Corporate advisors have convinced the Murray Goulburn dairy co-operative its unpopular retrospective claw-back of farmgate payments was driving the company into the ground.
Grant Samuel and Associates said action to minimise the risk of further milk loss and improve the co-op’s profitability was an “urgent imperative”.
“Loss of milk supply during 2016-17 has undermined the profitability of Murray Goulburn (MG), reducing its capacity to pay a competitive milk price and increased its effective economic gearing (debt),” the advisory firm told co-op directors this week.
The Milk Supply Support Package (MSSP) was widely viewed by dairy farmers as “fundamentally unfair”.
“It has become clear the MSSP arrangements are a fundamental obstacle to stabilising milk supply and recommencing recoveries in July will risk significant loss of milk supply,” Grant Samuel said.
Continuing with the claw-back scheme to recover milk payments, which the co-op decided last April exceeded what it should have been paying in 2015-16, would reduce MG’s ability to pay competitive future prices for milk.
To retain milk supplies, improve profitability and rebuild its milk supply base the advisors recommended deviating from its profit sharing mechanism for its listed trust unitholders and farmer shareholders, and rationalising its factory assets.
About MG 105 workers will lose their jobs at Rochester in northern Victoria when that plant closes by March next year, and another 135 will be out of work at Kiewa near Wodonga, by September 2018.
In Tasmania at Edith Creek, which shuts late this year, 120 jobs will go.
While the MSSP “forgiveness” and asset rationalisation plans would add a further $167m to MG’s debt, Grant Samuel warned failure to pursue these initiatives was likely to result in further significant milk supply loss, which would also increase MG’s effective gearing.
Although MG’s reputation in public equity markets could suffer in future because of the action to halt shareholder dividends, Grant Samuel said “the damage in this regard has arguably already been done”.
Shares in the listed Murray Goulburn Trust, which has a 40pc stake in the co-operative fell from 94 cents each to 89c after Tuesday’s announcement – down 14pc.
MG managing director, Ari Mervis, agreed the dividend suspension would support the co-op’s balance sheet and generate much-needed additional capital.
“MG remains committed to ensuring a strong balance sheet throughout the footprint restructure and into the future,” he said.
“We will consider the dividend payout ratio and provide an update at an appropriate time”
He said weaker than expected trading conditions were still weighing on MG’s milk budgets, but the company was committed to paying the forecast farmgate milk price of $4.95 a kilogram of milk solids, with the payments supported by MG’s deviation from its profit sharing mechanism
Directors unanimously believed their decisive actions to close the factories, halt shareholder payments and re-think its business footprint were in the interests of all relevant stakeholders.
MG would support employees by providing access to career transition and redeployment services.
It was also working with federal and relevant state governments to leverage existing assistance programs.
Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
