Murray Goulburn: Dairy crisis hits new low

May 12, 2017
A farmer makes his feelings about Murray Goulburn clear.

Australia’s largest milk processor Murray Goulburn has announced it will close manufacturing plants in three small rural towns: Kiewa and Rochester in northern Victoria and Edith Creek in Tasmania.

Murray Goulburn expects 360 people will lose their jobs. The closures are in areas where there are no other industries.

This will have a huge impact on these three local communities. The 700 residents of Kiewa-Tangambalanga will lose 135 jobs from Murray Goulburn's factory closure.

“It’s devastating to the town,” former Murray Goulburn employee Jack Britten said about the Kiewa closure. Kiewa was built around the butter factory. Most will have to move to find jobs, which will mean shops and local services like schools may close.

Murray Goulburn attributed the closures to a 20.6% slump in milk supplies and a 14.8% drop in revenue.

Sacrificing farmers for profits

These drops in supply and revenue were the result of the decision by Murray Goulburn, on the advice of then-CEO Gary Helou, to float the farmer-owned cooperative to allow outside investors to become members.

The idea was to use the funds to build more infrastructure to take advantage of export opportunities to Asia. The directors then chose to prioritise paying returns to those investors out of their $40.6 million 2016 annual after tax profit, at the cost of returns to the farmers who supply the product.

This decision is despite a clause in the prospectus that allows the company's directors to slash the dividend returns to investors, so that money could then be handed to dairy farmers in the form of a higher price per litre for their milk.

An overestimation of the global market price by Helou last year meant that when milk prices dropped below the estimate, Murray Goulburn slashed its farmgate milk price (FMP) without warning last April to $4.31 a kilogram or 33 cents a litre — nearly half the costs of production — and told farmers they had to repay the higher price they had been receiving — a total of $183 million in “overpayments”.

Fonterra, the other major Australian processor, matched the FMP drop, driving many dairy farmers out of the industry. As Helou left Murray Goulburn last May with a $10 million payout, farmers were left owing an average $120,000 “overpayment” debt each to Murray Goulburn based on payments set at Helou’s promised and “achievable” $6 a kilogram milk price.

Tucked away in Murray Goulburn’s last annual report is a remuneration report that shows the average director’s pay jumped from $85,050 in 2014–15 to $116,666 in 2015–16, a 37% pay rise. Now-retired director Peter Hawkins’ pay rose by 73% to $173,333 in 2015–16 and Finance, Risk and Audit Committee chairperson Michael Ihlein’s pay went from $100,000 to $165,000. New financial adviser management fees of more than $3 million a year added insult to injury.

Ex-Murray Goulburn supplier and dairy farmer Paul Griffiths commented: “Murray Goulburn shareholders were never paid dividends on their shares. Its shares were worth a dollar and sold for a dollar. Every farmer became a shareholder and had to buy x amount of shares for a set amount of milk volume. Farmers could borrow against these shares but the company was very stable.

“The writing was on the wall at least 10 years ago when I was still milking cows, as the smaller Mum and Dad type farms were forced to subsidise the larger corporate style farms. The smaller farms were paid less and charged more for their milk pickups. The productivity incentives were unobtainable to the smaller farms. The encouragement was for farmers to get bigger and a lot tried but with the drought and what have you a lot folded that were owned outright before this mess started.

“Along came the CEO who promised the world. I warned farmers about voting for this as they then lost control of the company. Don’t get me wrong I am a true believer in co-ops but when you have to hire someone and pay him millions to run the show, he doesn’t have the co-op's best interests at heart.

“Murray Goulburn used to return every cent it could to its suppliers. Greed caused this, the farmers’ own greed to chase a few extra dollars and allow the company to be floated.”

Cost of float

Helou’s Australian Stock Exchange (ASX) listing of Murray Goulburn raised $500 million in newly-issued capital from unit holders. But it cost 7.2% of the transaction value or $36 million in fees for the investment bankers and lawyers who advised the dairy co-op on its transformation into a partially-listed cash-eating monster — the “ongoing increased costs” of maintaining the capital structure are $3 million a year.

As for the $438 million of the $500 million that listed on the ASX — the other $62 million is owned by farmers on the grey market — by May 26 it had halved to $213.7 million, significantly less than the company owed its lenders. Murray Goulburn gave away 38% of its total equity for $460 million, all to fund grand new production facilities, including an $86 million cheese plant in Cobram to ship branded snap-frozen cheese to Asia.

As a result of Murray Goulburn forcing farmers to pay back money they had already received, many farmers abandoned the cooperative, including some of its biggest milk producers. By switching to other processors they no longer had to pay back their contracted earnings and in some cases got a higher FMP.

This walkout is what has led to Murray Goulburn’s present problems. It has lost more than 800 million litres a year to rivals such as Fonterra, reducing its milk pool to the point where it is closing facilities. It has gone from a $44 million profit last year to a $31.9 million loss for July to December, with net debt up 72% to $677 million.

Murray Goulburn made a compromise attempt it called its “Milk Supply Support Package” which spread low farmgate prices over the next three years to reduce the impact of its shock milk price drop to recover its “overpayment” bill. It also axed 200 jobs in September to cut costs and increase returns to desperate farmers, saving Murray Goulburn an estimated $50-60 million a year.

Although Murray Goulburn has abandoned this payback scheme and announced it would repay backpayments already made by farmers, traditional farmer loyalty to their cooperative, along with their trust, has been destroyed. The backdown has, however, resulted in the dropping of one of the class actions against it by farmers for the unprecedented clawback of its contracted payments.

Prosecution of executives

On April 28, the Australian Competition and Consumer Commission (ACCC) instituted proceedings in the Federal Court against Murray Goulburn, alleging it engaged in unconscionable conduct and illegally made false or misleading representations to its suppliers.

The ACCC also alleges that Helou and former chief financial officer Bradley Hingle were knowingly concerned in Murray Goulburn’s conduct. 

ACCC Chairman Rod Sims said: “The ACCC alleges that Murray Goulburn’s conduct had an adverse impact on many farmers who, as a result of Murray Goulburn’s representations regarding the farmgate milk price, had made business decisions. 

“The farmers relied on Murray Goulburn’s representations and were not expecting a substantial reduction in the farmgate milk price, particularly so close to the end of the season when it was not possible for them to practically readjust their expenditure.

"That caused the farmers considerable problems, because many had invested money based on that price. Had they had a better indication of the price, they'd have made different decisions and wouldn't have been as severely affected as some of them were.

“Many farmers are in a relatively vulnerable trading position, and rely on transparent pricing information in order to budget effectively and make informed business decisions. In these circumstances, farmers were entitled to expect Murray Goulburn to have a reasonable basis for determining its pricing, and to regularly update farmers if there was any change in forecast prices.”

The ACCC alleges that, in all the circumstances, Murray Goulburn’s conduct towards farmers was unconscionable. The ACCC decided not to seek fines against Murray Goulburn because, as a cooperative, any penalty imposed could directly impact on the affected farmers. However it is seeking declarations, fines, disqualification orders and costs against Helou and Hingle and they could face penalties of up to $220,000 per breach.

However these penalties are not going to help the communities of Kiewa, Rochester and Edith Creek and the 360 people who will lose their jobs in the closures. Their only real option to keep their communities alive is to occupy the three processing plants and continue to process local milk and direct-sell it locally to pay their wages and costs.

[Elena Garcia is a free range cattle farmer on marginal land in western Queensland  and a co-author with Alan Broughton of Sustainable Agricuture versus Corporate Greed available from Resistance Books.]

Like the article? Subscribe to Green Left now! You can also like us on Facebook and follow us on Twitter.

You need Green Left, and we need you!

Green Left is funded by contributions from readers and supporters. Help us reach our funding target.

Make a One-off Donation or choose from one of our Monthly Donation options.

Become a supporter to get the digital edition for $5 per month or the print edition for $10 per month. One-time payment options are available.

You can also call 1800 634 206 to make a donation or to become a supporter. Thank you.