something to go right.

It isn’t. Farmers seem sure that the milk price for 16/17 won’t be good. Will it be devastating? We’re all wondering and worrying.

On top of all this came the Murray Goulburn announcement that it had overspent this year and will have to claw money back from farmers for the next three years. None of it makes sense. Many farmers had hailed the MG plan as visionary, something that would transform our industry to create sustainable prosperity. But the loss of so much money in so little time is incomprehensible.

It’s a blow from left field that will leave barely a Victorian dairy farmer untouched. MG is the pacemaker for the entire industry. Processing half our state’s milk and 38% of Australia’s, it sets the benchmark for the southern farmgate milk price. When it falters, we all do.

In the face of all this, the message from last night’s speaker was simple: seek help, watch out for your neighbours and don’t lose sight of the vision for your farm. Good advice.

What MG’s announcement means in plain English

/ dairymilkmaid / 17 Comments

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 trouble with the MG and “Gary the Great” sideshow

/ dairymilkmaid / 13 Comments

Murray Goulburn’s colourful managing director, Gary Helou, is not universally loved and he’s become a bit of a target over the last year or so.

Some dairy farmers are nervous about his proposed transformation of the much-loved 100% farmer-owned co-operative into a “farmer-controlled” hybrid or are alienated by his brash, bullish style.

Some of his competitors hate him for driving up the price of raw milk (which is, of course, his mandate) and they also deeply resent this Devondale ad:

Given that Gary himself is a suit-wearing Sydney-sider who flies in weekly to MG’s Melbourne headquarters where a large corporate Mercedes Benz awaits him in the basement, he could be accused of a little hypocrisy.

So the acerbic commentary from the Financial Review directed at the so-called “Gary the Great” generates plenty of sniggers, including yesterday’s piece, which was republished outside the pay wall in The Land.

The article reveals a series of sales figures that suggest sales of MG’s Devondale branded products have tanked disastrously, followed by an observation that:

“When Helou locked Murray Goulburn into a decade of skinny margins supplying Coles with its $1 milk, his rationale was that it would lead to growth in his branded products and thus higher margins for his farmers.”

“But the growth has not transpired, which means the margins are on borrowed time – especially as Helou juggles significant debt covenants, tries to raise $500 million in new capital and wears major cost blowouts getting his new processing facilities online.”

Are the figures fair? I asked dairy industry analyst, Steve Spencer of Freshagenda, about the data quoted in the story.

“The figures are sourced from retail scan sales data reports, which are expensive and normally only purchased by some of the larger supermarket suppliers,” Steve explained.

“The figures supplied to the Financial Review are current and specific and certainly not publicly available, so the data was most likely leaked by a competitor. It’s unlikely that any of the figures were inaccurate but could have been used selectively to paint a certain picture or the columnist’s agenda.”

But if the article is fair, it’s worrying news for MG farmer shareholders. I invited MG’s Robert Poole to answer a series of questions to set the record straight:

  • Are the figures quoted in the Financial Review a fair representation of Devondale’s sales performance?
  • To quote from the Fin Review: “According to Murray Goulburn, a big upside of the Coles deal was that it would ‘drive significant growth in sales for [its] core Devondale milk and cheese brands in the years ahead’”. To what degree does the profitability of the Melbourne and Sydney plants rely on the sale of Devondale products?
  • How do actual Devondale sales figures compare to the budgets set when the plants were planned?
  • Does Murray Goulburn continue to enjoy “preferred supplier status” with Woolworths?
  • How have the Devondale sales at Woolworths compare with those at Coles?
  • Does MG plan to review its product mix or marketing strategy in light of Devondale’s sales performance?
  • How does Devondale’s sales performance compare with other areas of MG’s business?

Robert pointed me to a media release on MG’s website released later in the day. Unfortunately, it does not answer the questions. Instead, it plays the man rather than the ball, providing any genuinely concerned farmer shareholder little comfort.

Are the criticisms of Gary Helou and MG simply sour grapes or dirty competitive tactics? I hope so but it seems only time will tell. This is the tragedy of the “Gary the Great” sideshow: it all descends into an ugly bun-fight in which, ultimately, the farmer is the loser.

EDIT: I HAVE WOKEN TO AN EMAIL FROM ROBERT POOLE INDICATING THAT HE WILL BE PLEASED TO ANSWER THE QUESTIONS TODAY (20/02/2015).

Bittersweet as Devondale milk reaches Coles shelves

/ dairymilkmaid / 12 Comments

Photo: The Weekly Times


Three men in suits – a prime minister, supermarket supremo and the MD of a dairy processor – stood drinking glasses of frothy cold milk on the steps of the first MG Co-op factory dedicated to supplying fresh Devondale-branded and private label milk to Coles. Beneath the froth, however, doubt among the very dairy farmers sponsoring the opening celebrations continues to simmer and bubble.

Ever since the Coles deal was announced, there have been skeptics. Plenty question whether it is possible to make money supplying milk that retails at a dollar a litre and the concept alone that milk could be priced cheaper than water offends many dairy farmers.

The speculation and anger reached new heights this week, however, after a scathing opinion piece in the Australian Financial Review that says MG managing director, “Helou ‘in a hurry’ has a reputation at MG, as he did at SunRice, for being hell bent on revenue over margins.”

The AFR also writes, “MG’s margins are non-existent and its deal has locked the whole industry into $1 milk for a whole, punishing decade, structurally squeezing the profit pool.”

All that gloom follows the journalist’s derisory comments about the Sydney factory being at least one month late, $30 million over budget and the trigger for contractual penalties that can only be imagined. And, yes, when the deal was announced, MG’s farmer shareholders were promised the factories would cost “just” $120 million. MG now puts that figure at $160 million, hinting at a cost blow-out of staggering proportions.

To top it all off, Coles ads pimping our cherished, premium Devondale-branded milk at just 75 cents per litre sent shockwaves through the Australian dairy community on Twitter yesterday.

This ad went viral on Twitter for all the wrong reasons

This ad went viral on Twitter for all the wrong reasons

So, I sent a list of questions off to MG’s executive general manager shareholder relations, Robert Poole, who to his great credit offered these explanations:

Q. What are the actual costs of the two factories?
A. Following our initial cost estimates for the two factories we decided to invest in additional capability and capacity to maximise efficiencies through automation and layout. This brought the total investment in our Melbourne and Sydney facilities to approximately $160 million. This provided for future operational cost savings.

Q. Has MG been unable to supply milk to Coles on time?
A. We have had some shortfalls, however contingency plans were promptly enacted . Laverton is ramping up towards its full capacity and at the moment is servicing Coles requirements in Victoria plus the Devondale Brand both in Victoria and NSW. Our NSW plant remains scheduled to commence production in early August, at which time MG expects to be able to be supplying all of Coles requirements in Victoria and NSW

Q. If so, what are the penalties?
A. This is a contractual matter between MG and Coles.

Q. Does MG have adequate raw milk supply for the Sydney factory now?
A. In New South Wales, we have already sourced more than 180 million litres of milk. This is more than enough to cover our initial requirements of approximately 100 million litres per annum in this market and allows for future growth.

Q. When do you expect the Sydney facility to be supplying milk Coles with its full requirement of milk?
A. The site is being commissioned through July with production scheduled to commence early August, reaching full capacity by the end of August.

Q. When will the investment break even?
A. Both sites are forecast to add positively to MG’s farmgate price from year 1.

If the Murray Goulburn deal with Coles can withstand a 33% cost-overrun and Coles’ penalties while adding to the milk price from year one, this must be an extraordinarily lucrative contract indeed. Who would have thought the Down, Down, Down folks could be so generous?

While you’re chewing that over, take a minute to look at the new Devondale ads via my fellow dairy blogger Lynne Strong, who tells me her post discussing the commercials has gone viral attracting around 1500 views in 24 hours. MG cannot be accused of being boring!

MG capital raising program raises plenty of questions

/ dairymilkmaid / 5 Comments

Farming is all about taking risks. Our businesses rise and fall largely on the backs of increasingly volatile international commodity price cycles, exchange rates and the weather. Plenty of really good farmers have come unstuck through no fault of their own, other than taking a good risk at a bad time.

On the other hand, our co-op, Murray Goulburn, has always been considered a pretty safe bet. It was formed more than 60 years ago by a group of Victorian dairy farmers seeking a better deal for their milk and has grown to become Australia’s third-largest food and beverage company – dwarfed only by Coca Cola Amatil and Lion.

Our managing director, Gary Helou, doesn’t want to stop there. At a supplier meeting this week, he spoke about the need to move at “break-neck speed” with new products to capture new markets within the next three to five years, swallowing competitors along the way.

They’re exciting times for this once risk-averse co-operative. The proposal being put to farmer shareholders is to list a chunk of the co-op on the ASX so that anyone can buy a piece of the action. Farmers with excess shares will be able to sell to non-farmers but these external investors, however, wouldn’t have voting rights.

Am I in favour? Yes, if the new capital structure can:

  • Enshrine farmer control
  • Maximise farmer profitability
  • Treat all farmer shareholders equitably
  • Allow the co-operative to provide great opportunities for new generations of farmers

Those are big “ifs” and there just isn’t enough detail yet to know whether any of them are satisfied. It is incredibly heartening though that the MG Board has listened to member concerns that the initial start date of the program of July 1 was far too soon to consider the complex implications of the proposal.

That’s the beauty of a co-operative: members have a real say in their own futures. And that’s why those of us who cherish it must have no fear of asking questions.

Murray Goulburn Co-op sheds jobs: why it’s happening

/ dairymilkmaid / 3 Comments

The co-op we supply, Murray Goulburn, has made an announcement that immediately made me sad. In an email sent to its farmers yesterday, managing director Gary Helou, wrote:

“The change program embarked on by MG is even more critical given increasing cost pressure and the recent significant decline in world market prices due to higher global milk supply. This initiative will help reduce the impact of falling world prices and a high Australian dollar on our supplier/shareholders. As a result of these changes, MG’s total workforce is set to reduce by 12% or 301 roles.”

While it makes me sad, I’m not surprised. Farmers are struggling to survive (less water, increasing costs, horrible prices and now the carbon tax slug estimated to cost us $7,500 each) and milk flows have dropped as a result. When appointed as the new CEO a few months ago, Mr Helou announced he would cut the co-op’s operating costs by a whopping 25%. That’s a lot of money.

As he went on to write in yesterday’s email:

“We continue to employ more than 2,100 people, mostly in rural and regional Australia, and contribute an estimated $6 billion to the Australian economy. These changes will make a significant contribution to our goal of reducing operating costs by $100 million this year and set us on the path to becoming a world leader in dairy foods”.

To give you some background, MG is Australia’s last big dairy farmer co-operative and processes around 35% of the country’s milk. You can’t own shares in MG unless you supply the co-op milk, so all the profits go straight back to farmers. The other big players are privately owned and profit from buying milk at the lowest possible price and selling it at the highest possible price. In effect, this means that MG tends to set the benchmark for the price dairy farmers like me are paid for their milk.

This is why I feel torn about the “change program”. On one hand, I am worried that somewhere along the way, we will weaken MG’s co-op values but, on the other, we desperately need MG to be strong and efficient. Neither the 2,100 MG workforce or Australia’s dairy farmers can afford to lose this gentle giant. Please be careful, Mr Helou, and good luck.