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Murray Goulburn Sale Raises Issues for Australia's Dairy Manufacturers

01 December 2017

The $1.31 billion sale of Murray Goulburn, Australia’s largest dairy processor to Canada’s dairy giant Saputo – one of the top 10 dairy processors in the world – raises issues for Australia’s small to medium dairy manufacturers in general.

Saputo’s chairman and CEO Lino Saputo Jr. has made a series of commitments to the Australian dairy industry, including an assurance that his organisation’s milk collection and market pricing will enable farmer suppliers to reinvest and grow their businesses.

While seemingly good for farmers, the Saputo sale may nonetheless result in supply issues for Australian  small to medium dairy manufacturers, in production costs and subsequently in prices customers will pay.

Will Saputo sell most of its Australian produced milk to China and other overseas markets?  Will what’s left be enough to meet demands of small to medium dairy manufacturers of other dairy products in Australia, and will the Saputo price henceforth be competitive with other domestic suppliers?

Background to the sale

Murray Goulburn (MG), stricken by its disastrous decision last year retrospectively to cut milk prices and consequent desertion by suppliers, and having failed to win Deputy Prime Minister Barnaby Joyce’s support for a short-term loan from the Federal Government, sought a deal with Saputo.

This was, according to MG Chairman John Spark, “the best option for unit holders”, having benefits for them “far above what can be achieved should MG remain in its current form without access to additional capital”.

The deal increases the farm gate milk price to farmers this year by 40c to $5.60 per kilogram of milk solids, MG’s still-active suppliers to receive an additional 40c loyalty payment.

Currently this farm gate price corresponds to that of MG’s competitor Warrnambool Cheese & Butter – also owned by Saputo – compared with New Zealander Fonterra’s milk solids price of $5.50/kg, and Bega’s $5.53/kg.

Moves to acquire MG by Fonterra, Goodman Fielder/Wilmar and Parmalat, were all out-played by Saputo, with Fonterra chief of Australian operations Rene Dedoncker declaring that irrespective of whether the sale is approved, his organisation - about to supersede MG as Australia’s biggest milk processor – will press ahead with planned growth.

Assessments of the deal

An Australia-wide road show has been planned for this month (November 2017) to sell the deal to MG shareholders, a minimum of 50% of whom must agree to accept it.

However, an independent expert must first conclude it’s in their best interests.  Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB) must then approve it.

While criticism of the sale has been savage – it being declared among other things “a morally bankrupt process by MG’s board to avoid administration” – many see it nonetheless as representing favourable timing and offering industry stabilisation that includes competitive milk pricing.

The deal values MG at as much as $638m if the full $1.15 per unit/share is eventually paid out, but an initial distribution of only 75 cents is guaranteed, the remaining 40c dependent upon the handling of liabilities that include potential class actions.

Farmer shareholders will own whatever cash remains when all MG’s liabilities are settled.

Morgan analyst Belinda Moore says the arrangement has swung in favour of farmers over unit holders, and accordingly believes MG was wise to seek a sale, there being no point in holding units in the financially crippled cooperative.

Dairy Farmers need to be sustainable to allow them to invest and grow to meet future growth demands.

Implications for Australia’s dairy manufacturers in general

Macks Advisory believes vision of the future for Australian dairy manufacturers following MG’s sale is blurred by some current imponderables -- although there’s no immediate reason for pessimism.

Indeed, fear in the industry, that either Mongolia Yili Industrial Group or Mengnui Dairy, with a combined 44% control of China’s domestic dairy market and a hunger for international acquisitions would purchase MG, has proved groundless.  Thus, the Australian dairy industry, given China’s interesting reputation and penchant for suddenly changing regulations governing importation of milk and its products, has seemingly dodged a bullet.

Particularly so if Montreal-based Saputo does what it says it will do – namely maintains competitive milk pricing and encourages its dairy farmer suppliers to expand their businesses.

But will Australian dairy manufacturers who previously bought milk from MG be able to continue doing this at satisfactory levels of quantity and price?

That’s problematic.

The lure of Asian markets

Saputo knows only too well that China offers a ready market for every litre of milk MG can supply.  In 2016 China’s 634,100-ton importation of fresh milk increased 38% on the previous year.  While there has been recent disruption to Australia’s sales as Chinese regulators waffle about what they are and aren’t prepared to class as “fresh milk”, long-term sales will tend to increase in step with the increasing affluence of the population’s middle class.

Macks Advisory has no doubt MG’s new owner Saputo -- perhaps also other afore-mentioned would-be MG purchasers - will make milk sales to China and emerging markets elsewhere in Asia a priority, and NZ’s Fonterra, already with a strong foothold in China, has confirmed its intention to step up growth in Australia.

How many Australian dairies will follow this lead in the light of the MG sale is a matter of conjecture, as is the quantity and price of milk henceforth available for the nation’s dairy manufacturers.

MG’s sale is not indicative of an industry problem.  It’s resulted essentially from a MG problem long identified within the industry.  In fact, positively the sale may well herald stabilisation of the Australian dairy industry, provided milk exports don’t disadvantage Australian companies – including manufacturers of products derived from milk.

As well as ensuing they can meet demand domestically, these companies, together with fresh milk producers, want to be able to target Asian markets, particularly in China -- which imported a total of 1.96m tons of dairy products in 2016, a 21.4% increase on the previous year.

In that period its 21,000-ton importation of yogurt increased 104.3%, and volume imports of whey, cream, cheese and milk power products all increased by at least 10%.

And the effect on small to medium dairy manufacturing?

How does all this affect the typical small to medium dairy manufacturer, which owns no dairies, produces no dairy products other than ice-cream that it sells primarily in Australia – although it would like to build on inroads it’s made into China and other Asian markets.

Fundamental to realisation of such aspirations, is supply of fresh milk.  But whether milk has been bought from MG or other dairies, continuity of supply after the sale of MG will become questionable, given Asia’s increasing lure to all potential suppliers. 

There can be no guarantee that attraction to this lure won’t leave Australia short of milk, even if dairies grow and the industry benefits from MG’s sale as Mr Lino Laputo Jnr predicts.  (Look, for example, how export of Australia’s natural gas has contributed to the nation’s power problems.)

Consider: milk powder imported from NZ is most popular in China, and of the 503,600 tons of milk powder products sent there from NZ last year, 83.3% was milk powder.

Current market conditions have driven dairy inputs to record levels, for example cream and butter.

Why wouldn’t milk from NZ-owned Fonterra in Australia be sourced for a booming market like this, rather than be held here to meet domestic demand?  Why shouldn’t other potential suppliers of milk to dairy manufacturing companies opt instead first to meet the demands of Australian companies selling and hoping to sell milk-based products to Asia (among them cheese, butter, yogurt, and powdered milk)?

And that would be over and above any desire they might also have to sell fresh milk to Asia or Southeast Asia.

So, might a stage obviously be reached when only by government regulations could Australians be assured of adequate top quality fresh milk and component products at world competitive prices?  Would governments respond to the obvious or ignore it?  Government at all levels should buy Australian and support Australian industries and commit to this philosophy.  Come overseas countries legislate this, why not Australia?

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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