Death of a dairy cooperative — Part 3

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 third of this multi-part series (read part one and two), Elena Garcia provides some answers.

There are profits to be made from dairy. Murray Goulburn’s new owner Saputo is one of the top 10 dairy processors in the world. The Montreal-based company is worth more than $15 billion and processes more than 8 billion litres of milk per year into a variety of dairy products, which are sold in more than 40 countries.

Outgoing Murray Goulburn farmer director Craig Dwyer told the April 27 AGM that voted to sell the cooperative: "Now it is time to turn to the future. Globally, there is an ongoing and growing demand for dairy products. Murray Goulburn farms and factories will continue to play a vital role in producing world-class milk and dairy products, marketed under recognised brands that the new owners will take over and continue to develop."

Saputo chief executive and chairperson Lino Saputo Jr appreciated the attractiveness of the Australian dairy industry. In a speech to the Australian Dairy Conference in February, he said: “Australia is a key dairy-producing country, high quality at a competitive price. So the infrastructure was here ... And Australia also had the capability to supply the international markets, because there was excess production. So it was inevitable for us, ultimately, to consider Australia as an important platform for Saputo, in our ambitions to be a global dairy player.”

Four years ago Murray Goulburn, then Australia’s biggest dairy processor with 30% of Australia’s dairy product, was attempting to buy Australia's fourth-largest milk processor Warrnambool Cheese & Butter, but was out-bid by Saputo.

Then-CEO Gary Helou had argued for a super cooperative to be created during the bidding for Warrnambool to make Australia more competitive globally. "I still maintain that the industry is too fragmented and the promise of consolidation will come through evolution not revolution," Helou said. "There is not enough money to be made by all players in the Australian dairy market so many players will either have to consolidate or venture internationally."

Helou said expanding internationally was "no easy task", requiring long-term investment and patient capital (something little seen from Australian banks, particularly when other customers can make them bigger profits from the same resources).

He said Murray Goulburn wouldn't take part in the consolidation because it had too much on its plate. As a dairy cooperative its policy was to take all comers, which means in corporate terms it has a “relatively inefficient” supply base and has been reluctant to encourage farmers to get big or get out to “improve efficiency”.

A merger or asset sale means one fewer competitor in an industry dominated by thin margins and powerful supermarket chains that have locked down milk prices.

Get big or get out

"Get big or get out" has been a refrain of the dairy industry since its deregulation 30 years ago, when farmers had to consolidate and gain economies of scale to survive. In 1983, there were 20,060 dairy farms with an average herd size of 90; in 2014, there were 6314 with an average herd of 268 cows.

In Victoria, where most dairy farms are, total cow numbers remained the same between 1980 and 2010, but milk production doubled by more efficient uses of feed. Only about 3% of Australian farms are corporate, with most family-operated small or medium-sized businesses. But these family farms are still run on mainly rain-fed pasture.

During the same period, many dairy farms overseas have been switching to bigger and more intensive factory farming. Almarai in Saudi Arabia has a facility housing a herd of 67,000. In the United States, Fair Oaks Farm in Indiana has 37,000 cows milked 800 at a time, 23 hours a day.

Housing cows in a shed where they are milked voluntarily and food is brought to them conserves their energy for milk production — none is "wasted" on tryingto stay cool or warm, grazing or walking to the dairy. As a result of this and an optimised diet, some cows are milked five times a day and annual output can top 12,000 litres —compared to an Australian grazed dairy cow average of 6000.

Large herds remain a rarity in Australia, but in the past six years there has been a flurry of investment in factory farming in the $13 billion dairy sector from wealthy entrepreneurs and corporate investors, including mining magnate Gina Rinehart and retailer Gerry Harvey.

The corporate dairy model is very different to the cooperative model, for both farmers and cows, and there has been increasing pressure to change. Ex-Murray Goulburn dairy farmer Paul Griffiths commented: “Murray Goulburn shareholders were never paid dividends on its shares. Its shares were worth a dollar and sold for a dollar. Every farmer became a share holder 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.

“Murray Goulburn through the millennium drought returned every cent it could to drought-affected farmers. Most people don’t understand what it was once like. 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.

Smaller farms were paid less and charged more for their milk pick-ups. Productivity incentives were unobtainable to the Mum and Dad-sized farms. The encouragement was for farmers to get bigger and a lot tried but with the drought a lot folded that would have been owned outright before this mess started.”

Water

Helou’s 10 year contract to supply milk to Coles for sale at $1 a litre, and the milk processing facilities built to supply the contract, increased the pressure on dairy farmers. Even Saputo told the dairy conference: “I just don’t see how $1 milk could be viable.”

“As a consumer, when I walk into the retail outlet and I see that water is sold at $3 a litre, and milk is sold at $1 a litre, I think there is an imbalance there,” he said. Nevertheless, he has committed to honouring existing contracts.

While milk prices are locked down, the cost of electricity and water are skyrocketing. With the price of permanent irrigation water increasing to $3000–$3700 a megalitre along the Murray River, and a one-off water purchase costing $100–$150 a megalitre, using irrigated water to grow grass for dairy cows is just not viable for many milk producers in poor rainfall areas.

And climate change makes rainfall less reliable.

The Australian Dairy Industry Council predicts that three out of four dairy farmers from northern Victoria and southern NSW — who produce 25% of Australia’s milk — could walk off their farms by 2024 if the full Murray Darling Basin Plan, with its cuts of 3200 gigalitres a year of irrigation water, is completed. The loss of 20% or 234 gigalitres of annual irrigation water — enough to fill half of Sydney Harbour — from the northern Victoria region has already taken nearly 1000 jobs with it and $200 million from the value of annual milk production.

Graeme Spunner, a dairy farmer in the Riverina since 1973, said: “It’s really healthy country for cattle and the water is here, so it’s very productive too. But you need permanent water rights (bought a long time ago) to make it all add up these days. No one can make a living buying water at more than $100 a megalitre on the spot market with the current farmgate milk price of 35c a litre.”

[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.]