The blame game is on. With well politicised debate erupting about the Murray Goulburn (MG) dairy cooperative saga and what went wrong, fingers inevitably are being pointed in all directions.
So far, fingers have been directed at a globally ambitious Murray Goulburn, its assertive CEO, regulatory failures, passive farmers, and Russian sanctions. It’s even been suggested you and I might be to blame each time we buy that $1 milk at the supermarket. But, whatever the causes, the reality is global over-supply of dairy products, with the result that, despite allegedly insatiable Chinese demand, plummeting prices have caught MG off-guard.
The search for someone or something to blame is always successful. And the search continues. It’s just that there are so many candidates. Not to be left out, I too want to point a ‘pinky’.
As you are aware, Murray Goulburn is a cooperative. According to Victorian Consumer Affairs, a cooperative is nobly described as a democratic organisation owned and controlled by its members for common benefit, based on values of self-help, self-responsibility, equality, and solidarity.
That definition doesn’t exactly square with what I have recently been reading about Murray Goulburn’s activities and members. But, to be fair, Murray Goulburn and its predecessors has for many years been a successful cooperative in the south-west of Victoria
What went wrong
Only recently, Murray Goulburn wanted to expand – and rapidly, too – beyond its regional base, to become not just a national but a global milk products producer. So Murray Goulburn went on an acquisitions campaign, taking over other cooperatives, most notably paying a premium for Warrnambool Butter & Cheese.
In the words of Claire LeVay, Murray Goulburn had decided to become a ‘pacemaker’. It wanted to engage in open-market competition as a major player. In this, it was urged on by its members, for to do so meant they would receive higher milk prices than non-members. This ensured their continuing loyalty, which they might easily transfer to a strong competitor such as NZ dairy gian Fonterra.
In the words of its CEO, Gary Helou, Murray Goulburn’s strategy was to “build a world-leading premium dairy foods company”. It’s interesting that he called it a company, not a cooperative; presumably, a company is not constrained by the previously mentioned ‘cooperative values’.
If those values still existed, then they were seemingly jettisoned, for in July 2015, MG publicly listed on the Australian Stock Exchange. By 2015, MG was Australia’s largest dairy producer. It sought a ‘partial float’ raising $500 million to fund “expansion into nutrient powders, dairy beverages, and cheese”. Despite the delightful description, in retrospect, it was folly to talk up the price of milk, when in fact the world price was falling.
It shows the incongruity of trying to hybridise a cooperative with a market-listed company, although, in this case, the company was technically a stock exchange listed unit trust. Unlike companies, unit trusts have the un-mediated but clearly attractive advantage of streaming profits and losses and tax consequences directly to unit holders. These unit holders own 40% of MG.
You can see how the interests of farmers and unit holders might not always be compatible. In fact, you may say their respective interests are inherently incompatible. The share market investor wants – in fact demands – and was told in the Prospectus, to expect good returns, based on rising milk prices. In truth, this means they don’t want the cooperative paying farmers buoyant prices for milk.
Ominously in the same week as the institutional float, on the Global Dairy Trade, cheese and milk powder prices fell 6%, butter milk powder 8%, and cheddar 5%. These were not one-off falls; prices continued to fall further throughout 2015. These falls were said to be due to oversupply and trade restrictions on Russia.
From a launch high of $2.50, unit prices took a southern trajectory, too, down to 0.80c. Investors were not impressed; they had been promised 7.5% yield. And if international sales could not deliver them a profit, the farmers would.
Funding capital growth is a problem for cooperatives. They can ask their members to subscribe, but this was not practical in this case. MG was in hurry, and its members – those mum and dad dairy farmers – had just emerged from a severe drought. They, too, were financially ‘dry’. Not that it is easy for members to contribute capital to a cooperative, unlike money put in by a swathe of shareholders in a capital raising.
In retrospect, it would have been cheaper for MG to have gone to its bank for a loan at 4%, but MG did not want such large borrowings showing on its books. And private investors and retail super funds are reluctant to invest – given security problems with cooperatives and profit returns – in a commodity notoriously subject to volatility in market price.
Milking the farmers
In early 2016, MG reported a 34% drop in profit from the previous year. And, as we now know, farmers were by then experiencing the twin tortures of a cut in milk prices and a clawback of monies by MG, who claimed to have ‘overpaid’ them in a shamelessly named ‘Farmer Support Package’. The average farmer’s liability for back payments is $100,000, a not inconsiderable debt for largely family-owned businesses.
And it’s not as if farmers can transfer their milk supply to Fonterra. It, too, (opportunistically, it has been said) did exactly the same to its dairy suppliers. Farmers say the price is now below their cost of production.
So it came as some shock to learn that, in August this year, MG revealed a 61% lift in profit to $40.6 million. “Smoke and mirrors”, said the Australian Financial Review of 25 August, a ‘profit’ derived from cost cutting rather than from sales revenue. The ambitious CEO was shed, along with 200 fellow workmates. The reality is that the cooperative recorded a real loss.
The ‘profit’ was designed to appease the investors. They will collect a dividend. It is clear that they, not the farmers, are to be protected. In the meantime, $183 million are being milked from the farmers (with interest). How can the government bail out (or socialise the losses) of a cooperative that is ‘profitable’?
The attempt partially to privatise a cooperative has been a failure. It is like trying to engineer a Siamese twin. The result is predictably freakish.
If a cooperative wants to be a major market player, and MG certainly wants to play in the major league, it really needs to restructure as a publicly-listed company. Other cooperatives and mutual associations have done so, buying out their members, and going on to succeed on behalf of their shareholders.
This is not to downplay the useful role of producer cooperatives and their essential function in looking after their supplier members. They and Economy of Communion organisations can also ensure fair redistribution of wealth to their members. That, sadly, has not happened recently with MG.
Lastly, of all the milk produced in Australia, only a surprising 4% finds its way into a milk bottle as drinkable product. Devondale, Murray Goulburn’s brand, has a mere 1.7% national share of drinking milk.
So, don’t feel guilty about paying a $1 for milk; instead, buy more and blame Vladimir Putin.
Tony French is a Melbourne lawyer and member of the Board of Social Policy Connections.