Oz co-op leaks milk as supplies leave

Suppliers have either moved to other processors or retired from the industry.

The co-op angered suppliers by retrospectively cutting milk prices in April. And a controversial support package of three-year loans offered to farmers in April has also come undone.

MG, Australia’s largest dairy co-op, acknowledges the loans had been counter-productive, with farmers feeling less loyal to the company. As farmers leave the partially listed company, those remaining are left having to repay more.

Replying to questions posed by suppliers, MG says about 240 of its 2400 suppliers have left, from all regions.

“Also, MG’s overall milk supply is down year-on-year due to wet weather during the start of the season.”

The co-op says it plans to reduce manufacturing costs in line with milk supply to insulate the farmgate milk price.

“We also have flexibility to move supply between plants to maximise efficiency.”

Farmers have asked the co-op to tell them how great the milk supply losses would have to be to cause a serious problem.

MG says it understands the loss of confidence among suppliers.

“We are working hard to improve the farmgate milk price to start to rebuild this confidence and limit milk supply loss.”

The co-op says it will consult more with farmer suppliers on the farmgate milk pricing structure.

“This was last fully reviewed in 2013 and significant changes were made then, including moving more payments into the peak base price and moving to a single base price. MG will continue to talk with suppliers about how to best distribute the milk pool.”

Farmers also asked MG why it cut milk prices after only a slight decrease in revenues in the 2016 financial year.

MG says lower revenues in ingredients were driven by lower commodity prices.

“This has not impacted the cost of ingredients products and therefore this reduces margin to the extent of the commodity price reductions.

“In addition, higher costs in distribution, sales and administration and higher volumes of inventory at June caused larger inventory revaluation than in previous periods.”

Directors fee under scrutiny

Murray Goulburn farmers, facing retrospective milk price cuts, are backtracking on their approval of a rise in the director fee pool.

In May last year, 75% of shareholders voted in favour of increasing the pool size.

MG says an independent benchmarking review by Ernst & Young last year showed its director fees were well below the average for similar size companies.

“As the setting of the director pool is a shareholder matter, this increase was put to shareholders at a meeting in May 2015, called to approve the capital structure,” the company says.

“Suppliers agreed, about 75% voting in favour of the fee increase.”

The board unanimously agreed to waive directors’ fees for May and June because of the co-op’s plight.

Telling its story

Murray Goulburn says it is working on a new advertising campaign to emphasise its need for support.

The co-op is 100% farmer controlled.

The ads will tell consumers that Australian dairy farmers are committed to making high quality dairy products.

The co-op has also sponsored the recent television series of MasterChef.

MG is under pressure from farmer shareholders to boost revenues.