The MG fallout for Fonterra

Murray Goulburn has shocked the share market today by announcing it will close three factories and “forgive” the MSSP. The news may be just as important for Fonterra suppliers as its own.

While Fonterra deliberates on how it will respond, I thought I’d repost this Q&A from November, which makes very interesting reading in light of today’s announcement.

The Milk Maid Marian

msspfonterra

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…

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Explainer: What the ACCC means by…

ACCClogo
After the ACCC announced today that it was taking MG and two of its former big bananas – MD, Gary Helou, and CFO, Brad Hingle – to court, Milk Maid Marian asked the competition watchdog to explain a few things. I’m very grateful to the ACCC for responding so swiftly. 

MMM: The ACCC is seeking orders against Murray Goulburn that include declarations, compliance program orders, corrective notices and costs. What do all these terms mean and can you offer any examples of what the declarations, orders and notices might look like or the form they could take?

ACCC: A declaration is an order from the Court stating that the conduct breaches the law, in this case -the Australian Consumer Law (ACL). This provides guidance to the ACCC and to businesses about what future conduct may be found in breach of the law.

Compliance programs can include requiring company directors to undergo training in the requirements of the CCA and the Australian Consumer Law.

Corrective notices can include notices printed online or in local newspapers alerting affected parties as to the Court’s findings of a breach of the law.

The Court can order that one party pay costs, or split costs, (such as the fees and other expenses a solicitor charges for providing of legal services, such as court fees.), if the court considers that party to be at fault.

The ACCC is also seeking disqualification orders against Mr Helou and Mr Hingle. A disqualification order can prevent a person from managing corporations for a period the court considers appropriate

MMM: Why is MG’s board of directors not included in the ACCC’s action?

The ACCC has taken action against former managing director Gary Helou and former chief financial officer Bradley Hingle, as it considers that they were knowingly concerned in Murray Goulburn’s conduct.

MMM: How long do these proceedings of this kind usually take?

Court proceedings can become lengthy, and matters can run in excess of 12 months. The ACCC cannot speculate how long this proceeding take to conclude.

MMM: What does the ACCC consider would be the magnitude of an appropriate pecuniary penalty for Helou and Hingle?

The ACL allows for pecuniary penalties for individuals of up to $220,000 per contravention. It is up to the court to determine the penalty to be imposed on the parties.

MMM: The ACCC is not seeking pecuniary penalties against MG but what is the likely scale of the costs it might face if the ACCC is successful?

The ACCC cannot speculate. It is determined, in part, by the length of the case.

MMM: Trade practices lawyer Michael Terceiro tweeted today that “ACCC sues Murray Goulburn – looks risky trying to dress-up a misleading & deceptive case as unconscionable conduct”. What is the difference between the two and why is the ACCC opting for unconscionable conduct rather than misleading and deceptive conduct?

It is noted that the ACCC is alleging Murray Goulburn engaged in unconscionable and misleading or deceptive conduct, and made false representations.

The ACL prohibits misleading or deceptive conduct, and making false or misleading claims.

The ACL also prohibits unconscionable conduct such as particularly harsh or oppressive behaviour that goes against conscience as judged against business and social norms and standards.

There are a number of factors a court will consider when assessing whether is unconscionable.

These include:

  • the relative bargaining strength of the parties
  • whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party
  • whether the weaker party could understand the documentation used
  • the use of undue influence, pressure or unfair tactics by the stronger party
  • the requirements of applicable industry codes
  • the willingness of the stronger party to negotiate
  • the extent to which the parties acted in good faith.

This is not an exhaustive list and it should be noted that the court may also consider any other factor it thinks relevant.

MMM: Fonterra Australia will not be pursued by the ACCC because it signalled the possibility of price falls early. Did it consider the retrospective nature of the drop, the lack of notice and the levying of interest on farmers who did not opt to take loans?

The ACCC considered all issues raised during its investigation.  After assessing all of the information provided, the ACCC considers Fonterra Australia was more transparent about the risks and potential for a reduction in the farmgate milk price from quite early in the season.

Thanks again to the ACCC for this explainer.

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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!

cropped-family

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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No light at the end of the tunnel: MG

MGDevondale

Okay, so here’s the thing: Milk Maid Marian readers are asking whether I have invited MG to write a guest post following on from the Light at the End of the Tunnel pieces contributed by ADF and Fonterra.

The answer is “Of course!”. I try to make Milk Maid Marian as balanced as possible, so invited ADF, MG and Fonterra each to contribute an (unedited and complete, as usual) guest blog that would give farmers some hope.

Unfortunately, after much discussion, an MG spokesperson said the co-op couldn’t offer anything at this time or say when it might be able.

I know the co-op is going through a really rough time at the moment and dearly hope the MG board and management soon do find light at the end of the tunnel.

And when they do, there’s always an open invitation for the co-op to discuss the future of Australian dairy here.

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Tired, stupid, almost dead farmer

FireRadishI was knackered. It’d been a long few days of really physical work and I’d just finished burning a paddock of dead weeds. I was tired, hot, stinky and pushing through a three-day-old crushing headache.

It was almost 8pm and I just wanted to go home. I only needed to ride the quad around the darkened paddock to make sure the fire really was out and safe to leave.

QuadLights

Squinting into the smoke, I darted west across the charred flats. And then, suddenly, a single strand of electric fence wire appeared where no wire had ever been. Until the day before, at least.

Yes, I had rolled out, strained and rammed in the posts for that very same wire just 26 hours earlier. But in my stupor, in autopilot, energy-saving mode, it didn’t exist.

I slammed on the brakes instinctively trying to lean back while hanging onto the handlebars. In slow motion, the wire lifted over the handlebars, twanging savagely against my forearms.

I was 30 or 40 cms – a fraction of a second – from being garotted.

Stunned at my own stupidity, I backed away from the wire and tried feebly to jam the steel post that I’d sent flying a couple of metres back into the ground.

It’s a salutary lesson. Once, I would’ve had contractors in to build that fence instead of wearing myself so thin. Today, the budget simply doesn’t allow for such luxuries. The ripple effect of the dairy crisis shouldn’t be underestimated.

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Light at the end of the tunnel: Fonterra

Well, as you saw in the previous post, I’m looking for light at the end of the tunnel (other than an oncoming train!) for Australian dairy farmers like me. In that post, ADF’s Terry Richardson took up the offer to present a vision. Today, Fonterra Australia’s new(ish) managing director, René Dedoncker, presents his view. My brief was pretty open: give farmers a reason for optimism without going into all the intricacies of Fonterra’s strategic direction.

I’m very grateful to René for sending Milk Maid Marian not just the written response below but a video too. Both are worth a look because they’re a bit different.

There’s no question that there have been challenges in recent seasons. What happened last season was a reminder that we operate as part of a global market – we can reap the rewards, but it also means we share in the risk. We as companies have a responsibility to tell it like it is, so that our farmers are prepared – positioned for prosperity when conditions are good and able to weather the storm when they aren’t.

However despite the challenges there are still plenty of opportunities for Australian dairy – it’s about knowing how to capitalise on those opportunities. Today, around 406 billion litres of dairy are consumed globally every year. By 2020 it will be 465 billion litres. That’s a 59 billion litre difference – around seven times the size of Australia’s current milk pool.

We know that countries that don’t have enough milk will look to the countries that have a surplus. Australia is one of those countries. But simply selling our surplus supply in the global marketplace will only ever achieve commodity returns. It will not be enough to win back confidence on the farm.

We need to be providers of premium dairy products that are aligned with specific consumer needs and life stages, and we have to make sure we produce and deliver those products as efficiently as possible.

Two years ago Fonterra embarked on a mission to change the way we operate to enable us to better capture that demand. Overseas consumers want Australian cheese. We have a reputation for quality and excellence. Across Asia demand for cheese is growing. Mozzarella demand in China is growing at around 30 per cent each year.

In China, and across Asia, pizza is a social food – they eat it with friends and with their hands rather than a knife and fork. That’s why it’s important that as a dairy company we create a cheese that enhances that social experience.

Understanding what our customers want is crucial to our long term success as an industry. The reason there is such high demand for Fonterra’s cheese is because we’ve been immersed in the Chinese market for 25 years.

We know what Chinese consumers want. For example, we know how they eat their pizza, and how they want it to taste. Chinese consumers want their food to look as good as it tastes – they want that slightly brown crust on melted mozzarella, they want those stretchy cheese strings as they pick up a slice. Now, Fonterra cheese tops around half of the pizzas in China.

As companies, we need to leverage Australia’s reputation for high-quality dairy to make the most of the opportunities before us. The way we do that at Fonterra is through innovation – innovation in farming, in manufacturing, and in product development.

It’s why we’re investing in modern and efficient manufacturing; using technology to make dairy foods that tastes and performs the way our customers want it to. We have the technical know-how to deliver what they want – products developed with the end user in mind.

When it comes to nutritionals, the fundamentals in China remain incredibly strong, despite recent dips in demand. Here are just a few figures to consider:

  • The Chinese economy has been growing for 26 consecutive years, with economic growth still relatively strong at 6.8 per cent per year.
  • Over 54 per cent of Chinese people live in cities; by 2030 it’s expected that over 1 billion people will live in Chinese cities.
  • In 2000, just four per cent of Chinese families were considered middle class. By 2020, 76 per cent will be deemed middle class
  • China’s birth rate is climbing after the relaxation of the one-child policy – in a country with only four weeks of maternity leave many Chinese mums rely on infant formula to feed their babies after they return to work.
  • The next 12 months will be tough, as authorities seek to get greater control through regulation over the supply chain. However, the reputation of Australian dairy and the quality associated with that in China is invaluable.

We take a base commodity product and leverage everything that we have – high quality farm practices, best in class manufacturing and a point of difference on country of source, and make it into a higher-value product that is highly-desired in China.

That’s why we are continuing to back and develop the nutritional partnerships that we have so that when we get to more stable settings in China, we can take the opportunity to flourish.

There is huge potential for dairy looking ahead – not just in China, or Asia, but across the developing world. If we as processors work smarter, developing products that meet the needs of our customers and fulfilling that demand, our entire industry will benefit through greater investment, more jobs, and most importantly, a higher farmgate milk price.

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