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.

Helou tells the Senate he’s a hero

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

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

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

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

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

mgcasxapril18

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

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

asxmgcapril27

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

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

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

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

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

adamjenkinsheloutweet

 

 

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.

 

 

 

 

 

The trouble with the MG and “Gary the Great” sideshow

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

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!

“Bring on the cows” demands a new routine

“Bring on the cows” trumpets The Australian, headlining a story about MG Co-op managing director, Gary Helou. In response to rumours that the co-op might purchase a large Tasmanian dairy farm, Mr Helou reportedly says:

“We are not farmers; MG is a global dairy food processing and milk company, and we will not be buying farms directly; that is not our business,” Helou says adamantly.

“The only way to get extra cows and milk is to up the farm gate price enough that farmers will want to invest (in more cows) themselves. So that’s what I have set out to do, maximise the farm gate price and reduce the cost of processing and the supply chain and then efficient production will follow.”

Here’s the problem: MG is not a global dairy food processing and milk company. It is a co-operative of Australian dairy farmers who are members because they expect MG to, first and foremost, maximise their profitability. Not by investing in a processor (they could just buy ASX shares if that was what it was all about) but by looking after farmers directly.

They don’t just supply MG, it’s not just their MG, farmers ARE MG.

Am I being hopelessly idealistic? I don’t think so. This focus on being a processor has flowed through to the co-operative’s milk price system.

The final milk price only tells half the story. The quoted “average weighted” milk price is skewed to favour farms with flat production curves (mirroring those of the processor) at the cost of farms whose milk supply matches the natural ebb and flow of cow and pasture. For the vast majority of Australian dairy farmers, the way our co-operative pays us is at odds with efficient milk production.

MG must remember what being a cooperative really means before its farmers will be ready to “bring on the cows”.

MG capital raising program raises plenty of questions

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.

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.

 

Divided we fall: so where to from here?

After a nose dive

Don’t worry if you fall, just get back up again.

Wayne said the other day that the farm has taught him something about resilience: live in the moment when the sun is shining and, when the hail stings your skin, think of the big picture.

But the big picture right now is confusing for this Milk Maid. The WCB war has thrust the outlook for Australian dairy into the headlines and, with it, a lot of questions.

Our co-op has offered half a billion dollars for WCB, claiming that its loss to a global player would be “a tragedy”. In its statement to the ASX, MG Co-op said:

“The combination of MG and WCB is the only option available that delivers an Australian-owned and operated company with the scale, capacity, strength and momentum to service global growth opportunities, returning profits to dairy farmers and their communities.”

In the midst of all this, the UDV hosted a farmer forum on Monday where independent dairy analyst, Dr Jon Hauser, told farmers that supporting cooperatives is a “no brainer” but has also said the golden era of dairy in Asia was “largely rhetoric” and that real progress for Australian dairy would come through cost control and increased efficiencies at the farm and the factory.

He created a stir at the forum too, simply by saying that milk prices of 48 to 50 cents per litre could not be sustained. Not popular news.

So, now that Saputo is on the cusp of announcing a new offer, prompting WCB to ask for a suspension of trade, what if Helou’s tragedy does unfold? How will the General regroup?

MG will certainly have to work harder to woo those who harbour a co-operative spirit but supply other processors. And that, I’m afraid, is something the co-op has not done well to date, in my view. Perhaps the tide is beginning to turn, reading between the lines of Helou’s interview with The Weekly Times dairy writer, Simone Smith, headlined Divided we fall:

“There is nothing stopping our farmers rallying around a well-run farmer run company that is of scale and relevance.”

“There is no law in the land against that. That’s what we are advocating. This rally around the MG foundation to create a new farmer-owned business that is really relevant to the 21st century.

“The farmers will only benefit from direct ownership and direct influence in supply chain from the farm all the way to market.”

I guess we farmers are used to falling and getting back up again.

 

UPDATE: In response to a question asked below, Dr Hauser has kindly sent me this. I don’t know how to put it – complete with charts – in the comments section, so here it is instead:

Sorry Marian, It would take me a day to properly represent my position on the Asian growth story and even more to update my analysis to the most recent trade data.

Here is a snapshot of the important data:

JH1

This is the demand growth for the developing nations. This comes from the FAO

Most of this growth has been serviced by internal development of their dairy industries.

JH2

This the export growth from the key dairy traders – Europe, US, NZ, Argentina, Australia. The average is 2 – 3 billion litres / year. Even if this has been accelerating in the past few years it is unlikely that the opportunity is more than 4 – 5 billion litres / year. I believe the average growth opportunity for the global traders is 3 – 4 billion litres but I would need to review the more recent data to check this.

YOY Production milk production growth – Million Litres
JH3

This is the year on year growth that has come from the major traders. This chart shows 15 billion litres of growth from the EU, US, NZ and Argentina from July 2010 – June 2012. The total for the period from July 2009 – June 2012 is 12 billion. In other words we saw contraction in 2009 and 2012 and that is because the milk price was low. The US and Europe turn growth on or off according to commodity and milk price (New Zealand just keeps on trucking except when it doesn’t rain).

In summary:

  • The Asia growth story is not rhetoric but the suggestion that the hole can’t or won’t be filled is.
  • The US and Europe will turn on and off milk production according to demand and price. They had no difficulty growing supply at 5 billion litres / year in 2010 / 2011 and they are already gearing up to do it again in 2014.
  • No I don’t subscribe to the analysis that has been done for the Horizon 2020 report. I believe the “Supply Gap” analysis is a flawed way of assessing Australia’s future export opportunity.

 

MG makes its move

I used to think of our co-op as a bit like the ABC: your favourite aunty. Comfortable, dowdy, trustworthy and a little quirky.

But Aunty MG has undergone a transformation.

Since it acquired a new CEO, Gary Helou, in October 2011, Murray Goulburn has embarked on lancing $100 million of costs, opened up in Dubai, restructured the way farmers are paid for milk, revamped its retail trading store network, developed assistance packages for the next generation of farmers and forged the spectacular Coles fresh milk deal. At least, these are the “headline acts” that come to mind.

Now, MG is making a $420 million bid for its rival, Warrnambool Cheese & Butter, gazumping Bega Cheese and Canadian dairy giant, Saputo.

According to MG, (if the bid is successful) the new Murray Goulburn Warrnambool:

“Creates a new 100% Australian farmer-controlled dairy food company with over 3,000 supplier shareholders delivering more than 4 billion litres of milk to nine processing sites annually. The business will be positioned for strong growth in both domestic and international dairy markets with forecast revenues in financial year 2014 of $3.2 billion including export sales of $1.4 billion to over 60 countries.”

This, Gary Helou wrote in a letter to MG’s farmer shareholders yesterday, would bring the coop, “…the necessary scale, market reach and competitive strength to capture the benefits of the historic growth opportunity resulting from the consumer affluence of developing Asian economies.”

MG’s triple-jump

The bid is in, it’s the most lucrative on offer and it’s Australian, yes, but there are three serious hurdles for MG:

1. A bidding war

What will Saputo and Bega do next? WCB traded higher yesterday, closing at $7.89, a sign that markets believe MG’s $7.50 isn’t enough to win the bidding war.

2. Shareholder seduction

WCB rejected a takeover offer from MG in 2010. At the time, there was quite a bit of anti-MG sentiment. It’ll be interesting to see if the reinvention of Aunty and a bigger bucket of cash will make a difference.

The Sydney Morning Herald reported Mr Helou said yesterday that farmers supplying WCB needed to consider the future of the Australian dairy industry when deciding on the take-over bid.

“For farmers generally, they are at a fork in the road today.”

“If they sell out to a private company, that they have no control over … they will be spectators.”

“What we are putting on the table is an offer for them to take a stake in every step in the value chain.”

“It’s a fundamental, philosophical different point of view.”

3. The competition watchdog

Back in 2010, the ACCC was loathe to allow MG to acquire WCB. As reported in the SMH at the time:

THE competition regulator says its preliminary view is to oppose Murray Goulburn’s proposed acquisition of Warrnambool Cheese & Butter on the grounds it would cut competition in some markets for raw milk.

The Australian Competition and Consumer Commission said yesterday it was concerned the proposed deal “would substantially lessen competition for the acquisition of raw milk from farmers in the relevant markets within South Australia and Victoria”.

“The potential effects in the relevant markets include a significant reduction in farm-gate prices paid to farmers for raw milk; and reduced competition in the offer of non-price terms such as finance, field advice services and discounted hardware and grain supplies.”

The irony of the ACCC’s 2010 statement is that Murray Goulburn’s mission, as a 100% farmer-owned co-operative, is precisely to return the maximum price to farmers — something to which the listed Bega Cheese nor the privately owned Canadian giant Saputo cannot lay claim.

I hope it takes a broader perspective this time. A serious exporter battling subsidies and tariffs around the world, MG needs scale so that its processing can be as efficient as its farmers. The Australian government does not afford our dairy farmers the protections enjoyed by most of our competitors. The least it can do is allow us to grow.

UPDATE: See this article and extended AFR interview with MG CEO Gary Helou: http://www.afr.com/p/national/the_battle_for_warrnambool_kxxm78XXLgfsAJ6y7ARaVJ