Dairy shake up

SOUTH Gippsland farmers could abandon the industry and rural businesses will be impacted after dairy company Murray Goulburn (MG) slashed its milk price last Wednesday.

Farmers have been left feeling misled and disheartened by the sudden decision that comes on the back of high feed bills after one of the worst droughts in the region’s history.

MG will cut its farmgate milk price to $4.75 to $5 per kilogram of milk solids for the rest of the season.

The dry conditions have forced many of the region’s farmers to rely on fodder brought in to keep cattle going, expecting the milk price to remain at $5.60kg/MS.

Fortunately, Fonterra has retained its price at $5.60kg/MS and Burra Foods has committed to its price.

In an announcement on the Australian Stock Exchange on Wednesday, MG said $5.60kg/MS was “no longer achievable”.

MG managing director Gary Helou stepped down from his role and chief financial officer Brad Hingle also resigned.

MG is expecting no changes to the current board of directors or job losses from the Leongatha factory.

Matt Harms from Onfarm Consulting said while he does not expect forced sales of farms or mass desertion from the industry, the combination of low milk price and drought could see some farmers “shut up shop”.

“Some farmers in precarious financial positions may find it hard to go on,” he said.

Mr Harms said the impacts of the MG announcement were still filtering through.

“Essentially, what it is going to do is affect farmers with autumn calving herds quite dramatically this season,” he said.

“Spring calvers are not going to see an immediate impact on cash flow in May and June, however it will impact everyone over the next three years.”

Mr Harms said morale within the dairy industry was hitting rock bottom.

“While it is early days, the key message for farmers is to focus on growing grass when there is moisture,” he said.

“They will need to operate as low cost as possible and critically, farmers will need to budget and know what their break even milk price is.”

Leongatha South MG supplier Gordon Vagg said the cooperative’s inability to maintain a farmgate price of $5.60kg/MS was going to have a widespread impact on farmers.

He is also devastated the cooperative will be losing Mr Helou, who in Mr Vagg’s opinion was “the best thing to happen to the company in the last 30 years”.

“At the last supplier meeting, we were told the price would stay at $5.60kg/MS so lots of farmers have spent tens of thousands of dollars on feed trying to get through,” he said.

“Everyone is going to have to tighten right up. Even at $5.60, farmers were just breaking even.”

When listed on the Australian Stock Exchange in June 2015, MG’s unit price was at $2.24. It peaked in December at $2.59. By last Wednesday (April 27), the price had dropped to $1.24.
A MG spokesperson said the listing of the MG unit trust on the stock exchange had no impact on MG’s ability to pay its price.

Chairman of the MG board, Phil Tracy of Yanakie did not respond to The Star’s phone call.

However he told the ABC on Wednesday about the company’s revised financial outlook.

He said quarterly reviews showed the cooperative faced a significant revenue shortfall and the farmgate milk price guidance of $5.60kg/MS was no longer achievable.

“We couldn’t have done anything any sooner,” he said.

MG has introduced a supplier support package to help hold cash distributions to $5.47kg/MS to minimise impact this year.

Farmers will have to repay the package costs, which will impact returns in the future.

“Suppliers will be impacted by a 13 cent drop in cash flow this year but the final result will be spread over the next three years,” Mr Tracy said.

“We think this action is in the best interests of all MG stakeholders, suppliers and investors.”

MG said factors that led to the reduction in farmgate milk price included a greater than 10 per cent unfavourable movement in the Australian-US dollar exchange rate and lower than expected adult milk powder sales in China.

The change in the exchange rate impacted the current financial year’s distributable milk pool by around $32 million and the low adult milk powder sales impacted it by $60 million to $100 million.

MG now expects to achieve net profit after tax of between $39 million to $42 million, less than half of its original forecast $89 million.

Peter Watchorn, president of the Leongatha Chamber of Commerce and Industry, said it has not been a positive season for the region’s dairy farmers.

“It is not a great outlook for them. We rely heavily on them and there are plenty of other businesses that rely on the dairy industry. It will affect the whole town,” he said.

“It is just the times we are in. As for retailers, we will just need to roll with it as best as we can and continue to support the dairy industry.”

Burra Foods CEO Grant Crothers said the company’s business strategy had enabled it to commit to its milk price this financial year.

“While the Burra supply incentive may not be issued this season, there will be no changes made to base prices,” he said.

A Fonterra spokesperson said the company had been upfront with suppliers throughout the season.

“We have expressed caution to our farmers to budget conservatively. As matters develop we will continue to keep our farmers well informed,” the spokesperson said.

MG did not respond to The Star’s questions about whether Mr Helou departed with a payout and if so, how much this was valued at.

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Posted by Tayla Kershaw on May 3 2016. Filed under Featured, News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry