Rod Newton joined Murray Goulburn last year because he trusted this giant co-operative to buy, process and sell the milk produced by his 600 cows at a price that could sustain his family.
Instead, with a suddenness that has shocked the dairy industry nationwide, the nation’s largest farmer co-operative slashed the price it paid at the farm gate.
Murray Goulburn’s chairman pleaded ignorance. Philip Tracy told the market as he announced the price crash in April, “the board was surprised at the quantum of the misses”.
But Fairfax Media can now reveal that key internal Murray Goulburn sales reports had been unequivocal for months: the company’s forecasts of how much product it could sell, and at what price, were hopelessly optimistic, unrelated to commercial reality, and were routinely being missed.
The reports showed big losses virtually every week from the start of the milk year last July. The reports were emailed to the company’s senior managers. Anyone watching could see a crash was coming.
But nobody bothered to tell the farmers.
The price drop means that, for the nine months since July 2015, Murray Goulburn has been “overpaying” farmers, so the farmers must pay it back. Newton – a relatively big producer – now owes Murray Goulburn more than $400,000. The average debt for a mum-and-dad farmer is perhaps $120,000.
The company proposes clawing the money back over three years, with interest.
“Trust,” Newton says, “they haven’t got any. I question what they stand for. They’re supposed to be a co-op for the farmers. We’re supposed to be shareholders, but they’ve thrown us under a bus.”
Murray Goulburn is the largest milk producer in Australia, and the price leader. As a co-operative, its job is to pay the highest possible milk price to its farmer owners. Last July, it agreed to pay between $5.60 and $6.05 per kilogram (milk prices are measured by the weight of solids).
It was a good price, and came with the virtual guarantee that it would not fall for 12 months. The price encouraged Newton, whose farm is in Whorouly, near Beechworth, to borrow to buy enough feed to see him through the drought. The feed kept his 600 cows producing milk at a peak rate. He also used borrowings to replant pasture to take advantage of the winter season.
Newton had also borrowed when Murray Goulburn partially floated on the share market in July 2015, buying 362,000 shares. The company seemed progressive. He liked the story that chief executive Gary Helou was telling about creating more value-added products out of milk. After the float, the dividend was pegged to the high farm-gate price. Newton’s advisers told him it was a good investment.
What the farmer did not know was that his trust was built on a false premise.
His co-operative was being led by a new breed of manager. Helou, who did not return calls from Fairfax Media, was not like the cautious, conservative chiefs of the agricultural co-operatives of old.
Appointed by the couple of corporate hardheads on the farmer-dominated Murray Goulburn board, Helou came in 2011 after a failed a $600 million deal at the helm of another co-operative, Ricegrowers Limited. Helou wanted to shake up the allegedly sleepy milk operation, expose it to the rigour of the market – and to take a multimillion-dollar salary in return.
He spruiked a move away from boring commodities and into “value-added” products, and urged dairy farmers to produce as much as they could. He talked up the promise of the Chinese market, embarked on a partial sharemarket float which raised $500 million, and predicted a $7 per kilogram milk price by 2017.
As recently as April 20 this year, Helou (whose performance bonus was also tied to a high milk price) told the world that a $6 per kilo milk price was achievable. He was wrong.
Just a week after he made those comments, Murray Goulburn bowed to the reality of falling global prices, and set the new price drastically lower, between $4.75 and $5.
On April 27, Helou and his chief financial officer Brad Hingle resigned. Both, said Tracy, would stay on to “assist our transition”, though a spokeswoman last week said Helou had now “left the business”. The chairman maintains that Helou did an “extraordinary” job, and the board was “very comfortable with the decisions made, with the information we had”.
Farmers are not comfortable. Some are restructuring their businesses or selling their cattle to abattoirs. Others are considering quitting altogether.
“Farmers are running a Watch My Neighbour program now,” one told Fairfax Media. “Some of them will suicide.”
What Newton cannot understand – no one can – is how the management and board of Murray Goulburn got it so wrong for so long. How did they miss the rapidly falling global price of milk?
Fairfax Media can now reveal that the senior management knew very well what was happening in the market. The information was contained in written reports called Weekly Trading Briefing Notes, produced every week for the company’s ingredients division since the opening milk price was set in July 2015.
The division sells cooking ingredients such as butter, cheese, and milk fat on both the global and domestic markets. It was one of the backbones of Murray Goulburn’s business, providing about 50 per cent of revenue.
Week after week, from July last year, the reports showed that actual sales had failed to meet the budgeted forecasts. The reports show that some weeks, the failures were spectacular.
Between July 28 and August 3 last year, export sales targets fell $15.5 million short of the target in just a single week. A couple of weeks later, it was $17.5 million in the red.
It’s not that the salesmen were incompetent. It’s that their targets, like the milk price, had been plucked out of “thin air”, a company source said.
“For the past two years the budget has been hijacked by upper management,” the source told Fairfax Media.
“These figures would have alarmed anyone into saying, ‘What’s happening here?’. You can’t second guess the market, and Gary [Helou’s] statement that we can deliver $6 per kilo irrespective of what the market is doing is just bullshit.”
By May this year, the reports reveal much smaller sales shortfalls, but only because the company had virtually stopped offering cooking ingredients to the market. One weekly report showed a loss of just $214,000, but on sales of only 224 tonnes, a fraction of a thousands of tonnes previously offered.
As the milk price went south, Helou started promising investors a new saviour: to triple sales of “adult milk powder” into China to 60,000 tonnes. But sales of this, as with everything else, fell flat.
“Sales of sachet powders, while still strong, have not continued to grow at the run-rate we had seen,” the company told Fairfax Media in answer to questions.
By then, farmers were producing milk for the warehouse. Farmers like Newton had borrowed to pay for feed to produce large amounts of milk. Murray Goulburn was parking the product in temporarily leased warehouses: there were 11 new storage facilities rented around Laverton alone.
Senior management cannot pretend they didn’t know. The email distribution list on the sales reports show they were distributed to Hingle, and David Mallinson, the man who has taken over as CEO since Helou stood down. Beyond this, insiders say individuals went separately to upper management to make their warnings explicit: Murray Goulburn’s business model was unsustainable. Something had to give.
Despite all this, a spokeswoman insisted that the board only found out last month.
The Australian Securities and Investments Commission began making inquiries at Murray Goulburn’s headquarters last week, as did the Australian Competition and Consumer Commission, which will investigate Murray Goulburn for false, misleading and unconscionable conduct.
The documents obtained by Fairfax Media will be of great interest to both, as well as class action lawyers at Slater and Gordon now looking carefully at the company’s disclosures.
They are asking two questions: how soon did the company know its repeated statements about high prices were wrong, and was the story about adult milk powder’s explosive growth a knowingly false attempt to cover up the holes in other parts of the business – something the company vigorously denies.
The secret of running a milk co-operative is to keep costs low. It’s the only part of the process the co-operative really controls.
But in Murray Goulburn, they say, spending ran rampant. In four years, the Mercedes-Benz-driving Helou pocketed $10.4 million in salary and bonuses, and the company sold off and leased back much of its production capacity. Staff numbers and head office expenses exploded as the company rented more than two floors of prime real estate at Freshwater Place. Even that was controversial.
Before Helou was hired, Murray Goulburn management had decided to move out of the derelict headquarters in Brunswick to a purpose-built office at Essendon Fields, at Essendon airport.
Andrew Fox, Essendon Fields manager and chief executive of Linfox, says the former Murray Goulburn management drove a hard bargain and, at $19.7 million, got a good price for a 10-year lease. Then the board hired Helou.
“He elected not to move into that building,” Fox told Fairfax Media. “He liked staying in the premises of [Freshwater Place], Southbank.”
Murray Goulburn sublet the building to the Good Guys but had to pay them $6.27 million of farmers’ money to take up the lease.
A Murray Goulburn spokeswoman said Essendon Fields was “deemed an inappropriate location because it is poorly serviced by public transport”.
But according to Fox, “I feel sorry for the people he [Helou] represents.
“Nobody in a private company would take a hit of $6.27 million. Good Guys should be sending the Murray Goulburn people a bottle of champagne every year to thank them. I hope it’s Dom Perignon.”