How did things go so wrong, so fast at Murray Goulburn, the farmer-owned co-operative that has annual revenue of $3 billion, is the nation’s biggest dairy company, and processes 37 per cent of the 9.6 billion litres of milk produced each year in Australia?
Just a month ago, they were being paid $5.60 for every kilogram of milk solids for their milk — a price that equates to about 42c a litre. And Murray Goulburn’s pugnacious chief executive, Gary Helou, who had been at the helm of the company for five years and partially floated the company last May on the ASX via a $500 million capital raising unit trust, was promising that a return to a higher farm milk price of $6 a kilogram (45c/l) was both realistic and achievable. But just a week later, Helou was gone, as the company reported drastically different fortunes. So, too, was chief financial officer Brad Hingle.
The accompanying bad news was that the price farmers were paid for their milk was to be slashed to an average of $4.75 a kilogram (about 35c a litre) backdated for all of the 2015-16 financial year, with a warning by the company of significantly lower milk prices for three years to make up for the “overpayment” for the previous 10 months.
For every Murray Goulburn supplier, most of whom live in Victoria and Tasmania, it meant a technical “backdated” new debt to be recouped through lower milk prices over three years of about $128,000.
The shortfall Murray Goulburn is asking its farmers to cover is $200m — $30m loaded over the next two months of May and June in the form of much lower milk prices, and the remaining $170m spread over the next two years. Murray Goulburn’s own profit forecasts of $89m for financial 2016, which underpinned last July’s public listing price of $2.10 a unit, had contracted to $63m by February. Last month, they were dramatically downgraded to just $39m-$42m.
For a farmer such as Kiewa Valley milk producer Stuart Crosthwaite, 41, who runs a herd of 420 milking cows at Kergunyah South in Victoria’s northeast, the price drop meant an immediate readjustment of his farm finances and dairy business.
With an overpayment “debt” from Murray Goulburn of $130,000 to make up, Mr Crosthwaite will have to suffer an immediate 8c a litre drop in the price he is paid for his milk for May and June, from 49c to 41c.
It means his farm business will be paid less than it costs to produce every litre of milk for two months.
But cows cannot be made to stop producing milk at whim, and Crosthwaite has had little alternative but to continue supplying Murray Goulburn, the only processor that picks up milk in the Kiewa Valley, although he is happy to do so as he supports the principle of a farmer-owned cooperative
The drastically lower milk price for the next two months will recoup about $30,000 of the “overpayment” bill foisted on his farm. The remaining $100,000 will be recouped via artificially lowered milk prices paid by Murray Goulburn until 2018-19.
It’s a hit to his dairy business — which Mr Crosthwaite, like most farmers, is passionate about — that he can only handle by immediately axing all capital expenditure, culling any cows that are not top producers, and reducing operational costs on necessary expenses such as fertiliser.
“I’m disappointed. I’m watching this unfold and thinking how can this happen so quickly and all in the 11th hour of the financial year — how can they balls it up this much?” Mr Crosthwaite said yesterday.
“I’m behind Murray Goulburn’s value-adding strategy and I would like to think this will all sort itself out and we will come out the other side in the next 18 month as world prices start to pick up. But it does make me wonder if there are enough checks and balances within the system given that value-adding clearly carries a higher risk with it, and whether there should have been higher levels of accountability and risk management within MG to stop this happening.
“But my biggest disappointment, both as a shareholder and farmer, is how can you as a $3bn company that has just raised $500m (on the ASX) turnaround and overnight ask your farmers for $200m back — it seems very unprofessional.”
There are fears 20 per cent of Murray Goulburn’s 2600 farmers — especially young farmers starting out with large bank debts — will not be able to weather the current storm.
United Dairyfarmers of Victoria president Adam Jenkins is angry at how the crisis has unfolded, with second-biggest milk buyer Fonterra following with its own price cuts a week after Murray Goulburn.
Mr Jenkins is demanding Murray Goulburn answer the growing number of serious questions raised in the wake of the announcement by Australia’s biggest milk processor that its farmer suppliers will have to “repay” an average $120,000 to Murray Goulburn because of “milk overpayments” since July last year.
His questions are similar to those now being asked by Australia’s two corporate watchdogs, ASIC and the ACCC, in their own formal investigations into Murray Goulburn. Was Mr Helou’s promise to Murray Goulburn’s farmer-owners last May of a high $6-a-kilogram milk price a misguided pitch or a lure to get them to agree to vote in favour of a partial listing of the co-operative, which was always unsustainable and high risk?
Was Murray Goulburn’s decision to supply large volumes of $1-a-litre home-brand milk to Coles in a very low margin contract a major flaw in its business strategy? Was there corporate mismanagement? Where enough checks and balances put in place by the board on Mr Helou’s upbeat forecasts?
How much can the company’s collapse and the yawning $140m gap between Mr Helou’s sale forecasts in prospectus documents last May and the cold hard reality revealed in the past fortnight all be blamed — as Murray Goulburn claims — on low global dairy commodity prices given less than 30 per cent of the company’s 3.6 billion litres of milk is sold as relatively unprocessed, low-value bulk export milk powders, and half of all dairy produce is sold domestically.
And, the big question the corporate world is now asking, is whether proud and mighty Murray Goulburn — with its ASX share price at a lowly $1 a unit and high levels of debt — is facing its own cash crunch.
Murray Goulburn chairman Phil Tracy is adamant on the last question.
“There is no question about MG’s solvency. The capital structure, the $500m that was provided (via the partial ASX listing) has given us a real balance street strength to navigate through this bulk commodity rout,” Mr Tracy told The Weekend Australian yesterday. “Our total debt, while we haven’t given a revised debt number since the March accounts, we are still at the bottom edge of our gearing ratio, which I am very comfortable with.”
Mr Tracy, who has steadfastly resisted calls for his resignation despite being closely aligned to Mr Helou, is equally angry at claims of mismanagement, or a chief executive with too much power.
He also believes the move towards more valued-added processing to produce dairy food products such as yoghurts, infant formula, speciality cheeses and high-value nutritional powders and drinks to reduce the company’s exposure to volatile global bulk markets was, and remains, the right move. Up to 70 per cent of Murray Goulburn’s milk volume now goes to produce value-added dairy foods, with just 5 per cent or 180 million litres of its milk pool becoming supermarket $1-a-litre milk.
Mr Tracy attributes the unexpected profit and sales crash — which he claims to have no knowledge of until the April board meeting — to two factors.
First, the global commodity prices for bulk skim milk powder and whole milk powder failed to recover as predicted from the start of 2016, instead continuing their downward spiral as the global dairy glut continued.
While Murray Goulburn’s direct exposure was small, Mr Tracy said it had a disastrous impact on sales of the company’s new “star performer” product: 1kg sachets of instant full cream milk powders it was selling to China at a high value-added margin.
Sales for the first six months of 2015-16 were up 300 per cent on the same time last year, with Murray Goulburn constrained by its packaging capacity to meet the new China demand. Mr Tracy said the company invested at low cost in new plant in the knowledge it was sales of this product alone that were enabling it to prop up the milk price it paid its farmers to $5.60 a kilogram. But the export demand from China for these instant powder packs slumped alarmingly this year.
Instead of the 46,000 tonnes Mr Helou had budgeted on selling in 2015-16, just 16,000 tonnes was sold to December, with demand then almost stalling. At the end of the March quarter, less than half of all these stocks of sachets — valued at $7500 a tonne — had been sold, leaving Murray Goulburn with a stockpile inventory of about 20,000 tonnes, valued at about $150m.
Mr Tracy will not confirm these figures, and points out the inventory is not a stock write-off since it is not perishable and can be sold later. But the stockpile had to be included in the accounts at raw material cost price, deeply affecting profit forecast.
“This was our star performer and was the significant segment filling the gap (to keep farm milk prices) at $5.60 a kilogram — but when the sales didn’t eventuate, by the time we got to the April board meeting we knew we couldn’t meet our June profit forecasts,” he said. “By the end, the fall in commodity prices was too big, for (the sachet sales) to cover and protect us from the rout. I still think the (value-adding) strategy is exactly right, but we are dealing with incredibly difficult market forces.”
Investment banker David Williams of Kidder Williams is less forgiving. He doesn’t believe the blame of Murray Goulburn’s misfortunes can all be attributed to packets of instant milk or global market forces, as convenient as that may be.
“There is no doubt they did get into problems in export markets and being forced to pay too much for their milk because ‘Gary the Great’ had staked his position on the $6-a-kilogram milk price. But that is not the real reason,” Mr Williams said. Instead he points to the dual co-operate and listed structure of Murray Goulburn.
“As soon as you tie a 7.5 per cent yield (share dividend) umbilically with a $6-a-kilogram milk price paid to your farmers, through combining the co-operative with a (partial listed) forward instrument, you are by definition going to blow up the company under certain global or export pricing scenarios — and that’s what has happened now.”
Source: The Australian
