MG milk shake up puts farmers before shareholders

MG milk shake up puts farmers before shareholders


The trust and confidence restoration journey starts now for Murray Goulburn, says managing director, Ari Mervis.

The trust and confidence restoration journey starts now for Murray Goulburn, says managing director, Ari Mervis.

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The rebuild of trust and confidence in Australia's biggest milk processor will take a long time

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The new chief executive of embattled Murray Goulburn says the rebuild of trust and confidence in Australia's biggest milk processor will take a long time but a sweeping restructuring is a vital first step.

Ari Mervis will shut down three manufacturing facilities, book writedowns of $410 million and immediately scrap a controversial program introduced last year to claw back milk payments already made to farmer-suppliers.

The retrospective payment cuts had triggered a huge exodus of disgruntled dairy farmers, with numbers falling to 2000 now compared with 2500 a year ago.

"The journey starts now with restoring trust and confidence," he said.

The closure of the three facilities, one in Tasmania and two in Victoria, will result in the loss of about 360 jobs and leave Murray Goulburn (MG) with seven plants in Australia and one in China."

MG has also suspended dividend payments in a move which will annoy non-farmer investors.

Shares in the Australian Securities Exchange-listed MG unit trust tumbled more than 13 per cent to around 89.5 cents on Tuesday.

The company has put the long-term rebuild of farmer supplier numbers ahead of the short-term interests of shareholders, but it used independent expert Grant Samuel for an outsider's view on how best to weigh up the competing interests of a complex structure.

Grant Samuel found that fully scrapping the Milk Supply Support Package (MSSP) mechanism, widely hated by dairy farmers, was the "only way forward" in minimising the risk of further milk loss.

It had been a "fundamental obstacle", Grant Samuel said.

Mr Mervis, a former managing director of beer giant Carlton and United Breweries, took the helm in mid-February and said a string of roadshows to farmer-suppliers had made it clear what needed to be done to stem the exodus of suppliers, which will result in milk volumes at Murray Goulburnbeing 22 per cent down.

"What we've done is try and remove any reason for a supplier to leave us," Mr Mervis said.

There had been been some ferocious encounters with dairy farmers out in the regions.

He pointed out that the firm was still the largest milk processor in Australia although the three plant shutdowns would remove about 400 million litres of capacity from a business which had 3.6 billion litres of processing capacity.

The group will close the doors to its Edith Creek factory in Tasmania by the end of the December quarter in 2017-18, with the Rochester and Kiewa plants in Victoria to follow in a staged process which will happen over 18 months.

The shutdowns of those plants will save up to $50 million.

As part of its overall writedowns of $410 million, Murray Goulburn will scrap the MSSP which will result in a specific $148 million writedown.

The deeply unpopular program was implemented in April 2016 as the company moved to claw back some of the payments suppliers had already received during 2015-16.

MG said yesterday it would pay an average farmgate price of $4.95 a kilogram of milk solids through 2016-17, below the level of competitors such as Fonterra.

It also said it would not proceed with a proposed major capital investment in the dairy beverages and nutritionals segment and that would result in writedowns of $62m.

  • This article appeared first in The Australian Financial Review
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