Category Archives: Warrnambool Cheese and Butter

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.

7 Comments

Filed under Farm, Fonterra, milk price, Murray Goulburn, Warrnambool Cheese and Butter

The ethics of profiting from animal welfare

Lino Saputo (pic: ABC)

Earlier this week, dairy processing giant Saputo announced it was getting tough on animal welfare. Well, more precisely, it was getting tough on the dairy farmers supplying it milk.

Saputo toughens stance on animal welfare @ABCRural.

The announcement was greeted by farmers on Twitter, both in Saputo’s native Canada and here in Australia where it owns Warrnambool Cheese & Butter, with a degree of skepticism.

The common theme of the discussion was that farmers were already meeting the standards trumpeted by Saputo. The exercise was simply one of a processor profiteering off the backs of dairy farmers, yet again. But it’s worth remembering that Saputo’s move followed a case of a farmer doing the wrong thing as Lino Saputo told the ABC:

Mr Saputo said an incident in Canada motivated the work behind this new policy.

“One of the farms that was supplying us milk had a recorded incident of animal abuse. Here in Canada we are buying milk from the milk marketing board, and typically we don’t know where that milk is coming from,” he said.

“As it turns out, the milk from that farm that had some abuse was being delivered to our plant. “We tried to rally with the dairy industry to have some stronger practices in place, but quite frankly we found ourselves alone in this process and we felt like we needed to take a leadership role.”

Saputo is not on its own. Fonterra has quietly begun animal welfare audits on the farms of its suppliers. Perhaps coincidentally, its own customer, Nestle, threw its considerable global weight around earlier this year, demanding a set of welfare standards from suppliers that has already seen scores of Australian dairy farms whose milk eventually reaches Nestle inspected.

I’d be willing to bet the farm that Saputo, Fonterra and Nestle are the tip of the iceberg. As farmer Shelby Anderson (@cupslinga) tweeted, “it’s society, not a foreign Co” that is demanding transparency and rigour around the way we farmers care for our cows.

The RSPCA is already considering accrediting milk for animal welfare, as it does with eggs. The idea is rejected by peak dairy body, the Australian Dairy Farmers, because it fears the RSPCA marketing will imply most dairy farming is not up to scratch. It’s a fair point that leaves me feeling conflicted because, on the other hand, it’s great to put a value on good animal care (err, beyond having healthy, productive animals and being able to sleep at night).

Just as the quality of Australian milk is taken for granted by Australian shoppers, they expect the cows to be treated well. I for one am pleased that Saputo and Fonterra have been proactive to protect that reputation for kindness.

I only hope that the way we care for animals is marketed with the same sensitivity. A ghastly adversarial marketing campaign might make a quick buck but would leave everyone a loser.

20 Comments

Filed under Animal Health and Welfare, Warrnambool Cheese and Butter

Protecting farmers from ourselves

Apparently farmers cannot be trusted with anything. Not even to want the highest farm gate milk price for ourselves.

Bega has just sold its stake in Warrnambool Cheese & Butter to Saputo, putting the Canadian billionaire on the brink of controlling WCB even though a higher price was on offer from Aussie farmer co-op, MG.

This happened because our co-op hasn’t been allowed to bid during the bidding period.

Australian farmers who want to invest in their own futures and who are willing to pay the highest price for WCB have been stymied by a government artifice in the name of protecting…you guessed it…farmers from themselves. Apparently, another processor that thrives on a low farmgate milk price is better for us farmers than having an efficient farmer-owned co-op.

This Aussie dairy farmer will never forgive Joe Hockey for sitting by and watching.

So, where to now? That, my fellow source of low-cost milk, is up to us, for although Saputo can buy WCB’s stainless steel, it cannot buy our future. Only Australia’s dairy farmers decide where our milk flows and our fortunes lie.

13 Comments

Filed under Community, Farm, Warrnambool Cheese and Butter

Australian dairy: does it matter if it’s sold to China?

Worth saving?

Worth saving?

Does Australian milk matter? We have to decide.

It seems two of Australia’s milk processors, United Dairy Power and Warrnambool Cheese and Butter, are about to be sold to China. Firms backed by the Chinese government are having unofficial talks that would put the price of WCB at a staggering $10 per share.  Meanwhile, the ruthless but charming Canadians continue to acquire a bigger stake of WCB.

Here, close to home, another Chinese firm has already purchased a formerly decommissioned factory and is repackaging milk powder to send back to China. (It’s been a debacle, with outraged and distraught workers regularly featured in the local papers desperate to be paid.)

It’s not limited to the dairy processing sector, either. The Chinese have been buying up our breeding stock for years and now, they want our farms, as Brett Cole reports in the Business Spectator:

“For more than a year, China Investment Corporation has contemplated acquiring Van Diemen’s Land Co, which owns and operates 25 dairy farms with 30,000 dairy stock. Other Chinese companies have moved decisively amid concerns about their nation’s safety standards.”

All this while our Australian farmer co-op, currently the highest bidder for WCB, languishes in the competition tribunal as it ponders – for months – whether we are allowed to bid at all.

Do you care? If you’re a dairy farmer, hell yes, you should. No foreign company cares about your future like you do or your co-op does. Perhaps worse still, once these assets are sold, the fragmentation and inefficiency of our processing sector is locked in, forever limiting the price farmers are paid for our milk.

If you’re not a farmer but an Aussie, there’s an awful lot to be lost. These international companies and governments so keen to pay more than twice the value of WCB are not irrational. They want control of their food. Does that matter to you?

39 Comments

Filed under Community, Dairy Products, Farm, Warrnambool Cheese and Butter

Nine tricky questions for MG, answered

Today, Murray Goulburn Co-op stepped up its offer for Warrnambool Cheese and Butter again, to a staggering $9.50 per share. In a year where most dairy farmers are still playing catch-up from a horror stretch, it’s no surprise that some of us are getting nervous about how the deal stacks up.

I wanted to put the top nine the questions I’ve heard from farmers to one of MG’s most senior people, general manager shareholder relations Robert Poole. His responses have just arrived. Let me know what you think!

1.    Where is the money for the bid coming from?

Murray Goulburn has committed financing facilities available from its existing lenders to fund the Offer.  A further $350 million of new facilities have been provided by National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ) and Westpac Banking Corporation (WBC) in order to finance the transaction and assume Warrnambool’s facilities to the extent required.  The support of the financiers in providing these facilities re-enforces Murray Goulburn’s views that the rationale and financial metrics implied by the offer are sensible.

It also confirms MG management and the Board’s view that the level of leverage in the business is appropriate for a co-operative structure particularly in its current phase of significant growth and investment.

2.    MG’s balance sheet is described by commentators as “over-stretched”. Gary Helou countered by saying cooperatives are different. In what way?

Our offer is financially prudent and has been well considered. Our gearing will increase to around 57.2% – a level that our Board is comfortable with taking into account that we are a 100% farmer controlled cooperative with a range of options. At the financial year just ended our gearing was 43%. Based on a successful transaction, our FY14 gearing is estimated to be around 57%.

Co-ops are generally well supported by banks and this is the case with MG. Our bid for WCB is fully funded by NAB, Westpac and ANZ. Co-ops are not listed and are backed by their farmer suppliers. The capacity of the co-op model to sustain debt is well established and is evidenced by offshore examples most recently and notably Fonterra prior to their raising of non-voting equity capital. Co-ops traditionally have a higher level of debt. For example, Fonterra reached gearing levels of over 60% during growth phases.

3.    How can you justify paying so much more than WCB’s stated “fair value”?

MG has carefully assessed the value of WCB, and our Offer is financially prudent and well considered. MG would NOT proceed with any bid unless the result added to the overall milk price and our analysis shows that a combination of WCB and MG will do just that.

This is an extremely complex and ever changing situation. However what is clear is that the industry needs consolidation to improve the efficiency of the supply chain and create a larger scale globally relevant Australian dairy food company, uniquely positioned to capture the unfolding long-term opportunity in international dairy markets. We believe it is vital that the co-operative has a central role to play in this – to build a strong farmer-owned business that can compete on a global scale against the other giant dairy co-operatives like Fonterra, Dairy Farmers of America, Friesland Campina and Arla – not to mention multi-national giants like Nestle and Kraft.  MG is the only partner for WCB that has the scale and co-op structure to invest, grow and maximise farmgate returns for farmers, and ultimately regional communities.  We remain committed to acquiring WCB, satisfying our conditions and delivering the benefits of the combination back to the farmgate.  This can only be good for local investment, jobs and communities.

4.    Can MG guarantee that its WCB bid will not damage the farm gate milk price? If so, how?

MG would NOT proceed with any bid unless the result added to the overall milk price and our analysis shows that a combination of WCB and MG will do just that. MG itself is entering an exciting phase of growth and has identified a series of strategic capital investments that will target a $1.00 per kilogram of milk solids lift underlying farmgate milk prices over a five year period from FY12 to F17.  MG will deliver these benefits to supplier shareholders including those WCB suppliers who join the co-operative regardless of the outcome of the WCB bids.

5.    Competition is often said to be healthy for businesses. Doesn’t a strong competitor for milk supply help to keep MG on its toes?

I would counter that it is MG that keeps competitors on their toes, as we traditionally lead the market on farmgate pricing.  As a 100% farmer controlled co-operative MG’s primary objective will always be to maximise farmgate returns for our supplier/shareholders. As opposed to competitors who have the primary objective of maximising profits to their shareholders.

MG is the only partner for WCB that has the scale and co-op structure to invest, grow and maximise farmgate returns for farmers, and ultimately regional communities.

The current structure has not served the industry well over the last decade. The Australian industry has gone backwards while Asian demand has grown significantly – Australia is now a less relevant player in the international markets than it was in 2002. This has coincided with the drought, deregulation of the dairy industry and investment by foreign players.

Increased participation by foreign players has not lead to a restructure of the processing industry – the processing structure remains extremely fragmented. While foreign players have been in Australia for some time, they have not driven growth for Australian dairy products in the international markets.

MG’s own strategic plans and the proposal for WCB will assist in leading the Australian dairy industry to recovery and growth over the longer term. Our proposal is the one that creates a larger-scale globally competitive Australian dairy company uniquely positioned to capture growth in international dairy markets. Our plans involve investing and growing the businesses to meet the opportunities.

6.    Why do you think farmers tend to be polarised in their attitudes towards MG?

I can’t comment on why. However, what I can say is that in recent years MG has been committed to improving and building relationships with dairy farmers and this has been underpinned by meaningful, in depth engagement and transparency. We believe this is yielding some very positive long term results for both the farmers and their co-operative.

We respect that people will have differing opinions however we welcome the opportunity to talk with any farmers to clarify questions, share our plans and our vision for the industry, as we did this week in Warrnambool and Mt Gambier.

We will continue to work hard to demonstrate to WCB and other dairy farmers the benefits and importance of becoming a supplier/shareholder of the co-operative. We believe we have a compelling story and look forward to talking to WCB dairy farmers about our offer and the opportunity for them to become part of the co-op.

7.    How has MG’s culture changed in the last few years?

Over the past few years MG has been on a journey to become a more efficient and effective co-operative that can return more, and contribute more to its supplier shareholders, their communities and the industry as a whole. There is no doubt this has been reflected in the culture of our business, while remaining true to the co-ops core objective of maximising total farmgate returns.  In addition, to a focus on improving and building relationships with dairy farmers, corporate governance has also been a priority, including developing Board and Committee Charters and formalising policies such as Public Disclosure, Risk Management and a Code of Conduct.  Over the past couple of years MG has also had Board renewal with a number of new supplier Directors being appointed, appointing two specialist Directors; as well as the appointment of a new executive management team, including Managing Director, Gary Helou.

8.    How differently do you expect to run the Allansford factory? Can its workers feel secure?

Foremost our bid is about investing and growing the MG/WCB business to increase scale and maximise farmgate returns. We see significant potential and this can only be good for local investment, jobs and communities. Both the MG and WCB processing facilities are already operating at or near capacity and they are making different products which makes them complementary. Down the track, we may identify operating efficiencies and if we do, these will flow through to the farmgate price and ultimately to farmers and their communities. That said we believe there will be substantial opportunities for existing employees in an enlarged group with national and global reach.

Our proposal is the one that creates a larger-scale globally competitive Australian dairy company uniquely positioned to capture growth in international dairy markets. Our plans involve investing and growing the businesses to meet the opportunities.

9.    Aside from size, how would MGW compare to Fonterra?

Fonterra has become a highly successful global dairy giant and we believe that MG now has a similar opportunity before it. The combined business will be positioned to capture the unfolding long-term opportunity in international dairy markets. A combined MG/WCB would create one of the largest Australian owned food and beverage businesses, 100% controlled by dairy farmers, making us a top 20 global dairy producer.  To put it another way when combined we’ll have forecast revenues (FY14) of $3.2b and be one of Australia’s top 5 food and beverage businesses, behind Lion and Coca-Cola Amatil, Fonterra and JBS Australia.

The combination will give us the necessary scale, market reach and efficiencies, and like Fonterra, we will have far greater relevance in export markets to be able to grow the brands and products from each business.

The combined business will have over 3000 suppliers, approximately 4 billion litres of milk processed annually, a diverse product range and market reach, forecast revenue of $3.2 billion (2014), diverse operations and a strong production base in Australia’s best producing dairy regions.

So this is an historic opportunity for Murray Goulburn and WCB suppliers and shareholders to create a larger scale, globally competitive Australian dairy food company that they own and control.  Importantly, it will retain the primary objectives of a co-operative in maximising farmgate returns for farmer owners.  It will also support on-farm and industry investment, and in turn grow the Australian dairy industry for the benefit of regional communities.

 

15 Comments

Filed under Warrnambool Cheese and Butter

Cooperation versus investor returns – the future of dairy farming in Australia

MMM: Below is the first paragraph of an article by Professor Tim Mazzarol that appeared in The Conversation this week and, while it’s a long read, it puts everything facing Australian dairy beautifully into perspective.

If you feel as strongly about this as I do, please contact the office of Treasurer Joe Hockey on 02 6277 7340 and ask to speak to an advisor, as well as your local MPs and even Barnaby Joyce on 02 6277 7520 (who has no direct authority in this matter but does have a cabinet voice). The pollies need to know what farmers think so that they can give us a fair go.

Cooperation versus investor returns – the future of dairy farming in Australia

By Tim Mazzarol, University of Western Australia

The battle is heating up between Australia’s Murray Goulburn Co-operative, Bega Cheese Ltd and Canada’s Saputo Inc. over the acquisition of Warrnambool Cheese and Butter Factory Ltd (WCB). Much of the discussion around who will end up buying WCB has focused on share price and investor returns, but there are much deeper issues at stake. These relate to the tensions between long term collective ownership of dairy supply chains by Australian farmers and the short term gains of shareholders. How this battle unfolds may decide the future of farmer control over Australia’s dairy industry.

Read the full article at The Conversation.

Leave a comment

Filed under Warrnambool Cheese and Butter

Dear Joe, how will you be remembered?

Dear Joe,

Why have you betrayed me so cruelly?

You came to me in September with promises of fatherly love and affection. You described me as your pillar and that, after mining’s bloom had faded, I would be your everlasting rose. You said you needed me and that, without me, you would forever be insecure.

But now that my fate lays in your hands, you act swiftly to hasten the courtship of WCB by Saputo whilst locking me in the cellar, dressed in rags. I implore you to at least allow me to attend the ball so that I may win the hand of my beloved.

Your faithful Milkmaid

Okay, I never really fell for you, Joe, but here it is:

  • Before the election, you described agriculture as one of the five pillars of the economy and said that food security was important. I’ll hold you to that.
  • For Australia to have a dairy sector, it must be able to compete with the international goliaths. That means we need a big processor with scale.
  • Australia’s dairy farmers are sticking together and want to grow so we can be more resilient. We absolutely have to because we don’t have the subsidies, FTAs, cheap labour or government support enjoyed by most of our competitors.
  • Our 100% Australian farmer-owned cooperative exists to maximise farm gate prices and consolidation rather than competition is what’s needed. We are prepared to step up to the plate and invest in our futures.
  • You gave the giant, privately-owned, foreign Saputo a huge leg-up with swift clearance, declaring Australia “open for business” with a grin on your face.
  • Don’t hide behind the ACCC or the slow-as-a-snail tribunal. Where there’s a political will, there’s a way. Your Kiwi counterparts knew that doesn’t make sense and cast their equivalent aside to allow the much-admired Fonterra to take shape.
    To pin us to such a protracted process while ushering though our foreign competitor is to drive a stake through the heart of the co-op’s bid.
    You surely understand the irony of thwarting MG’s bid based on competition policy when it is Australian farmers themselves desperate to become more competitive who are driving this bid and, in turn, are being rendered non-competitive in this fight to keep WCB Australian-owned by you, our own government!
  • You are the biggest impediment to Australian farming families taking a greater stake in our own futures by keeping WCB Australian owned.
  • If you insist on holding us back, you will be remembered as the man who sold Australia’s dairy farmers down the river. And for what? The love of Lino?

Joe, it’s time you stepped out of the way and gave us a fair go.

9 Comments

Filed under Warrnambool Cheese and Butter