Murray Goulburn admits milk price cut will ‘challenge’ farmers

Murray Goulburn says the sharply lower milk price to be paid to farmers will ‘challenge’ many in the dairy industry.

Murray Goulburn says is latest opening milk price robust, fair and financially responsible.

Murray Goulburn’s interim chief executive, David Mallinson, has acknowledged that the sharply lower milk price to be paid to farmers from July would “challenge” many and could force some to walk away from the dairy industry.

The worst fears of the industry were confirmed yesterday when Murray Goulburn, Australia’s biggest dairy processor, slashed the price it will pay its 2600 farmers for their milk by a further 15 per cent, with many producers likely to operate at a loss.

Mr Mallinson — who took over the company after former chief Gary Helou resigned in late April as profit downgrades and a 10 per cent milk price drop were outlined — labelled the company’s latest opening price robust, fair and financially responsible.

Murray Goulburn, which markets its products locally under the Devondale brand, said its opening farmgate price for the 2017 financial year was just $4.45 a kilogram of milk solids, equivalent to a price of 34.2c for each litre of milk sold.

But Murray Goulburn said it would deduct another 14c from that opening price as part of the funds “owed” by each farmer, averaging $128,000, following the decision by the co-operative in April to retrospectively drop its prices for the previous 10 months.

This means the dairy major will claw back the difference in already-received milk payments with the pain spread over the next three years.

An opening price of $4.31 a kilogram — or 33c a litre of milk — will hurt most of Murray Goulburn’s farmers, who estimate they need a regular payment of about $5.20 a kilogram, or 40c a litre of milk, to cover the cost of production.

Murray Goulburn’s $4.31-a-kilogram price is also sharply lower than the opening $4.80 milk price offered by smaller rival Warrnambool Cheese & Butter two weeks ago, and well below the psychologically important price of $5 a kilogram set last week by sixth-biggest producer, the listed Bega Cheese.

Australia’s second-largest processor, New Zealand’s Fonterra, is now expected to follow Murray Goulburn’s price fall.

Mr Mallinson said some farmers would be able to adjust their costs by feeding their cows less and reducing milk production per cow.

But he admitted some farmers would be forced or “may elect” to quit the dairy industry.

Mr Mallinson denied that the new milk price was a result of past mismanagement at Murray Goulburn, blaming low global commodity prices and a world milk glut, mainly caused by European overproduction after quotas were abolished.

“We probably didn’t drop the price early enough (in 2016); that’s probably the most you can say against us,” Mr Mallinson insisted yesterday.

Murray Goulburn offered some hope, saying its financial-2017 price paid to farmers over the whole year could average $4.80 a /kilogram, equal to about 37c a litre of milk, if the industry showed signs of recovery in the first six months of next year and price rises could be announced.

But farmers remain wary of Murray Goulburn’s $4.80 average price forecast, given the past year of chaos, and pledges by a former management team that as much as $6 was achievable and sustainable.

“I think we have lost a lot of credibility and trust; it will take some time to make that back up,” Mr Mallinson said yesterday.

“No matter what happened in the last eight weeks — and we are not happy with what has occurred — the reality is that this is the right price that the market globally will bear and a fair reflection of where the market is at right now.”

Murray Goulburn also handed down a net profit of $42 million for the 2016 financial year. This was down from earlier forecasts of more than $80m but in line with revised late April figures. Murray Goulburn’s listed units closed down 2.6 per cent at $1.10. This is less than half their stockmarket debut price in July last year.

Unitholders — about two thirds of whom are farmers — will be paid a fully franked dividend of 3.5c a share.

Murray Goulburn is Australia’s largest dairy foods company, processing 3.6 billion litres of milk, or 39 per cent of national milk production, annually.

More than a third of its earnings are from exports, with more than half of its products now sold as higher-value, value-added processed foods and dairy drinks, rather than as bulk, low-value dried milk powders.

Murray Goulburn reported to the ASX that it remained “well capitalised”, with net debt at June 30 at about $550m. The board also said there was “substantial opportunity” to release working capital across the business, leading to an improvement in cash flows and capital position in the 2017 financial year.

“We have had to go back (after the April disastrous profit and sales reassessment), start from scratch and build the budget from bottom up,” Mr Mallinson said. “After Brexit, no one knows where the Australian dollar is going — we have carried on based around US74c — and we believe we should be able to hit the number of an average $4.80 a kilogram milk price over the entire year, as long as there is no unforeseen deterioration in the global market.”