MG’s Gary Helou pays high price for unrealistic China hopes

Gary Helou’s sudden exit from Murray Goulburn is another reminder of the pitfalls in growing food trade with China.

Murray Goulburn’s Gary Helou paid a price for his optimism

Gary Helou’s sudden exit from the top job at dairy producer Murray Goulburn is another reminder of the pitfalls in Australia’s growing food trade with China.

A week ago at the Global Food Forum hosted by The Australian, Visy and the Grains Research and Development Corporation, Helou was assuring the market that he had the China situation in hand.

He told the conference that his company, which sells Devondale brand milk products and adult milk powder to China, had worked through short-term problems with regulators about what could be brought in under China’s new e-commerce rules.

China, he said, was a “fascinating market” which would be “immensely rich and prosperous”.

He was, he said, more “shocked” by the reaction of the media and stockmarket analysts to the news earlier this month about higher taxes on goods brought into China by the internet and the stricter rules on what products could be brought in by e-commerce.

Asked about the domestic price, he assured his audience, that, in the long term, a domestic price of $6 per kilogram of milk solids to its dairy farmer suppliers was a “very realistic, doable target”.

Helou now has paid the price for his optimism, or overoptimism, about the immediate outlook for his company and the near term outlook for the China market.

In its trading update yesterday, MG directors said the company’s outlook price of $5.60 per kilogram, which it announced in February, was “no longer achievable”.

Helou’s downfall is a sharp reminder of the dangers of over-estimating the Chinese market, particularly in the short term, and the bumps and bruises ahead for Australian exporters looking to China as the next big market.

But in Murray Goulburn’s case there a more fundamental question to be asked about why the board and the market accepted its bullish projections on dairy sales to China for 2016 at a time when there was plenty of publicly available data on the problems facing the global dairy market and also slowing demand within China itself.

The world market is suffering from oversupply of dairy from a big increase in production in Europe following the end of production quotas in the EU and other market changes such as sanctions on selling goods to Russia.

China itself has become one of the biggest milk producers in the world in the past few years, its production soaring from less than 10 million tonnes of milk a year in 2000 to around 40 million tonnes following a very proactive government policy.

In an outlook published in February, Dairy Australia contains a sobering summary of the near-term global market conditions, noting that international prices “remain depressed” with European milk production continuing to rise “seemingly impervious to global market influences”.

It predicts a continued subdued outlook for demand in China, with import volumes down by 8 per cent, with the European Union’s low-priced products helping to push out sales from the US and New Zealand.

In a report issued earlier this month, HSBC talks about the slowdown in the growth of the food and beverage market in China, which it describes as “generally gloomy” and predicts bluntly that the dairy sector would “disappoint”.

Yet Murray Goulburn’s optimistic view its of profit potential, under Helou, were based on the rosiest views of its immediate term potential in China.

Its trading update to the market released yesterday shows surprising optimism.

“Based on the very strong performance of adult milk powder sales in (the six months to December 2015), Murray Goulburn expected ongoing growth of sales of this product category into the emerging China market in the second half,” Murray Goulburn said.

“Adult milk powder volumes for the six months to the end of December were approximately triple those in the prior corresponding period and had exceeded the total volume for the full 2015 financial year.

“As a result of this increased demand, management significantly increased its forecasts for the sale of adult milk powder in the (six months to the end of June) and increased production to match the forecast sales.”

But as 2016 progressed, the full horror of their overestimation of the market became apparent. Demand for adult milk powder in China fell along with prices.

Longer term, MG said yesterday, the company still believed there was a strong growth potential for adult milk powders in China.

But Helou’s projections were becoming so out of touch with the short-term market situation that he no longer had the chance to see out his plans.

Murray Goulburn’s experience highlights the dangers signalled by National Australia Bank’s senior Asian agribusiness manager, Chinese-born Laura Mattiazzi, in an interview with The Australian published on the day of the conference.

She warned that optimistic Australian food exporters needed to realise that they were not the only ones targeting the China market.

An article published earlier this year on the website agrimoney.com discusses the rocky short-term outlook, asking: “Will China deal dairy markets another blow?”

For Helou and MG shareholders the answer has been yes.