Death of a dairy cooperative — Part 4

May 25, 2018
The transition from cooperative to corporation is almost complete for Murray Goulburn.

How did Murray Goulburn, once Australia’s biggest milk processor and a successful dairy cooperative since 1950, end up being sold to its international competitor, Canadian dairy giant Saputo? In the final part of this series (read), Elena Garcia provides some answers. [You can also read part one, two and three.]

Despite the profitability of the Australian dairy industry and its claims to support “innovation" and "jobs and growth”, the federal government refused to step in and help Murray Goulburn expand into untapped Asian markets.

Government refuses to help

Its initial response to the crisis in the cooperative was to offer more loans to farmers already drowning in debt and a welfare payment for farmers with no income, which in practice is extremely difficult to access.

Murray Goulburn farmer director Craig Dwyer told the October 2017 Annual General Meeting (AGM) that he and CEO Ari Mervis had talks with then-Deputy Prime Minister Barnaby Joyce two weeks previously about a possible short term loan. "The outcomes of that conversation [with government] were that it is not an industry problem but a Murray Goulburn one, so it was suggested that we needed to find a commercial resolution," he said.

"I asked the Deputy Prime Minister directly whether he wanted Murray Goulburn to stay in the current industry. The option of short-term loans for Murray Goulburn to buy itself some time to trade out of the situation was flagged but it was clearly understood firstly, that it would be challenging to secure government agreement, and secondly, any loans would still have to be repaid in full at a point in the future."

Small farmers going broke is very convenient for big corporate donors to the major parties. Prime farmland resumed for the cancelled Mary River dam ended up being sold to Gina Reinhart for her dairy factory farming projects. As the Murray Darling Basin Plan takes water from irrigators, corporate water speculation and profiteering is on the increase, and big irrigators have influence with Barnaby Joyce and the Nationals.

Irrigated dairy farmers have been the biggest losers in the cuts to water licences across the southern basin under the Murray-Darling Basin Plan, which is making water scarcer, less reliable and dearer to access.

Low milk prices, the end of the long millennium drought and the Murray Goulburn dairy crisis have resulted in many dairy farmers around Shepparton and the Goulburn Valley selling their water rights in government buybacks or to alternate agricultural users, such as more profitable nut or fruit farmers, to pay down debts and ease bank pressure.

Winners and losers

On February 29 2016 Murray Goulburn forecast a farmgate milk price (FMP) of $5.60 a kilogram of milk solids (kg MS) for that financial year. Two months later they announced a drop to $4.75/kg MS. Two years after that the co-op was sold.

Under the deal with Saputo, the farm gate milk price paid to farmers will be increased by 40¢ to $5.60/kg supplied from November 1 2017, with active suppliers to receive an additional 40¢ loyalty payment bringing them up to $6/kg. They will also get up to 40c/litre backpay for milk supplied from July to October 2017 (after the resolution of all the legal issues and liabilities) that would bring the $4.95/kg FMP received up to $5.35/kg. This FMP is in line with Warrnambool Cheese & Butter, while Fonterra's is $5.50/kg MS, and Bega's is $5.53/kg MS. However Murray Goulburn will also retain a large chunk of proceeds of the sale to deal with its liabilities, which could take years to finalise.

"We intend to continue to pay leading competitive milk prices to farmer suppliers in Australia so they can reinvest and grow their businesses," Saputo's chairperson and chief executive Lino Saputo Jr said. But there is no word on whether they will maintain the farmer assistance infrastructure programs set up when it was a cooperative.

In September 2016 the co-op axed 200 jobs to cut costs and increase returns to desperate farmers, saving an estimated $50–60 million per annum. Another 360 people will lose their jobs with the closure of manufacturing plants in three small rural towns — Kiewa and Rochester in northern Victoria, and Edith Creek in Tasmania — areas where there are no other industries. Many farmers will now be too far from a processing plant to sell their milk.

Skimming the cream

Meanwhile the corporate managers are laughing all the way to the bank.

Former chief executive Gary Helou left Murray Goulburn in May 2016 with a $10 million payout for his five years with the co-op. Under his management Murray Goulburn went from a $40.6 million annual after tax profit in 2015–16 to a $31.9 million loss for July to December 2016, with net debt up 72% to $677 million.

The average director’s pay jumped from $85,050 in 2014–15 to $116,666 in 2015–16, a 37% increase. Board directors’ fees then rose by a further 38% in 2015–16 and went up again in 2017.

Now-retired director Peter Hawkins’ pay rose by 73% to $173,333 in 2015–16, and specialist director and Murray Goulburn’s Finance, Risk and Audit Committee chairperson Michael Ihlein’s pay went from $100,000 to $165,000 in 2016 and to $183,089 in 2017.

In total, the directors were paid just under $2 million for 2017, a year when Murray Goulburn made a $370.8 million loss after tax. This was nearly $300,000 more than the director payments in 2016, when Murray Goulburn made a $39.8 million profit.

New CEO Ari Mervis received more than $1 million for four and a half months work in 2017, while farmers were making a loss with a milk price of $4.95/kg MS and supplies dropped. More than half of that was a performance-related bonus.

Investors profit

Helou’s listing of Murray Goulburn on the Australian Stock Exchange (ASX) raised $500 million in newly-issued capital from unit holders but cost $36 million (7.2% of the transaction value) in fees for the investment bankers and lawyers who advised the co-op. This was in a year when Murray Goulburn made only $40.6 million annual profit after tax.

The directors then chose to prioritise paying returns to investors out of that profit, rather than setting a FMP that would allow the farmers to at least cover their costs. Instead, the FMP was slashed and farmers were hit with a $183 million "overpayment" bill, an average $120,000 “overpayment” debt each.

Murray Goulburn also gave away 38% of its total equity for $460 million to fund grand new production facilities, including an $86 million new cheese plant in Cobram to ship branded snap-frozen cheese to Asia.

These new assets now belong to Saputo, along with the existing assets and the milk supplies, for the bargain basement price of $1.31 billion. The deal values Murray Goulburn at $638 million if the full $1.15 per unit/share is paid out.

Chairman John Spark said once the deal completes, Murray Goulburn will continue to exist as it manages shareholder class actions and defends ACCC legal action for misleading conduct. It will then be liquidated and any proceeds distributed equally between farmer shareholders and investor unit holders.

At that time the transition from cooperative to a corporation will be complete.

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