MURRAY Goulburn has revised down its forecast milk price for the financial year to June 30, 2017 from the previous expectation of $4.88 per kilogram of milk solids (kgms) to $4.70.
And, in an announcement made to the Australian Stock Exchange and suppliers on Thursday, October 20, they will also be suspending the milk price ‘clawback’ or Milk Supply Support Package (MSSP) contribution from October 1, 2016 through to June 30, 2016.
The news has, however, been greeted with a mixed response locally.
Matt Harms of On Farm Consulting calculates that the impact of the latest announcement means a lift in milk price to MG suppliers, from the present level, of 10 cents kgms across the whole year but he expressed particular concern about the downgraded outlook.
Murray Goulburn supplier Paul Zuidema of Leongatha South has not taken much comfort out of the MG announcement.
“It’s disappointing to see that they’ve revised down the milk price by 18 cents but most suppliers would have been hoping to see them scrap the crawback (MSSP) altogether with this announcement.
“That’s something I just can’t get my head around.
“I had no part in creating the debt, so why should I be paying it back.
“It’s a disincentive to stay and it creates disloyalty among suppliers.
“It has got to go.
“The other thing is that they keep changing the goalposts.”
Mr Zuidema also dismissed the growth dividend as being in any way helpful to most suppliers.
“It’s an incentive to increase your milk supply, above your two-year average, but the reality is that most suppliers are in survival mode. They’ve reduced feeding and got rid of excess cows.
“How are you going to turnaround now and chase the incentive? You won’t.
“We’ve got about the same number of cows and nothing to do with the seasonal conditions, we’d be down 10 per cent at this stage.
“We can’t go after that incentive. We never chase it anyway.
“They’ve got to come back to suppliers with a simpler, fairer payment system without the clawback. It’s creating a lot of anger and it’s also allowing the other processors to cherry-pick all the best suppliers.
“You’ve got to wonder where it’s all headed. We’ve got to have a strong cooperative and most people are optimistic that it will all turnaround eventually but the clawback has got to go.
“I’m an investor as well as a farmer and we’re concentrating on putting ourselves in the best position so that we can take advantage of it when it does turnaround.”
Paul and his partner Kerry milk 600 cows at Leongatha South.
Details of the announcement
In his letter to suppliers last week, interim CEO David Mallinson said that he had made a commitment to notify suppliers of market changes affecting MG as soon as they occurred.
“As you know, the dairy industry across southeast Australia is being severely impacted by extreme wet conditions and lower farmgate milk pricing. We recognise the severe financial strain this is causing your business,” Mr Mallison said.
“Our absolute priority during this challenging time is to return cash to farmers’ pockets while being financially prudent. Along those lines, I’d like to update you on our actions to achieve this,” he said, listing the following adjustments:
* Recovery of the Milk Supply Support Package (MSSP) contribution will be suspended from 1 October 2016 until 30 June 2017. As a result of this, an increase of $0.09 per kilogram butterfat and $0.18 per kilogram protein (the equivalent of $0.14 per kgms) will be applied for milk supplied from 1 October 2016 to 30 June 2017, resulting in an average weighted available price of $4.60 per kilogram milk solids (kgms). MG is also offering the option to receive this increase as a farmgate milk price (FMP) pre-payment from 1 December 2016 which will assist with farmers’ cash flows in the coming months.
• MG will also make an additional growth incentive payment of $0.35 per kilogram butterfat and $0.70 per kilogram protein available to eligible suppliers from 1 November 2016.
• We have advised the market that the forecast full year net profit of $42 million will now be lower given revised expectations for milk intake.
• Given the unexpectedly wet climatic conditions, we now anticipate a FY17 farmgate milk price of $4.70 per kgms, down from our previous expectation of $4.88 per kgms. Achieving this also remains subject to commodity prices and foreign exchange not deteriorating. While this is a disappointing outcome, this revised forecast with no MSSP deduction still provides farmers with a higher net milk price than their current estimations.
Exacerbating the impact of seasonal conditions, exchange rates and commodity prices for MG has been its plummeting milk supply.
“We have experienced losses of approximately 10 per cent to competitors and retirements which we have largely managed by focusing our manufacturing output on the highest value products. However the forecast revision announced today includes the provision of an expected additional milk production loss of 10 percent due to the seasonal conditions.
The statement explained the reduction in milk intake is driven by two factors:
1. Milk losses: Net milk losses are now approximately 350 million litres, representing approximately 10 per cent of FY16 production. Retirements from the industry represent approximately 80 million litres, with the balance being supplier departures to other processors.
2. On farm production to reduce due to very wet conditions: MG now expects production from the cooperative’s approximately 2200 suppliers to be 10 to 12 per cent lower in FY17 – broadly in-line with results to date for FY17 production across the South Eastern dairy industry. Climatic conditions have quickly turned from very favourable settings in August, and are now a significant headwind for milk production. All regions are impacted, in particular the North and West of Victoria, where widespread flooding has impacted dairy herds and pastures.
Mr Mallinson said MG will continue to manage its production facilities to target additional savings.
“Production plans have been revised to best cater for lower milk intake and we will continue to review options to enable this cost base to remain competitive.”
Finally, the interim CEO also left open the possibility that the objectionable clawback provision or MSSP might yet be scrapped.
“The broader review of the MSSP is ongoing, and the remaining aspects of the review are expected to be announced before the AGM on October 28,” Mr Mallinson said.
MG will provide a trading update at the AGM and expects to be able to update investors on earnings at half year results in February 2017.
The AGM will be held at the Melbourne Convention and Exhibition Centre, Meeting Room 210 and 211 (Level 2), 1 Convention Centre Place, South Wharf at 11am.