Death of a dairy cooperative — Part 1

May 3, 2018


How did Murray Goulburn, once Australia’s biggest milk processor and a successful dairy cooperative since 1950, end up sold to its international competitor, Canadian dairy giant Saputo? In the first of this multi-part series, Elena Garcia provides some answers.

After nearly 70 years as a cooperative that was wholly owned by the farmers who supply the milk, on April 5 Victorian dairy farmers voted to sell Murray Goulburn, once Australia’s biggest dairy processing business, to foreign owners.

The $1.31 billion deal, unanimously supported by the Murray Goulburn board, includes the cooperative’s operating assets and liabilities, including the 10-year contract to supply Coles with $1 a litre milk. Saputo officially took over Murray Goulburn on May 1.

After a campaign, begun by Murray Goulburn directors at the annual general meeting on October 27, to present the sale as the only way to protect the cooperative from the banks, nearly 96% of farmer shareholders voted in favour of the takeover deal by Canadian dairy giant Saputo.

But the farmers were furious.

They had arrived at the annual general meeting expecting offer updates from their board, only to learn the cooperative had already been sold to Saputo.

Gavin Williamson of Tinamba told the Weekly Times: “We have got no choice. … To get out of the situation the company is in, it’s pretty much has got to happen. If farmers vote no, we could end up with nothing. The company is crippled with debt.”

Iona McJames of Pound Creek said: “I’m angry at the lack of disclosure to us. It wasn’t until we were on the bus on the way to the AGM [that we heard] … We’ve been left in the dark.”

How it all went wrong

For more than sixty years Murray Goulburn had returned all its profits to its farmer owners by paying them the best price possible for their milk.

To look after its members, Murray Goulburn had rural produce stores, fodder purchasing schemes, a broad farm services team, generous loan schemes, a New Generation fund for farm expansion and a milk vat scheme. Its processing plants were major employers in eight rural towns.

Paul Kerr was Murray Goulburn’s CEO from 2000 to 2011. In August 2016 he told ABC’s Four Corners: “Murray Goulburn is the most important company in the dairy industry. It's not about making profits, it's about paying the best milk price for the farmers and that's what's important.

“Murray Goulburn historically is like a big family. It's not like any other corporate business. It acts on behalf of its farmers. Everyone at Murray Goulburn knew what they were there for, even the guy on the floor. They weren't there for some investor or someone outside the business; they were working for the farmers and people were proud of that fact.”

But in 2011 corporate high-flyer Gary Helou took over as CEO and corporatised the cooperative’s structure and policies. Helou's mantra was growth. He preached expansion to Asia and world markets.

He signed Murray Goulburn up to a groundbreaking 10-year contract with Coles, supplying milk to be sold for $1 a litre. He convinced the farmers to allow a partial float of the company on the Australian Stock Exchange to raise $500 million to invest in new processing facilities for products targeted at growing Asian markets.

As farmer Paul Mundy told Four Corners: “Gary certainly very strongly encouraged us to believe that yes, absolutely, with growth would come greater revenue and greater profits.”

The unprecedented partial float presented conflicts of interest between farmers and investors. The farmers want no profit and all returns paid to the farmers as higher milk price, but investors want maximum profit and that means lowest price paid to the farmer.

Farmers were told there would not be a problem because their milk price would be linked to the dividends paid to investors. Gary Helou’s salary was also linked to the milk price.

But when the bottom dropped out of global milk prices in 2016, the Murray Goulburn directors chose to prioritise paying returns to the investors out of their $40.6 million after tax profit.

Despite a clause in the prospectus that allows the company's directors to slash the dividend returns to investors and give that money to dairy farmers in the form of a higher price per litre for their milk, Murray Goulburn chose to slash the farmgate milk price from $6.05 a kg to $4.31 a kg or 33¢ a litre — half the cost of production.

In a shock move, Murray Goulburn then told farmers to pay back the high milk prices they had been receiving for the past 10 months. Farmers were left owing an average $120,000 “overpayment” debt each to Murray Goulburn.

Instead, farmers walked away from the cooperative.

By April last year, Murray Goulburn was forecasting to collect 1.9 billion litres for the year, nearly half the 3.6 billion litres it collected two years before. The Melbourne-based processor had lost its position as the nation's biggest milk processor.

Farmgate milk price

Farmers were already angry at the $1 a litre milk deal with Coles that valued their product cheaper than water. The April 2016 cut to milk prices meant it was costing farmers far more to make the milk than they could get for selling it. The situation became so desperate that a large part of the national dairy herd was sold for meat, as milk was near worthless, and many farmers walked off their farms for good.

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 shock of its price drop and attempt to recover its $183 million “overpayment” bill.

However, farmers who leave Murray Goulburn cannot be legally pursued for the $183 million collective “debt” on milk prices they were paid in 2015–16, which the company claimed it was owed. So, angry and desperate farmers left the cooperative in droves.

In May last year, in moves to restructure its finances, the cooperative dropped the support scheme, shut down three plants and cut 360 jobs. But the farmer exodus continued because the farmgate milk price was still too low for farmers to survive.

In the 2017–18 financial year, Murray Goulburn opened farmgate milk prices at $4.70 a kg for milk solids, but within two weeks it was forced to raise them to $5.20 a kg to stop even more farmers leaving. In the six months to December 31, its milk intake dropped a further 30% to 1.1 billion litres.

The only benefit to farmers of the sale to Saputo will be a rise in the price that Murray Goulburn pays them for their milk.

As ex-Murray Goulburn dairy farmer Paul Griffiths told Green Left Weekly: “At the start of each season Murray Goulburn would issue the prices per months you were guaranteed to get for the year as a minimum. Murray Goulburn had field officers who would come and do budgets based on your history and this gave you a budget to work from, and because you had the farm’s history it was a very accurate picture of what you could expect. These figures supplied to us each season were always described as a guaranteed minimum price.

“Murray Goulburn would also tell us how many price step-ups we would get through the year and when they were likely to be. If you have never run a dairy farm you may not understand that the cows’ production is largely driven by the farmer and how he feeds the cows each season.

“Based on the figures and other information the farmers have, they formulate a plan for the season. But all the farmers caught up in this mess were, I think, nine months into the season when the rug was pulled from under them.

“The figures from Murray Goulburn were so respected, banks would lend the farmer money against these figures so the farmer could buy feed before summer and the feed crunch.

“The farmers may have brought this on themselves by allowing the float with their greed for a few extra dollars. But Murray Goulburn’s actions are borderline criminal. The figures they provided for each farmer were as good as money in the bank. And the banks thought this as well.”

Read part 2 of the article here.

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

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