Fonterra, farmers and that fat profit


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.


Filed under Farm, Fonterra, milk price

Coles Farmers’ Fund is anything but a fund for farmers by farmers


The Coles Farmers’ Fund is perfect material for a stand-up comedian really.

Step 1. Using your massive market power, you send the price of milk down, down, down and dismiss the pleadings of farmers as ignorance.

Step 2. Next, you secure a 10-year deal with MG to source cheap milk while saying it’s a great deal for farmers.

Step 3. When history brings MG’s credibility to its knees and farmers down with it, consumers fall out of love with cheap milk and Coles. So what do you do?:

a) respond by restoring the price of milk to sustainable levels; OR
b) maintain the discount on milk and begin a “Down, down…” campaign targeting cheese as well; OR
c) come up with a farmer-endorsed PR stunt that costs you nothing but wins you back sales lost to branded products?

Well, bless you Coles. Presented with the easy option of permanently fixing the problem you created with solution a) you’ve instead gone with a devilish combination of b) and c).

Call me an ungrateful, whingeing farmer but…
I think I have cause for concern. The Coles Farmers’ Fund has been designed by Coles marketing executives for Coles, not farmers:

  • The cheap milk has brought the value of all milk down (check the numbers for yourself in my previous post) and no more milk is sold today than before Coles drove the price down. This Farmers’ Fund will do nothing to address the cause of the problem.
  • Only a few farmers will be awarded any funding – not the thousands who need a fair price.
  • The fund only applies to farm improvements and, this year, most farmers are in survival mode – money is needed to pay the basic bills. Farmers simply need to be paid a proper price for their milk.
  • A group of unnamed VFF people will decide who receives the funds. Transparency and accountability is sorely lacking.
  • Only the consumers who care about farmers will buy this milk, so it’s likely to further damage branded milk sales, redirecting sales straight back to Coles.

Contempt for dairy leaders
And it didn’t even matter that the peak dairy bodies were apparently opposed to the stunt: Coles simply gazumped the United Dairy Farmers of Victoria and Australian Dairy Farmers by garnering endorsement by the VFF. A stunning coup for Coles. A sickening own goal by the VFF.

Call me an ungrateful, whingeing hypocrite of a farmer but…
After first deciding against applying to the Farmers’ Fund, I changed my mind.

Fellow farmer Dianne Bowles argued convincingly that as many farmers as possible should apply, demonstrating the need for support and the value that even small change for a supermarket can have on farm. So there, it’s done.

This may have been a very expensive blog post for me and my family but one I simply had to write. If I get funding, I’ll be quick to let you know.


Filed under Farm

The perils of serving two masters: food for thought for MG farmers


Next week, MG will host meetings for farmer supplier-shareholders to discuss its recently announced FY16 results. It’s the first set of annual financial results since the co-op’s partial listing and the accounts have seen some change, so Milk Maid Marian asked financial whiz, Michael Stapleton, to help make sense of the figures. This is not a light blog post but well worth reading right through to the end.

Michael is a Melbourne based Virtual CFO who helps business owners understand the drivers of their cash flow and make financially informed decisions. He is a founding member of the Association of Virtual CFOs and an occasional contributor of financial articles to Smart Company.


Michael Stapleton

Murray Goulburn (MG) released its unaudited FY16 report last week, reporting an increased profit. At face value this didn’t sound like a business that had to claw back $183.3m of payments already made to its supplier members.

So, I thought I’d take a look at their information to see what is going on behind the headline numbers.

Here is a snapshot of MG’s reported earnings:
MG produced an unchanged sales/litre return but a higher Gross Profit, Gross Margin and Net Profit in FY16.  To do this, it paid a lower FMP of $4.80/kgms in FY16.

The FMP is derived through a pool payment system.  Under a pool payment system, supplier members of a co-op receive what is left over once the cost of production and cost to run the business has been deducted from the revenue of the business.

MG’s magic profit

Do you see the trick?  The final pool payment figure (and final profit figure) is worked out in reverse.  In practice, a conservative pool price is set at the start of each year and adjusted as the year progresses.  Supplier member expectations are managed by delivery of a final realised price usually somewhat better than the initial pool price.

MG’s Distributable Milk Pool for FY16 was $1.157bn.  Of this amount, $1.1bn has been paid as Milk Payments, which are included in the Cost of Goods Sold as the Cost of Raw Materials.  The other component of their Cost of Goods Sold is the Cost of Production – drying milk into powder, turning it into cheese, pasteurising and homogenising for drinking milk etc.

Incorporating this detail into MG’s earnings looks like this:

This additional layer of detail exposes an increase in the Cost of Production.  At 45.7% of Sales, it is a big increase from FY15.

If this was my business, I would like to know what is happening to the operational efficiency of my factories.

Let’s see what MG’s earnings look like if they had not taken the $183.3m of payments to the supplier members out of their Cost of Raw Materials (they did this by capitalising the payment on their balance sheet as an asset – essentially as a prepayment of future FMPs):
The FY16 Adjusted column shows that retaining the $183.3m as a payment to suppliers increases the Cost of Raw Materials to $1,282m and lowers the Gross Profit to $228m.

A final Pre-Tax loss of $126m is realised. Quite a different position to that announced, and more in line with the issues faced by the business.

What hybridisation means for MG’s finances

FY16 is the first year MG has operated under a hybrid structure. Its results for FY16 are a child of the hybridisation process and I think some observations about the practical effects of hybridisation are relevant.

First of all, hybridisation has strengthened the financial position of the business. But, it has come at the cost of reduced flexibility, higher payments to the ATO than in the past and the difficulty of balancing competing interests.

The Profit Sharing Mechanism means MG has limited flexibility when deciding the split of the Distributable Milk Pool between FMP and Net Profit.  Except in abnormal circumstances, MG must now record a Net Profit after Tax of between 3.5% and 7.5% of the Distributable Milk Pool.  

In practical terms, as MG has elected to move from a Co-operative tax status to a Corporate tax status, the Profit Sharing Mechanism means MG must record a Pre Tax Profit of between 5% and 10.7% of the Distributable Milk Pool (this is the grossed up level of NPAT required to meet the 30% Company Income Tax obligation and achieve the 3.5% – 7.5% after tax profit outcome).

The pre-tax profit is shared between the ATO (first) and then suppliers and external investors.  The ATO and the external investors receive 56% of the higher Net Profit before Tax, whilst the remaining 44% flows to supplier members.

In the four years prior to hybridisation, MG’s declared Net Profit before Tax averaged 1.9% of the Distributable Milk Pool (well below the 5 – 7.5% range now required).  The tax paid averaged 0.05% of pre-tax profit, well below the 30% now required to be paid.

The trade-off for a stronger balance sheet has been a reduction in the Distributable Milk Pool flowing to supplier members in favour of the ATO and external investors.

Prior to hybridisation, MG’s purpose was clear – all its activities were for the benefit of their supplier members.

Since hybridisation, MG has to consider both the interests of the supplier member and those of the external investor. These interests will not always align and I think FY16 is a clear example of competing, not aligned interests.

I think the alignment of supplier member and external investor interests is vitally dependent upon the success of the value-add strategy.

Thank you very much to Michael Stapleton for this analysis of MG’s FY16 results and the impact of the new structure.


Filed under Farm

Supermarket milk wars: the hard numbers tell a remarkable story

Milk sales 20160825
Thank you. The most heartening thing about the Australian dairy crisis is the support ordinary Australians have shown for farmers. The remarkable graph above proves what we’ve all seen on supermarket shelves. Real people taking real action.

This graph showing the split between home brand and brand name milk sales comes from Dairy Australia analyst John Droppert, who has answered a handful of questions from Milk Maid Marian with some very telling numbers. Thank you, John! I have added quotes from John in italics. Because they were so fulsome, I have selected some highlights for you.

Is supermarket milk really important to dairy farmers?
To answer this question I asked Dairy Australia how much of the milk that leaves the farm gate ends up in cartons on supermarket shelves. Well, (with apologies to Lara Bingle) that depends on where the bloody hell you are. In Queensland, just about every drop goes to the supermarket. Here in Victoria, about a tenth of our milk ends up in the fridge and another half is turned into other foods like cheese, yoghurt and butter plus ingredients for everything from toothpaste to glue.


So, yes, what happens in the supermarket matters – critically for farmers in Queensland, NSW and WA. It also can’t be ignored in dairy farming powerhouse, Victoria, especially in the light of cheese prices now targeted by Coles to follow milk down, down, down.

The value of milk has fallen


Aussies are drinking less fresh white milk, despite the supermarket discounts

JD: “…it appears that after an initial lift in demand from consumers in response to discounted milk, consumers have become accustomed to paying the reduced price for fresh white milk, and consumption patterns have since reverted back to pre-discounting levels. Therefore, the implementation of this discount pricing strategy has ultimately failed to lead to a sustainable lift in per capita consumption of fresh white milk.”

Using a table of numbers supplied by John, I’ve created a chart showing the decline below:


Why processors want to supply milk to supermarkets
That graph of falling consumption matched with falling retail prices doesn’t look good but could it be part of a bigger deal? DA’s John Droppert notes that:

“DA’s understanding has been that dairy processors, when faced with adverse conditions in one segment of their market, will naturally look to make decisions in other segments of their business to offset those impacts.”

“With the understanding that processor profit margins were compromised by the consumer shift to private label milk after the $1/litre policy, DA was of the view that the change in market dynamic was likely to have encouraged processors to seek alternate revenue streams – particularly UHT and flavoured milk. It is our understanding that processors consider returns for branded and private label milk across their portfolio of milk (both white and flavoured), while factoring in any efficiency benefits generated by additional private label milk throughput.

“Per capita consumption for both flavoured milk and UHT milk has achieved consistent growth over the last 25 years. DA believes that this has been supported by increased investment by processors in advertising to encourage consumers to purchase more flavoured milk to offset profitability challenges in other parts of the total milk category. We are currently in the process of trying to secure a time series of data showing advertising spend across the liquid milk category in order to verify this claim.”

Again using data in a table supplied by DA, I created the graph below. And wow, look at UHT (in grey) and and flavoured milk (orange)! Those babies might be a small part of the equation but they’re doing the heavy lifting, propping up total consumption.


At the time MG announced it would supply home brand milk for Coles, getting other Devondale products on the shelves – particularly cheese – was certainly considered a triumph for the co-op.

Is the profitability of fresh milk for processors known?
JD: “DA is not privy to retailer or processor profit margins for any manufactured product. There is a widely held belief that processor margins are better for branded product, compared to private label equivalents.”

“DA also understands that there may be an advantage for processors in attaining additional supermarket shelf space for their company branded products in both milk and other dairy categories by supplying private label milk (i.e. a non-financial return). The upcoming ACCC dairy market study is likely to bring some of this information to light, and allow some of these questions to be more definitively addressed”.

Does DA have a position on whether supermarket discounting is a positive or negative for dairy farmers? Why/why not?
JD: “From a DA (services body) perspective, we look at this in terms of impacts along the supply chain back to farmers; the peak bodies (ADF and ADPF) take this analysis into account in projecting an industry position through ADIC. As far as impacts go, there are two levels to look at: the emotional aspects, and the data.”

“Taking the emotional side of the issue into account first, there is no doubt that the discounting of fresh white milk has devalued the perception of product value in the eyes of farmers. To see milk selling for less than the price of something like bottled water has an impact on farmer sentiment that the economic data doesn’t capture. It suggests to farmers that all the hard work, capital investment, and management skill that goes into producing the product is not properly valued, by those selling it, or the wider community buying it.

“From a data perspective, this is a complex issue, and a proper evaluation relies heavily on assumptions in place of open access to hard data relating to profit margins which in most cases is commercial in confidence information held by the processors and retailers. However, DA is concerned that the analysis published in the recent S&O was deliberately misinterpreted to infer that the $1/litre discounting of private label fresh milk has had a positive impact on dairy industry profitability. 

“Data available to DA relating to sales volumes and values does not allow us to derive definitive evidence relating to the impacts on dairy supply chain profitability.  But based on the assumptions noted above (notably around margins) and in our broader fresh milk market analysis, DA believes it is incorrect to suggest that the introduction of $1/litre private label milk has not had a detrimental impact on the dairy supply chain. DA recognises that there is a significant opportunity to improve upon the coverage and robustness of analysis in this space, and believes that the upcoming ACCC investigation will provide a means to obtain the data required to do this.

“What DA can demonstrate though is that per capita consumption of fresh white milk has not increased as a result of the $1 litre pricing policy introduced in 2011.”

A huge thank you to John Droppert and Dairy Australia for answering Milk Maid Marian’s many questions regarding “$1 milk”.




Filed under Farm

Secret meeting the ultimate irony in quest for transparency and trust


Barnaby Joyce and Malcolm Turnbull meeting MG. Pic credit: The Guardian Australia

Tomorrow, Deputy Prime Minister Barnaby Joyce will bring the cream of the dairy community – from retailers and processors through to farmers – together in a symposium to discuss our futures.

It’s acknowledged there is much work to do in order to rebuild trust. One of the measures widely touted – including by Murray Goulburn itself after an earlier chastening at the hands of Minister Joyce and PM Turnbull – has been increased transparency.

Yet tomorrow’s meeting will be:

  • attended by a list of so-far-unknown representatives on an invitation-only basis and;
  • their discussion will be conducted in secret.

No wonder many average dairy farmers outside the inner circle feel excluded and frustrated.

I take my hat off to Barnaby for dragging all the parties together. But this pivotal meeting needs to be an open and honest discussion of what can be done to renew the confidence of Australian dairy farmers in our futures. And if there’s a bully in the room who demanded the doors be closed, it’s time that bully was called out.

Nobody in the Australian dairy supply chain has the right to hold the rest of us to ransom any more. The high moral ground has been well and truly lost.

There are fears that the dairy symposium will be yet another talk-fest over tea and cucumber sandwiches that achieves little other than the fulfillment of a political promise. I’m hoping it will be so much more. If Barnaby Joyce can hold Johnny Depp to account, anything is possible.


Thank you very much to the Deputy PM’s office for providing this information:

The symposium will be held in Melbourne tomorrow. The Australian Bureau of Agricultural and Resource Economics and Sciences, Dairy Australia and the ACCC’s agriculture commissioner, Mick Keogh will all address the symposium, to be chaired by the Deputy Prime Minister Barnaby Joyce.

A spokeswoman for the Deputy Prime Minister said:

“We have invited key stakeholders from farmer organisations, processors and retailers to a dairy symposium to facilitate industry-led options to address the challenges facing the Australian dairy industry and discuss ways to improve the industry’s prospects going forward.

“The agenda will cover a number of topics including the outlook for the Australian dairy industry and options for improving milk price transparency, strengthening bargaining and restoring industry confidence.

 “The symposium is an opportunity to facilitate an industry-led discussion to better manage risk along the dairy supply chain, including managing the effects of world dairy prices.”

Thanks again to the Deputy PM’s office for a list of RSVPs:

Farmer representative bodies
Australian Dairy Farmers
NSW Farmers
Dairy Connect
Queensland Dairyfarmers’ Organisation
South Australian Dairyfarmers’ Association
Tasmanian Farmers and Graziers Association
United Dairy Farmers of Victoria
Western Australia Farmers
National Farmers’ Federation
ACE Farming Company
Farmer, Willow Grove Gippsland
Farmer, Trafalgar Gippsland
Leppington Pastoral Company
Dairy Farmers Milk Co-operative
Farmer, QLD
Farmer, WA
Farmer, VIC
Farmer, VIC
Farmer, VIC
Farmer, QLD

Australian Dairy Products Federation
Australian Food and Grocery Council (AFGC)
Murray Goulburn
Bonlac Supplier Group
Burra Foods
Premium Milk
Richmond Dairies


Dairy Australia
Macalister Irrigation District Customer Consultative Committee
KAP President
Sinclair Wilson Accountants Warrnambool
Manning Valley Fresh Group, Taree Collective Bargaining Group NSW
Freedom Foods

Deputy Prime Minister and Minister for Agriculture and Water Resources
Assistant Minister for Rural Health, Federal Member for Lyne
Federal Member for Forrest
Federal Member for Wannon
Senator for Victoria
Victorian Minister for Agriculture
Leader of the Nationals Victoria, Victorian Shadow Minister for Agriculture
Deputy Prime Minister’s Agriculture Industry Advisory Council

Australian Competition and Consumer Commission
Dairy Food Safety Victoria
Murray Darling Basin Authority
Campaspie Shire Council
Department of Agriculture and Water Resources
Department of Economic, Jobs, Transport and Resources



Filed under Farm

Why I welcomed Four Corners to our dairy

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.







Filed under Farm, Fonterra, milk price, Murray Goulburn

Meet your MG board candidates

UPDATE 31/08/16: Congratulations to Lisa Dwyer, Craig Dwyer, Kelvin Jackson and Harper Kilpatrick for being elected to the MG board and to all the other candidates for putting their hands up.

Murray Goulburn farmer shareholders will soon vote to elect new members to the board of directors. The dairy processor accounts for a huge chunk of Australia’s milk and tends to set the benchmark for the milk price, so its performance is important to most farmers in the south-eastern states.

The candidates have been touring the country to introduce themselves but since only a small percentage of shareholders attend the meetings, Milk Maid Marian offered this post as an added platform to help MG farmers make an informed choice.

The candidates were invited to answer two questions in a video that is three minutes or less:

Q 1:  Tell us about you, how you farm and your roles outside the farm

Q 2:  What would you work to change at MG if elected and why?

Three of the candidates, Lisa Dwyer, Raelene Hanratty and Harper Kilpatrick sent in their videos. Here’s your chance to learn a little more about them!

Lisa Dwyer

Raelene Hanratty

Harper Kilpatrick


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Filed under Farm