The big opportunity for MG, the last big co-op

cowcockiesbook

To many dairy farmers, Murray Goulburn is much more than a milk processor. It’s their co-op. I know, it was my co-op too. For the record, our farm had always been a dairy co-op member for generations, even before MG was formed, until just before the partial float.

But sometimes, that zeal can backfire. It’s counterproductive to say farmers can leave the co-op without penalty and then openly consider placing special conditions on returnees. Zealots also look foolish, or callous, publicly arguing black is white in an attempt to airbrush the hurt caused to so many since April. Nor is it okay for them to harass anyone – as I was this weekend in private messages – who simply points out inconvenient facts. Aggression is not the path towards conversion.

As MG director-elect Craig Dwyer pointed out on Twitter this morning, the fish rots from the head.

craigdtweet

And this is where Murray Goulburn is at a crossroads. Until the April trading halt, it had been travelling at what the then MD Gary Helou loved to call “break-neck speed” towards its vision of becoming a “first choice dairy foods company”. The co-operative ethos had faded into the background.

Over the last few years, MG’s culture has moved away from that of a real co-op towards a company. “Each for all and all for each” once graced the cover of MG’s annual report but in its submission to the Senate inquiry published just days ago, MG revealed there were many more “special deals” than many had suspected (see below).

specialdeals

Excerpt from MG Senate Inquiry into the Dairy Industry submission (p. 10)

The zealots often lament the treatment of MG by the media and commentators like me. The reality is that this scrutiny offers the co-op a massive opportunity. Everyone is listening and the story MG could tell is compelling. It is the last big Australian dairy co-op (with apologies to Queensland’s Norco) and many – even those who have fled MG – still cherish the co-operative spirit. We just need to know that MG does, too.

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

DevondaleRedHairy

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.

MichaelStapleton

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:
MGresults1
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:
MGresults2

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):
MGresults3
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.

Secret meeting the ultimate irony in quest for transparency and trust

BarnabyMG

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.

UPDATE:

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.”

FURTHER UPDATE FROM AUGUST 25
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

Processors
Australian Dairy Products Federation
Australian Food and Grocery Council (AFGC)
Bega
Murray Goulburn
Fonterra
Bonlac Supplier Group
Saputo
Norco
Burra Foods
Lion
Parmalat
A2
Premium Milk
Richmond Dairies

Retailers
Coles
Woolworths
ALDI
Metcash

Other
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

Government
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

Officials
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

 

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.

 

 

 

 

 

Theo was too right…

keep-calm-let-s-cut-the-cake-and-eat-it

Here’s an unpalatable truth: when Fonterra head Theo Spierings said the milk price was unsustainable back in August last year, he was right. He also said the way milk prices are set needs to change. Correct again. Then he started talking about the need for, “a good debate with farmers … about how are we going to share – how are we going to cut the cake.”.  That’s what really matters right now.

At the time, Fonterra Australia head, Judith Swales responded to Milk Maid Marian’s request to clarify what Theo had meant by “sharing the cake” and said:

“We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.”

It’s hard to disagree with that sentiment. The problem is that we’ve learnt one more lesson in the last couple of months: if you’re stranded on a desert island with a hungry gorilla and a small cake, you’re in very big trouble indeed.

This post is not intended as an attack on Fonterra. After all, things are no better at Murray Goulburn. The reality is when there are thousands of small businesses selling a highly perishable product to a handful of large corporates and multinationals, the playing field is anything but even.

Just 12 months before Theo was talking about cake, the majority owner of Warrnambool Cheese and Butter, Lino Saputo, was quoted as wondering:

“…what will it take for the dairy farmers to be optimistic about the dairy industry and investing in their farms and what kinds of programs can we put in place that will assist them.”

At the time, I summarised my answer as “reliable profitability”. I posted the charts below showing just how far dairy farmers’ terms of trade had slipped and the wild fluctuations in profitability.

DairyTermsTrade

DairyBusinessProfit

“Productivity in the Australian Dairy Sector”, ABARES, September 2014

There’s one more factor I missed: confidence.

Writing for the latest edition of The Australian Dairyfarmer magazine, Dairy Australia managing director Ian Halliday notes that :

“In 2015, confidence among dairy farmers was at 75 per cent. In February this year, confidence had fallen to 65 per cent reflecting the dry seasonal conditions and also what milk prices were looking like for 2016-17 when considering the global price outlook.”

“Following the sudden milk price cuts in late April, which affected up to 65 per cent of all dairy farmers, we conducted another survey to get an understanding of changes in farmer confidence. This sample, although smaller, indicated confidence nationally had droppedd to 45 per cent.”

I’m willing to bet that confidence has fallen to historic lows after the Murray Goulburn opening price announcement.

What’s needed now is:

  • Transparency
  • Risk management strategies to deal with volatility
  • A more level playing field that provides farmers with real choices when dealing with processors.

These are the ingredients of reliable profitability and, without it, we’ll be continually wrestling the gorillas for the crumbs of a perpetually shrinking cake.

The haves and have nots of Australian dairy

CowTongue

I’ve had requests from farmers, investors, the media and even politicians for an explanation of how milk prices work (or don’t). I’m going to start with the factors that affect the price a dairy farmer in Australia’s south-eastern states receives.

  1. Who buys Old Macdonald’s milk?

The opening prices of most of the processors are in:

ACM $5.30
Bega $5.00
Lion (variable option) $5.00
NDP $5.00
Warrnambool Cheese & Butter $4.80
Fonterra $4.73
Longwarry $4.60
Burra Foods $4.40 to $4.60
Murray Goulburn $4.31
ADFC To be advised

It’s a massive spread of prices, with the top almost 25 per cent higher than the bottom. And it doesn’t stop there. The pricing systems are incredibly complex, with the prices no more than weighted averages. I know of a farmer supplying MG, for instance, who will receive just $3.79kg MS for his milk. I’ll explain that later in this post.

But, why, you ask, doesn’t Old Macdonald simply choose the buyer with the highest price?

It’s easy to change factories. You just call, make an appointment, fill in some forms and voila, a new sign hangs on the gate! But the reality is that there are lots of other factors in play:

  • Not all processors collect milk in every region. ACM, for example, does not collect milk from Milk Maid Marian’s district.
  • Many farmers are tied up with debts to their current processor or incentives for flat milk supply that would see them penalised tens of thousands of dollars for leaving.
  • Some farmers are contractually bound to the processor as part of share acquisition or “Next Gen” programs.
  • Then, there’s the waiting list. Processors tell me that since the opening prices were announced, there are hundreds of millions of litres of milk on waiting lists for new homes right now. The processors will cherry-pick those that suit their ideal profiles. In fact, many processors already have too much milk and have simply closed their books.

2. The breed of cows and what they’re fed
As a rule of thumb, if you’re not familiar with this industry pricing, you can convert prices expressed in kilograms of milk solids (kg MS) into cents per litre (cpl) by dividing by 13. So, $5.30 per kg of milk solids equates to 41 cents per litre and $4.31 equates to 33 cents.

It’s a formula that works pretty well for the 80% of Australian dairy cows that are the classic black-and-white Holsteins.

But not if your cows are Jerseys. Around 11% of Australian dairy cows are Jerseys, which produce around 30% less milk than Holstein Friesians but a lot more fat for every litre. According to ADHIS statistics, HF cows’ milk contains an average 3.83% butterfat and 3.24% protein, while Jersey milk is creamier at 4.76 % fat and 3.67 % protein. This means that returns from Jerseys appear higher than those of HF in terms of cpl and lower in terms of dollars per kg MS.

3. When the cows give the most milk
Every cow produces no milk for two months until she calves, then her milk production increases steeply for a couple of months before tapering off again. We call this her “lactation curve” and when you add together all the herd members’ curves, you get a farm’s “milk supply curve”.

It makes sense to have the herd’s milk production peak when there is the most grass in the paddocks. Inevitably, that’s in Spring. Of course, if all herds peaked in Spring, it would cause big trouble for the processors. The entire Australian dairy milk supply is getting less and less seasonal over time because the processors offer more money for “off peak” milk.

Here’s an excerpt from my own farm’s income estimate to show you just how much the price changes over the year with Fonterra.

FonterraTotal

For MG suppliers, the shift can be far more dramatic if suppliers elect to provide “flat milk” but I would need to dedicate a blog post to explaining this aspect of its system.

The differences in payment systems mean that even if a farm receives the average milk price from one processor, it might not from another.

4. Compulsory charges and levies
Most processors have compulsory charges that come off the headline price. These are not trivial and amount to tens of thousands of dollars. In my farm’s case, we pay a transport levy that amounts to 35 cents for every kilogram of milk solids we sell. On top of these, there are Dairy Australia and Dairy Food Safety Victoria levies.

5. Bonuses for the big and beautiful
If you think you’re across all that, don’t forget there are productivity incentives that favour larger farms and MG still has a growth incentive for farms supplying more milk than the year before. These can be very significant. There are also quality bonuses (and/or penalties) with different processors having different benchmarks.

6. Clawbacks
As you might already know, both MG and Fonterra dramatically dropped their prices for May and June to bring back the overall price. They have both come up with “support packages” for suppliers. Farmers are now beginning to pay for those. Fonterra suppliers are on interest-only this year and principal repayments will begin in the next financial year. MG suppliers are paying off their packages in the form of an artificially-lowered milk price already.

7. Special deals
Farmers were outraged back in 2012 when it was revealed that even the co-op was offering special deals for the really big farms. Nobody can say for sure how common these are today.

The bottom line is that every farmer needs to get an individual income estimate from processors to be sure what their milk price really is and what it would be if they supplied a different factory. Not all milk is created equal.

Which dairy farmers will survive?

Damocles

The Sword of Damocles. Pic credit: Moritz Aust

I was digging a post hole today when my phone binged a message in my pocket. And binged again and again and again and again.

I paused to check the messages, still with the post hole digger under my shoulder and stared in shock at the Murray Goulburn announcement.

As the biggest milk processor, MG tends to set the benchmark price and, in the new financial year, it will be $4.31 per kilogram of milk solids or about 33 cents per litre. After you take off the compulsory fees the processor charges for milk collection, it’s around 30 cents. Even less again for the many Gippsland farmers whose cows calve in Spring in line with Mother Nature.

It costs a farmer like me about:

  • 40 cents to produce a litre of milk when the season is good and nothing goes bust and the bank is happy with interest-only; or
  • 42 cents to make milk and maintain the farm; or
  • 45 cents to breathe and grow.

On top of the drought we’ve just endured, this fresh set of bad news will finish many farmers off. Not just the inefficient producers, either. Far from it.

Those coasting along with little debt will emerge at the end of the year with the fewest scars. In fact, it will be the youngest, most ambitious farmers who heeded the calls for growth from Murray Goulburn, Fonterra and the banks just 18 months earlier and invested accordingly who are the most vulnerable.

We stand to lose the innovators, the future leaders of our industry. They are also those who were in line to buy the properties of retiring farmers.

I am not a Murray Goulburn supplier but the opening price announcement left me reeling. The phone rang. In a daze I answered it but found I simply could not speak.

Words fail me and with Fonterra yet to announce the price it will pay us for our own milk, the sword of Damocles hangs low. Fonterra’s behaviour over the last few weeks has been inconceivable. Will it be able to rebuild any trust tomorrow?

An EGM for MG: who, what, where, when and how

Devondale logo

Understandably, there’s been a lot of angst among Murray Goulburn’s farmer-supplier-shareholders.

At the heart of debate in dairy circles has been a proposal for an extraordinary general meeting (EGM). But few MG suppliers feel sure of what an EGM really entails, especially since the massive changes to MG after the co-operative was partially listed last year.

I am grateful to  MG’s Executive General Manager Supplier Relations, Robert Poole, for answering some important questions for Milk Maid Marian.

Q: What’s needed to trigger an EGM at Murray Goulburn?
RP: Calling a General Meeting is a fundamental right of all supplier/shareholders. To call a General Meeting, supplier/shareholders require 5% of shareholder votes – as defined under our Constitution and in line with the Corporations Act. For any resolution to pass at such a meeting, a 50% vote of shareholders is required, unless it is a constitutional amendment which requires 75% support.

Q: Where are EGMs held and can they be shared electronically (eg: via video link) for those unable to attend?
RP: Murray Goulburn’s general meetings are normally held in Melbourne. Typically we don’t provide remote access to these meetings due to cost considerations.

Q: How long after an EGM is triggered must it be held?
RP: If shareholders with at least 5% of the votes that may be cast at the general meeting request that Murray Goulburn convene a general meeting, the meeting must be called within 21 days and must be held no later than 2 months after the request is given to the company.

Q: Who pays for an EGM called by supplier shareholders? What is an indicative cost?
RP: If shareholders with at least 5% of the votes that may be cast at the general meeting request that Murray Goulburn convene a general meeting, it is expected that the costs of the meeting would be borne by Murray Goulburn.  The cost varies depending on venue availability and number of attendees, so it is hard to define until closer to the event.

Q: What is the format of an EGM? Can questions be asked unannounced from the floor? Do resolutions need to be submitted in advance or can they be proposed from the floor on the day?
RP: It is expected that questions will be allowed from the floor.  However, any resolutions to be proposed at the meeting must be set out in the formal request given to Murray Goulburn to convene the general meeting. Effectively, this is to ensure that shareholders will know what business is to be dealt with at the meeting, and can decide whether to attend or not, or if they attend by proxy, they can instruct their proxy how to vote.

Q: For a resolution to pass, does the 50% vote of shareholders apply to those at the meeting or the entire shareholder group? What is the voting process on a resolution?
RP: An ordinary resolution must be passed by at least 50% of the votes cast by shareholders entitled to vote on the resolution. A special resolution (eg. for proposed changes to Murray Goulburn’s Constitution), generally must be passed by at least 75% of the votes cast by shareholders entitled to vote on the resolution.

At a general meeting, a resolution put to the vote must be decided on a show of hands (where each shareholder present who is entitled to vote has one vote), unless a poll is demanded (where each shareholder present shall have one vote for each ordinary share held). In the event that a poll is called, this means that all the vote will include the proxies received prior to the meeting as well as those voted on the day.

Declaration: Marian’s farm no longer supplies Murray Goulburn but she does hold non-voting shares in the unit trust.

Who wants to sue who and who will pay?

DevondaleTwirl

One of the first things farmers asked about the Murray Goulburn and Fonterra announcements was: “Can they really do this? Is it legal?”.

The lawyers have duly arrived.

I know of three firms circling Murray Goulburn right now. While Slater & Gordon was the first to announce it was opening an investigation into a class action against MG, it has not yet confirmed whether it will proceed.

Last week, a so-called “maverick” lawyer, Mark Elliott, reportedly filed a class action against MG on behalf of unit holders who had bought shares in the listed part of MG.

At the same time, another lawyer, David Burstyner of Adley Burstyner working together with Harwood Andrews, is building a list of farmers affected by the sudden milk price collapse who might be interested in one or more of the three legal strategies:

  • a “group claim” against a range of processors to recover financial loss;
  • steps to change and take back control of MG management, and;
  • an urgent court order stopping the claw back.

The big question on farmers’ lips is: if MG gets sued, won’t farmers ultimately pay the price?

The stakes are high because MG farmers face a double whammy:

  1. Now more than ever, farmers are acutely aware that when processors don’t do well, the answer is to slash the price paid to farmers.
  2. Every farmer who supplies milk to MG must own MG shares, so its falling share price is robbing many retirement nest eggs. Some are even facing margin calls on loans they took out to buy more shares.

The targets
The Elliott class action is targeting the MG unit trust and its directors. The good news is that the trust and directors should already have insurance that deals with such a claim.

There’s likely, however, to be an excess they will have to pay, which the lawyers call “deductibles”, which means the insured party has to cover part of the loss out of its own resources as “self insurance”.

On top of that, director’s insurance is no silver bullet. This type of insurance is complex and it’s quite possible that out of court settlements won’t be covered.

The proposed action from David Burstyner could target any of the processors who stepped down: MG, Fonterra, Lion and NDP. Mr Burstyner expects to know in the next few weeks. If launched, class actions usually play out over several years, so buckle yourselves in.

Will it help farmers?
Because there’s likely to be plenty of coverage of the Elliott class action for unit holders, I’m concentrating on the Adley Burstyner proposal for farmers and its potential impact on MG, the hybrid co-op.

Speaking with Milk Maid Marian on the weekend, Mr Burstyner said his firm is investigating an injunction to halt the milk price drops.

“An injunction is difficult to secure but the situation is urgent,” he said. “We are prepared to try if it is achievable, but it depends on what we learn from farmers”.

He also plans a “group claim” against processor(s) funded by a litigation funder, which roughly works on what some people call a no win no fee arrangement (see more at http://www.adleyburstyner.com.au/group-claim-faq). This arrangement minimises the risk to participating farmers but, as a guide, around 30% of the proceeds after costs is likely to go to funders. Mr Burstyner said the participation of thousands of farmers is necessary but that it’s possible because more than 3000 supply MG and Fonterra alone.

At the same time, Mr Burstyner said he hopes there will be no need for “all-out war” and that a class action could be avoided with the processors reaching a settlement with farmers that could also improve the way milk prices are set in future.

MG, however, is not a normal company. The fundamental ways it interacts with farmers must be put to co-op members and voted on rather than hastily negotiated on the court house steps.

But what if “all-out war” is the only option? Mr Burstyner acknowledged the possibility of short-term pain for the processor (which may carry through to its supplier shareholders) but the long-term benefit would be a “clean up” of the industry.

Asked why farmer shareholders could not simply reshape their co-operative by voting on special resolutions rather than litigation, Mr Burstyner strongly agreed that strategies along those lines could be very useful, saying, “Although MG is no longer the cooperative it was prior to July 2015, we would like to assist farmers with the solutions which could be possible in the newly formed corporatised structure, using farmers’ significant rights as shareholders which we think could really improve their position.”.

In notes he offered to Milk Maid Marian, Mr Burstyner clarified his point:

o    Murray Goulburn Co-operative Co Limited ACN 004 277 089 is an unlisted public company. It is controlled by its shareholders who for present purposes are the farmers. MG is no longer the same cooperative structure it was before July 2015.

o    Shareholders with more than 5% of votes can call a meeting or ask the company to call one.

o    They can sack the board and appoint alternatives by ordinary resolution.

o    There is a 2-month notice requirement for certain resolutions, for example, sacking board members.

o    The Company (under new management) may even be able to bring a claim against former Directors for not satisfying their director’s duties.

Mr Burstyner is keen to hear from farmers who would like to be kept updated on these three types of potential legal action (in the short term an injunction or challenging management, or the long term solution of a class action to recover financial loss and bring about systemic changes).

You can register your interest at http://www.adleyburstyner.com.au/farmers-farm-gate-milk-price-action.

Mr Burstyner stressed that he has no interest in any legal strategies if farmers don’t want them. Without interest from significant numbers of farmers, Adley Burstyner and Harwood Andrews will close their file.

Important: this post is general commentary only, please seek legal advice before considering any action.

 

 

Why the system is broken

The interaction between processors and farmers is bizarre to outsiders. The way it works is this:

Out of a handful of processors in the district, you ask one to collect your milk, although, if you’re unlucky and live somewhere a little remote, you might not actually have a choice at all. We’ll call this processor “your” processor for convenience.

Whichever processor you choose, they tell you what they will pay for your milk on July 1 – sometimes after July 1. This “opening price” is meant to be the lowest anticipated price, the one you can budget on. The only other time the price has fallen below the opening price in the last couple of decades was during the global financial crisis and even then we had a couple of months’ notice.

The price generally goes up along the way from there, though, unless you are one of the very few farmers who gets a fixed price, nothing is actually guaranteed after that.

It all depends on the exchange rate, global commodity prices, the performance of the biggest processor in the market and the success of “your” processor’s particular product mix.

What’s the performance of the biggest processor in the market and the success of your processor’s particular product mix got to do with the amount farmers are paid, you ask? Everything.

And it’s a system that used to work brilliantly. Once upon a time – not too long ago for those sporting the odd grey hair – there were not one but two major dairy co-operatives in the southern states: Bonlac and Murray Goulburn.

Every cent of profit the two co-operatives earned was returned to their farmer-shareholders and, because their whole reason for being was to maximise profits for their farmers, they effectively set a base for the farm-gate milk price.

Neither co-op could get too lazy or arrogant because there was strong competition from the other. Then, disaster struck, as reported by The Age:

“Crucially, Bonlac is processing only 1.6 billion litres of milk. Over the past 10 years, its share of Victorian milk production has declined from about 40 per cent in 1992 to 16 per cent in 2002.”

“Bonlac’s milk plants are running at only 75 per cent of manufacturing capacity. Particularly underused are the factories at Darnum in West Gippsland and Stanhope in northern Victoria.

“Debt, the result of an ambitious expansion into value-adding branded products in the 1990s, is still crippling the company, despite asset sales creating paper profits in the last couple of years, and the repayment of $185 million of debt.”

Now, in the midst of an ambitious expansion into value-adding branded products on the back of a partial listing, MG is in turmoil. Its MD and CFO have resigned and the milk price has collapsed, triggering ASIC and ACCC investigations, at least one class action and a share price meltdown.

Bonlac is long gone and, in the eyes of many farmers, MG has lost the title of reliable pacemaker. The system is broken.

It’s no longer acceptable for dairy leaders to tell farmers to concentrate on their farm businesses and blindly follow their calls for growth. It’s time we actively forged a new era for Australian dairying.