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.


Am I in a dairy crisis?

A group of young Gippsland dairy farmers say times are tough but not at crisis point, said well-known dairy consultant John Mulvany during an ABC Radio interview yesterday.

When I ask myself whether it feels like I am in a “dairy crisis”, the answer is a perplexing “yes and no”.

We will get through this year battle-weary but pretty much unscathed and the bank is still very supportive. The co-op recently delivered us a modest price increase, which included back-pay and that was very helpful. I hope I’m not jinxing myself by saying this but the autumn break has arrived, everything is green and growing and new seed is in the ground.

But when I look at why things are undoubtedly “tough”, that’s when it feels like a crisis.

International dairy commodity prices are good
Right now, we are actually being paid very well. It just doesn’t feel like it for two reasons. First, those excellent prices are in US dollars, which means that by the time you convert those prices into Aussie dollars, the prices are a lot less spectacular. Second, the cost of making milk has increased faster than milk prices have risen.

Given that international dairy commodity prices are notoriously volatile, I’m not looking forward to the next cycle, when they are considered “weak”.

The strong Aussie dollar is not going away anytime soon
Business commentators are telling Australian exporters (and around half of our milk is exported) to get used to a strong Aussie dollar. It’s here to stay.

Input costs are tipped to keep rising
The price of power, refrigerants and fuel is only going to keep rising, along with wages and, in the long term, fertiliser. Interest rates cannot be expected to remain so low forever, either.

Smart farming programs withering as R&D slashed
There have been savage cuts to agricultural R&D right around the country, with massive job losses here in Victoria. We are going to have to look further afield for innovation leadership.

Conflicting messages about the future of farm-gate prices
We are constantly told a massive protein shortage will transform dairy farmers from paupers to princes. As dairy industry commentator, Steve Spencer, writes in the latest edition of the Farm Policy Journal:

“One of the significant challenges faced by the industry – especially export manufacturers who can’t keep up with customer demand – is that too few of their milk suppliers have bought into the story that the future holds great opportunity.”

Glad you noticed, Steve. And little wonder we’re not buying the story. Not only are we no more profitable now than we were a decade ago when “the story” was first floated, just a few weeks ago, ABARES forecasted a 36 cents per litre farm-gate price within five years – well below our cost of production.

Steve goes on to say that the dairy industry is missing many key ingredients “…building confidence, showcasing success, positive esteem…” and then poses a “…critical question for all parts of the industry: how to motivate people to look long, adjusting their businesses and attitudes to accept the cycles of the market and cashflow as inevitable?”.

Steve, I think that is what we have done and that is why some call it a dairy crisis. Rhetoric no longer cuts it. But I reckon you’re right that we farmers do need to start thinking about the big picture beyond the farm gate so we are ready not only to face the future but to recast it before it’s too late to find our feet in the new world order of dairying nations.

Putting ourselves in the best position

In the lead up to the Australian Dairy Conference later this month, I’ve invited a few fellow speakers to do guest posts on Milk Maid Marian. One of them, Steve Spencer of the Freshlogic consultancy, issued this challenge to dairy farmers.

Steve Spencer

Steve Spencer

The world has changed in the last 5 years and with that so have the prospects for dairy producers. If you read the views of the global food gurus, we’re riding on the cusp of an ever-tightening world food shortage that puts the dairy industry in a great position. We’ll have plenty of competitors going after that future prize, and in the last decade dominated by the effects of drought, other exporters have emerged. But at the same time, decades of protectionism by major economies is steady evaporating, as governments admit they can’t afford to fund the high walls built around agriculture.

As we’ve seen in the past couple of years, the variables affecting our farmgate milk prices in Australia have become more complex, and the volatility in the future world that affects those prices, grain costs and weather will only increase.

As we step into the future, it has never been more important to make sure our industry is structured in the best possible way to make sure we optimise the flows from the market back onto farms. It isn’t something that we should steadily work on for a few years – this pressure now urgent!

I will be presenting a paper at the Australian Dairy Conference at Warragul, Vic (which is being held on 22-23 February) that will aim to stir up the debate on the agenda for getting that going. It will look at precisely what can be done to improve returns, and it should be no surprise to anyone to recognise that most of the things that can be done are within our own control.

So my paper will tour:
• How farmers do or can engage with the dairy market
• The value of the co-operative as a channel to that market
• How they perform in different industries
• What changes others are making and why
• What changes are most important in the Australian market
• How those can happen

We’ll discuss the elephant in the room. Murray Goulburn is the largest farmer-owned processor of milk in southern Australia, accountable to their shareholder-suppliers for performance through farmgate milk prices and dividends. In a highly competitive farmgate environment, prices paid by foreign-owned, privately owned or listed competitors will be set at or above MG’s price – others will only pay what they have to in order to get a secure milk flow. They are accountable to shareholders who may not be dairy farmers purely on their performance as a business.

It will be up to the co-op’s farmer shareholders to determine if the company is properly structured and managed to maximise performance, and the opportunities and risks of change.
Whether dairy farmers supply and own shares in MG or not and no matter where they farm, the performance of that largest co-op is an issue relevant to all Australian dairy farmers, as milk values are set by MG’s payment performance.

Like Australia’s competitors in the US and Europe will find as they embrace deregulation in the years to come, clinging to tradition is probably the worst thing farmers can do for the future of the industry.

I urge dairy farmers, their advisers and investors to attend the conference and get involved.