Murray Goulburn finds it’s all going sour, very fast

SUE NEALES
June 7, 2017
The Australian 

Murray Goulburn, Australia’s biggest dairy processor, admitted it was in a fight for survival when it announced yesterday it could­ ­afford to pay dairy farmers only 36c a litre for their milk ($4.70 per kilogram of milk solids) from next month.

The price is so low — less than the average $4.95 a kilogram Devondale farmers are being paid — that it almost guarantees dozens more milk suppliers will walk away from the beleaguered co-op.

Even if MG manages to lift its farmgate milk price to $5.20-$5.40 a kilogram during 2017-18 as new CEO Ari Mervis says he hopes to do, it leaves the once mighty farmer-owned co-operative a long way behind the expected $5.70-$6.10 a kilogram being offered in the new season by rival Fonterra.

Other processors Bega Cheese, Bulla, Burra, Lion and Warrnambool Cheese & Butter have also moved closer to paying $6 a kilogram.

But MG has little room to ­manoeuvre. Its debt load was already at $677 million in December. And that was before another $146m of debt was added to its balance sheet when Mervis scrapped the “clawback” of already paid milk cheques from farmers that the company had classified as “overpayments” in 2015-16. 

MG yesterday said it hoped its debt would have been reduced to $480m by the end of this financial year.

But it is hard to see how, when the company is not set to close its three doomed milk factories at Kiewa, Edith Creek and Rochester until later this year or early next and will have to meet substantial redundancy payments and plant closure costs as 380 workers lose their jobs.

Underlying MG’s pessimistic farmgate milk price are two key problems. The first is that the race for scarce milk supply is now on in earnest. 

Rock bottom farm milk prices, poor export markets and a wet 2016 season has seen Australia’s once buoyant 9.7 billion litre ­national milk pool — most if it produced in Victoria, southern NSW and Tasmania — contract at least 8 per cent in the past year to below 9 billion litres a year.

In the same period, MG has lost 30 per cent of its milk supply, down from 3.6 billion litres to just 2.5 billion litres. The number of farmers supplying it has shrunk from 2500 to 2000. 

But MG’s loss has been the gain of other major export processors. And now that MG has been forced to offer a continuing miserable price to its farmers from July, the competition is likely to get only fiercer.

While Bega Cheese-Tatura has pretty full supply books, Fonterra is looking for more milk to boost throughput at its factories and to ensure its soon-to-open $160m Stanhope cheese factory is running to capacity.

An aggressive Warrnambool Cheese & Butter is moving some of its milk trucks to cover major dairy districts in northern Victoria now deserted by MG.

The second underlying issue for MG is that it still has not been able to regain the trust and loyalty of its farmer-shareholders.

Despite the best efforts of straight shooter Mervis, MG farmers no longer see the dairy processor as their own co-op­erative.

The part-listing of MG on the ASX in mid-2015 has turned it — in the minds of many farmers — into just another soulless corporation, which believes faceless investors now take precedence over the interests and concerns of its farmer-shareholders. 

Mervis tried to remind dairy farmers yesterday that MG remains “their business, their co-­operative”, when he quietly implored suppliers that no more of them leave.

If milk supply falls below its current 2.5 billion litres, he said it would be hard to increase milk prices any time soon for any of them. And at that point, the company’s viability will be in serious doubt.