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Australian dairy has a precious chance to ‘get it right’

The heart of Australia’s dairy industry in Victoria is struggling through one of the toughest winters in living memory – as some milk companies continue to send farmers to the wall with undoable opening milk prices.

Mud sticks and none more so than the mud on Murray Goulburn’s reputation. As some farmers deal with a tough winter – they are also facing milk pricing challenges they never dreamed could happen. Photo: Sheila Sundborg

Mud sticks and none more so than the mud on Murray Goulburn’s reputation. As some farmers deal with a tough winter – they are also facing milk pricing challenges they never dreamed could happen. Photo: Sheila Sundborg

Farmer co-operative Murray Goulburn historically led the industry on pricing, processing more than one-third of Australia’s 9.6 billion milk pool. But the rhetoric has been hot and heavy since the news broke that the co-op would struggle to meet half of its net profit forecast that was outlined in the prospectus for its partial float on the Australian Stock Exchange (ASX) less than a year ago.

The feedback from other processors is damning – when it comes to the management strategies MG used and has tried to justify.

To recap

MG’s Managing Director, Gary Helou — who was MG’s highest paid CEO in history — resigned April 27, after he massively overestimated sales figures, plunging the company’s 2400 suppliers into a financial tub of iced water.

If that wasn’t bad enough, Fonterra then announced the price it paid its farmer-suppliers would immediately drop from between $6 and $5.60 for every kilogram of milk solids to just $4.75-$5/kg — equivalent to as little as 35c a litre of milk.

And it got worse

Not only would prices be slashed immediately, but they would be backdated or imposed retrospectively to the beginning of the 2015-16 financial year or milk season.

This meant that every litre of milk sold to MG and Fonterra during the past 10 months — for which farmers have already been paid — they are now paying back.

MG and Fonterra have offered low-interest loans, repayable after three years.

Or, the debt can be erased if suppliers accepted 14c a litre for their milk for the two months until July.

Some farmers could see no way out, and sent whole herds to slaughter. Suicides have become an overwhelming concern for the industry.

And opening milk prices (stripping away the confusing layers of smoke and mirrors) from July have been cold comfort – MG at best is $4.45/kgMS or 34c/litre and Fonterra has announced at $4.75/kgMS or 36.5c/litre. Australia’s cost of production is closer to 45c/litre. And one of the MG directors also named in the lawsuits that have followed MG’s fall from grace – Philip Tracy – remains as MG’s current leader.

Where to now

Increasingly, it appears the only way for Murray Goulburn (MG) to pave the road to recovery is to appoint an honest and approachable Chief Executive Officer (CEO), who understands the dairy industry and appreciates its co-operative culture.

Farmer lobby group Farmer Power rose up and has called MG on everything, asking for a 50c levy to be imposed on milk sales. Meanwhile, industry appointed industry watch-dogs (supported by farmer levies) have struggled to find their teeth.

Urban ally

Presenter Waleed Aly from Melbourne television show “The Project” (the 2016 Gold Logie winner) arguably did more for the industry in one newscast than many have ever been able to do. The result? The consumer listened. And sympathised. And bought branded milk. It proved one thing: the urban audience values Australian farmers.

Supported by intelligent and dogged journalism across mainstream media, MG — in particular – had few places left to hide.

Joe Aston, of the Australian Financial Review newspaper, called MG out for allowing Philip Tracy to take MG’s helm, given he was part of the initial board.

“Hasn’t Murray Goulburn’s Philip Tracy picked up right where ousted chief executive Gary Helou left off?” he wrote. “The dairy Chairman had an opinion piece in Melbourne’s Herald Sun on Thursday, which we’re seriously considering framing – so memorable it is for a scarcity of logic.

“Remember that on his watch, Murray Goulburn loaded the balance sheet with debt to lock in a decade of volume growth at paltry margins, failed to penetrate with its relaunched Devondale brand, and repeatedly fell short of profit forecasts, all while unrealistically promising its farmers $6 per kilo for milk solids, then retrospectively yanking it back to $4.75 and diluting 38 per cent of their equity to outside interests.

“Yet now Tracy sheets the blame to falling global dairy commodity prices and the fact that ‘Australia produces 35% more milk than it can possibly consume’.”

Trouser-deal stink

The journo also disagreed with Philip Tracy’s argument that MG’s 10-year contract to supply Coles with private-label milk was a “very good deal for our farmers”.

“Sorry, but the Coles deal is a stinker for Tracy’s farmers. The contract includes a rise-and-fall provision so Coles trousers the greater margin when commodity prices are lower. And if, as Tracy claims, Coles is paying MG a premium above the farm-gate price (and who knows which price he’s talking about – the real price or the one he recently foisted on his suppliers), then why aren’t the farmers seeing any of it flow back to them? Oh and that ‘much-needed investment’ he’s talking about are the factories (built with bank debt) that pump out more milk than anyone can drink, thus creating the oversupply he was earlier blaming for MG’s woes. Go figure.”

No one had to go far to find the bad guys in this story – it lands at MG’s door, and to a lesser degree, Fonterra’s.

It led to May 16, when class action specialist lawyer Mark Elliott launched legal proceedings on behalf of unit-holders in MG, alleging the dairy company and its board misled investors in a product disclosure statement (PDS) issued last May. (Mark Elliot is a former partner of Minter Ellison, but in the past couple of years alone, the now-sole solicitor has launched several shareholder class actions, including against Banksia Securities, Leighton Holdings, Treasury Wine Estates, Downer EDI and WorleyParsons.)

In a statement of claim filed with the Victorian Supreme Court, Mark Elliott alleged MG knew sales forecasts in the PDS were “unlikely to be achieved” on the very day it filed the fundraising document, May 29.

Enter the watchdogs

The action comes on top of investigations by corporate regulator the Australian Securities and Investment Commission (ASIC) and competition watchdog the Australian Competition and Consumer Commission (ACCC).

Mark Elliott, who is acting for lead plaintiff John Webster (as trustee of Elcar Pty Ltd Super Trust Fund) in the class action, alleges every member of the Board at the time — including chairman Philip Tracy and then-CEO Gary Helou — are liable to pay compensation because they “each consented to the inclusion of the misleading PDS representations”.

Mark claims MG breached the Corporations Act by failing to disclose any problems when it listed on July 3, 2015, even re-affirming its forecasts as late as October 26, at its annual general meeting.

MG units plunged on February 26 this year when the company initially downgraded its profit forecast, and again on April 27 when it released a second downgrade.

The Directors who were named in the lawsuit are: Philip Tracy, Gary Helou, Kenneth Jones, Natalie Akers, William Bodman, Peter Hawkins, Michael Ihlen, Edwin Morris, Graham Munzel, John Pye and Martin Van De Wouw.

Damning words of fairness

One of the most damning commentaries came from Bega Cheese’s CEO Barry Irvin later in the proceedings. He resisted saying anything publically for a month, but in the end it became too much for him.

“It’s an emotional thing for me,” Barry said. “Trust is built by your actions, it’s not built by rhetoric. It’s built by actually doing things and understanding the impact of those things on the people that do indeed trust you.

“We’re a very polite industry, the dairy industry. We don’t name people and I actually think the trust is also cultural, and I think if we don’t be public and we don’t address this [MG’s price cuts] in a very direct way, we will see this happen again, and again and again.”

“When MG cut the price — and I want to be fair here — no one was mentioning Fonterra because they were openly saying the price was too high. Not only do they [MG] cut the price, they elect to hold a profit, and that doesn’t feel fair to me. And it doesn’t feel like it builds trust.”

Collective ‘fluff’

“The actual price for May and June is almost impossible to work out because it’s hidden by something that is called a ‘milk supply support programme’. It sounds like a collective loan to me.

“If you give somebody money, and you ask for it back with interest, to me that’s a loan, and that’s what it should be called. And the speaking should be plain.

“Why did we [Bega Cheese] not drop our price? Because it was the wrong thing to do. Bega had to hold its price because that’s the commitment we made. Whether it’s legal or whether it’s moral I don’t actually mind. It’s a moral commitment so I’ll hold and I’ll take the pain and I’ll build trust over a long period of time — by my actions, not by my words, and not by my rhetoric.

“And so for me, this is about actions, demonstrating that you’ve thought very deeply about the lives you affect. I had a 26-year MG supplier who burst into tears while she was begging me to take her milk. That’s not what we should have in this industry. We have a long way to go to build trust back.

Unfair impact

“Sadly, for me I’ve spent my life trying to build trust and I am actually impacted by this. Because suspicion doesn’t stop at a particular company — the damage to the industry goes across the industry.”

Gippsland-based Burra Foods has also been open about its position, with its CEO Grant Crothers not mincing words.

Its website says: “We all know we are in a volatile and cyclical industry, but the selfish disregard that MG has shown to its supply base is culpable (which may well be confirmed by ASIC, ACCC and/or a Class Action).

“The cycle is against us, as has been the case for some time now. Fonterra NZ was honest about the outlook some 12 months ago, enabling the NZ industry to prepare as best as possible for the cyclical low, whereas our ‘industry leader’ decided their new business model could withstand the downward pressure.”

Less honesty, more fallout

“At Burra we were extremely suspicious and gave as many indications as possible that a $6 or even $5.60 milk price was unsustainable. In the end, MG could not defy gravity any longer and the fallout is significantly worse than if they had been more honest with themselves and their stakeholders at a similar time as Fonterra NZ.

“Personally, I am ashamed to be grouped as a processor with MG and recently refused the opportunity to sit on a panel with [Philip] Tracy as I don’t want to be grouped as a processor with the current MG Board and senior management. I have more invested in the industry than most, have been adding more value to it than most for an extended period of time, and I value transparency and communicating the best information possible to stakeholders — our values refer to it as respect.”

Hubris contained at MG

Grant Crothers went on to say that dairy is viable going forward.

“This speed bump is a steep one, made worse by management hubris at the largest processor. Thankfully there is competition in our industry and that some organisations have a stronger set of values than MG, the financial hybrid that continues to refer it itself as a Co-Operative.”

The in-house commentary appears to overwhelmingly support a clean slate for MG with fresh legs, fresh ideas, more transparency and less jargon-loaded press releases.

Co-ops have a place

Paul Kerr, CEO and Executive Director of Australian Dairy Farmers Corporation (ADFC), says he still believes in the co-operative model, and that MG should be the leading co-operative in Australia.

Paul spent 27 years at MG, including 11 as its COO. He is a current member of accounting body CPA Australia, and the Governance Institute of Australia.

He says that dairy-farming nations in the western world are dominated by co-operatives and without that model, farmers have “no chance” of a fair price.

“People will say they are only taking the market price in a co-operative. But they are also having a say in the costs up the chain, and what markets they’re going into – not just getting what someone wants to pay them,” Paul says.

Processors must collaborate

Paul also believes the future of the dairy industry lies in the 250-500-cow family farm.

“Because it is the family farm that can manage the market volatility, and it has the heart to manage its cost structure and it can weather the storms. There’s nothing like a family farm. We should be trying to create a lifestyle. That’s what we’ve got to get back in to in the industry. It’s a people game, and farming is about farmers being profitable. It’s not about big corporations and robots.”

He hopes for more collaboration between processors moving forward in a way never before achieved.

“We need this industry to be attractive to our younger people. We have got to make sure farms are profitable. And as milk processors, we should also be collaborating with other companies to take the costs out of the supply chain.”

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Check out more great articles like this in the latest edition of Crazy Cow In Print

Anger will die down…

He said farmer apathy would help no one.

“Dairy farmers are angry today. They’ll be a little less angry tomorrow. It’ll die down. It’ll rain, the grass will grow, the cows will start calving and all of a sudden it’s the peak of the season. You get tied up in your own world. It’s human nature.

“If I’m really positive about all of this, I see it as farmers having a great opportunity right now to move forward in a positive way.”

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