Milk problems due to Murray Goulburn

An over-reaction could make the problems worse.

Asciano boss John Mullen. Artwork: Eric Lobbecke

Before Deputy Prime Minister Barnaby Joyce goes too far in his calls for special help for dairy farmers, it should be noted the key cause for concern is not industry-wide: it’s monumental mismanagement at one company, Murray Goulburn (MG).

Its problems escalated yesterday with class action specialist Mark Elliott adding his name to the ACCC and ASIC in taking a look at just when MG realised it couldn’t afford to pay $5.60 a kilogram farm gate prices, let alone the $6/kg figure former boss Gary Helou floated right up to his departure last month.

The rest of the industry is holding the line aside from New Zealand giant Fonterra, which now admits to losing $100 million locally last year and is bound by an agreement with its takeover of the Bonlac Co-Op in 2003 not to pay farmers less than industry leader MG.

Global prices have collapsed through the basic laws of supply and demand, with European controls lifted and boosting supply just as Russia shut the gate to imports and China started managing down inventories.

Rabobank thinks this will have worked through the system by 2017-18 but farmers face a tough time in the meantime, with two processors accounting for more than 53 per cent of supply cutting prices extraordinarily late in the season, for just the second time since deregulation in 2001.

Helou ran headfirst into this global reality, lining up a decade-long deal with $1-a-litre milk and cheaper cheese deals with Coles. He built new plants and let inventories build up, and debt levels will be higher than before his grand $500m public offering.

Farmers are the weakest link in the supply chain and they will be left with 40 per cent less of the company and possibly high debt levels thanks to a board and management team that went too far too quickly at the wrong time in the cycle.

It’s a similar scenario to the fate of Arrium in the resources sector and an object lesson straight out of the management textbooks on what not to do.

Politicians like Joyce should tread carefully before damaging the sector further, based on the misfortunes of just one or two processors and the fortunes of Coles in lining up the 10-year deal it did at the right prices.

Bega is maintaining farm gate prices at $5.60 a kilogram and Lion, which maintains fixed and variable prices, is only cutting variable prices and is paying $6 a kilogram for fixed contracts, while in Victoria Parmalat is paying $5.60.

Granted, when the new financial year prices are released in the next month or two, the other processors will lower their prices.

What they are not doing is trying to claw back money from farmers, as MG and Fonterra are wrongly trying to.

Fonterra has an agreement with its supply company, Bonlac, which ensures it will pay at least as much as MG for Victorian milk.

The ACCC is taking a look at the timing of the Fonterra move, but its main concern is the behaviour of MG and potentially misleading and unconscionable conduct over the promised milk price.

Farm gate prices traditionally rise as the season progresses, and since deregulation at the turn of the century, prices have come down only twice: in 2008, earlier in the season in the wake of the GFC, and last month when MG cut its price. Effectively, MG is telling its farmers it is recovering $205m in losses — the $165m it is trying to recover from farmers and the $40m it has declared as dropped.

At some point the co-op must have realised it couldn’t sustain the $5.60-a-kilogram price.

Fonterra boss Theo Spierings has long warned he thought the farm gate price in Australia was too high and last August he was quoted as saying: “What you cannot do is pay money that you have not earned.”

This financial year it was actually Bega that was first in the market with a farm gate price of $5.60 a kilogram but, at the time, the MG prospectus was raising the prospect of $6 a kilogram. MG eventually came out with a $5.60 farm gate price, but with an implied promise of raising it. It has since cut the price to between $4.75 and $5. To get an average price for the full year at those levels it is effectively paying nothing now, which is why it is in the market with a loan and payback scheme.

Most in the industry think MG is treating its suppliers appallingly.

The market dynamics were well known to MG but it kept saying its switch to value-added products was shielding it from commodity price moves.

A different story emerged late last month.

Asciano legal stoush

The Asciano shareholder meeting to approve the Brookfield-Qube takeover is likely to be delayed from June 3 for up to a month, in part to gain the necessary clearance from the ACCC and FIRB.

FIRB normally waits for the ACCC to clear a deal before deciding and it is officially in caretaker mode pending the July 2 election.

There is a view the shareholder vote should happen within a certain period from the regulatory clearances, and keeping the meeting at its present time might conflict with that. This may force a delay until July.

The ACCC is due to opine on May 26 but given the complexity of the deal and level of cross-shareholding the chance of a quick clearance is not great.

A better view would be a statement of issues and more delays in getting clearance.

In the meantime, the Tzaneros action reported in The Weekend Australian represents another potential roadblock. Last April, Asciano boss John Mullen trumpeted his $100m joint venture with dad Terry and son Arthur Tzaneros, trading as ACFS, as “an expanded platform of services, allowing us to strengthen our customer relationships in an increasingly competitive market”.

As part of the deal Mullen agreed that while Asciano may change hands the structure in which ACFS was held would stay the same.

ACFS handles about 20 per cent of the container movements from the Asciano ports and about 35 per cent are handled by Qube, which is the proposed new joint-venture partner with Brookfield controlling the ports business.

ACFS will be transferred into the venture known as BAPS, which will be 67 per cent controlled by Brookfield, a move in part aimed at placating the ACCC.

The Tzaneroses are jumping in early to see what advantage they can milk from the move.

For its part, Asciano argues the change in structure is not a change in control and hence there is no breach of contract.

The matter will be settled shortly with a directions hearing for the ACFS injunction hearing this afternoon.

The Tzaneroses want Asciano to agree to sell them its stake in the joint venture, transfer all joint venture leases into Tzaneros’s name and give them the lease for the Cargo Link site.

The deal team played down the significance of the legal claim.

Its been a marathon deal since Brookfield first unveiled its bid last August.