Milk market turns to curd while Murray Goulburn says it knows the whey

Pressure is mounting on Murray Goulburn managing director Gary Helou after the milk co-operative plunged into a trading halt ahead of a likely earnings downgrade.

Units in Murray Goulburn's non-voting listed trust have been suspended from trade until Wednesday, while the company revises its earnings outlook.

The halt shocked the co-operative's farmer shareholders and investment analysts. One of its farmer shareholders said Murray Goulburn's management would have "a lot of egg on its face" if it downgrades earnings, given earlier this month it was talking up the market to farmers.

One analyst, who declined to be named, said: "Any downgrade is going to get investors off side and they'll take it out with management.

Under pressure? Murray Goulburn managing director Gary Helou.Credit: Wayne Taylor

"It comes down to what the cause is. They've been talking up dairy prices and everything … there will be a lot of pressure on Gary Helou."

The trading halt came two days after Mr Helou declared at a conference in Melbourne that Murray Goulburn could sustain its $6 a kilogram price to farmers because the co-operative was shifting more into branded products, which now account for about 70 per cent of Murray Goulburn's milk volume.

"It is absolutely do-able and feasible through engaging in the right products in the right markets, and upgrades and the investments that we've made," Mr Helou said.

"So if you ask me long term where we're taking this business, well, I would like to take it to an achievable $6, regardless of what's happening in the commodity markets. I think that is a very realistic target."

But the strategy has attracted criticism. Last August Theo Spierings, the chief executive of the world's biggest dairy exporter, Fonterra, said the Australian farm gate price did not reflect the collapse in global dairy prices, which have more than halved in the past two years.

"What you cannot do is pay money that you have not earned," Mr Spierings said.

A stockbroker, who declined to be named, supported that sentiment on Friday.

"You can't try to define market forces, otherwise you end up in a world of pain," said the broker, pointing to the '70s floor price scheme for wool, which led to chronic overproduction and the eventual collapse of the Australian wool industry.

"But Gary [Helou] is a very capable individual. He just has a very tough gig. He has so many different masters, with the farmers who effectively own the company, to the trust, which serves capital markets."

The farm gate price was a key part of Murray Goulburn's non-voting unit trust – which floated on the ASX last July – because it is tied to its dividend. If the farm-gate price falls to 2012-13 levels, the yield would fall from 7.4 per cent to as low as 3.5 per cent.

But farmer shareholder, Craig Dettling, believed Murray Goulburn was paying an accurate price, saying it reflected Murray Goulburn's shift from producing commodity products towards higher-margin branded goods.

"The product mix isn't the same," he said.

Mr Dettling was surprised at the trading halt but he said dry conditions as well as a spike in the Australian dollar could have hit the company's earnings.

And last week the co-operative was winded after China temporarily banned the sale of foreign powdered and UHT milk on its cross-border website. Although Murray Goulburn said it did not expect that ban, which has since been lifted, to materially hit earnings.

"There is a lot of speculation at the moment. We have just got to hope for the best and prepare for the worst," Mr Dettling said.

Respected agribusiness analyst Belinda Moore also found the halt surprising, given Mr Helou's comments in the press this week and the company's success with its Devondale-branded product range, the sales of which surged 46 per cent to $264 million in the first half of the year.

"On strategy, you can't fault them. With what they can control they are delivering and over delivering. The have launched their own infant formula. Who gets into Coles and Woolworths straight away? Murray Goulburn," Ms Moore said.

"The recovery in global milk prices keeps getting pushed out, but that's not in their control."

The co-operative confirmed at its half-year financial results in February it would miss its profit forecast outlined in its prospectus, citing a "horrific" global market for dairy commodities.

It said at the time it expected to generate full-year net profit of about $63 million. This compared with its prospectus forecast of $89 million, and previous warnings to investors that its net profit would be between $66 million and $86 million if global dairy prices didn't recover as expected.

Units in Murray Goulburn's non-voting listed trust closed 0.5 per cent lower on Thursday at $2.14. This compared with the broader market gaining 1 per cent.