May 20th 2017

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Articles from this issue:

COVER STORY Morrison's budget jive lacks inherent harmony

CANBERRA OBSERVED Does budget do heavy lifting or is it "Labor lite"?

NEW ZEALAND Porn poll shows strong majority supports default opt-out policy to protect kids online

FRANCE Emmanuel Macron: a president without a political base

YOUNG POLITICAL ACTIVIST TRAINING (YPAT) Seven-day intensive course without equal in Australia

FOREIGN AFFAIRS Taiwan to go full steam ahead with submarines

RURAL AFFAIRS Murray Goulburn closures an omen of an industry in crisis

CLIMATE SCIENCE Temperature hasn't risen in 20 years: latest data

QUEENSLAND ENERGY 50 per cent renewables target: Is it credible?

LITERATURE Inexplicable: the ongoing appeal of H.P. Lovecraft

LITERATURE The gentle giant: Samuel Johnson

MUSIC Promissory notes: the public funding siphon

CINEMA Going in Style: Old dogs turned rookie robbers


BOOK REVIEW An abstemious revolutionary

BOOK REVIEW Soviet-era thriller revels in details

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Murray Goulburn closures an omen of an industry in crisis

by Chris McCormack

News Weekly, May 20, 2017

Murray Goulburn’s (MG) decision to close three of its milk processing plants in Victoria and Tasmania with the loss of 360 jobs[1] could spell the death of the small rural communities that are heavily reliant on employment in MG’s plants.

For the smaller communities of Kiewa in Victoria and Edith Vale in Tasmania, MG was the main employer and the closures will have severe ramifications for them and for the surrounding districts. Rochester in Victoria will also feel the pain as retrenched workers leave to seek work in larger centres.

Former managing director Gary Helou

MG is Australia’s biggest milk producer and its decision to wipe the debt it foisted upon dairy farmers as a result of miscalculating falling global milk prices is the at least a silver lining among darkening storm clouds for MG cooperative dairy farmers. Whether this is enough to rebuild the trust broken by the implementation of the Milk Supply Support Package remains to be seen.

The decision to forgive the debt of hundreds of farmers came days after the Australian Competition and Consumer Commission (ACCC) announced it would take the processor to court for allegedly misleading its suppliers.[2] MG will also refund $6 million to suppliers who had already paid back debts.[3]

In February 2016, MG managing director Gary Helou said the cooperative expected to maintain its farm gate price (FMP) of $5.60 per kilogram of milk solids, generating a full-year net profit of $63 million.[4] This price, however, was later reduced to $4.95/kg mild solids.[5] In the face of falling prices MG embarked upon a Milk Supply Support Package, which aimed to claw back milk payments made at the higher prices, with dairy farmers required to pay back the difference in the FMP. This averaged out to a debt of $110,000 per farmer that had to be paid back over three years.[6]

The ACCC has taken MG to the Federal Court, stating: “The ACCC alleges that from June 2015 until February 2016, Murray Goulburn misled farmers by representing that it had a reasonable basis for setting and maintaining an opening FMP of $5.60 per kilogram of milk solids (kgms) and a forecast Final FMP of $6.05/kgms, and that it considered the forecast Final FMP of $6.05/kgms was the most likely outcome for FY16, when that was not in fact the case.

“Further, the ACCC alleges that from February 2016 until April 2016, Murray Goulburn misled farmers by representing it had a reasonable basis for expecting to be able to maintain its opening FMP of $5.60/kgms for the remainder of the season, and that it considered a Final FMP of $5.60/kgms was the most likely outcome for FY16, when that was not in fact the case.”[7]

The ACCC is not seeking pecuniary penalties against the cooperative as they saw this as unnecessarily penalising already affected farmers; but it is seeking declarations, pecuniary penalties, disqualification orders and costs against former MG managing director Gary Helou and former chief financial officer Bradley Hingle.[8]

Part of the Helou legacy was to partially list MG on the Australian Stock Exchange. This effectively turned MG members “from owners and members of a democratic community of purpose, into suppliers and investors whose share value is linked to the price of a litre of milk”.[9] Helou’s business model and inflated FMP predictions would later raise the ire of cooperative members required to repay the difference between the price promised and the price realised.

The decline in global milk prices that led to a fall in the FMP was the result of a combination of factors. Deregulation of the dairy industry in 2000 meant Australian dairy farmers were now exposed to the vagaries of the global milk price. While a series of dairy contamination scares in 2008 and 2013 had opened up the market for dairy imports into China, buoying dairy prices, in July 2014, Russia banned dairy imports from the West, in retaliation for sanctions by the West over the suspected Russian involvement in the downing of flight MH17 over Ukraine.

This affected Australian farmers because European milk products normally destined for Russia were now flooding markets where Australia was a significant player. For example, cheese that was produced in Finland but branded for Russian shoppers now had to be sold in Finland.[10]

Suddenly, there was a global oversupply of dairy product.

By early 2015, China added to the oversupply with a domestic milk glut, temporarily banning some dairy imports.[11] In May 2015, the European Union decided to lift production caps on European dairy farmers. Now European dairy farmers could produce as much milk as they liked, adding to the milk glut on world markets.[12]

These actions all conspired to push down prices for global dairy products since late 2013. [13]

“Since deregulation, the number of registered dairy farms in Australia has more than halved from 12,896 producing 10.8 billion litres (1999–2000), to 6,128 producing 9.7 billion litres (2014–15), according to Dairy Australia.[14] While the price for milk solids, i.e., cheese, butter, etc is determined by the global milk price, the concentration of buying power by Coles and Woolworths and their $1-a-litre branded milk has in effect set the price for fresh milk in Australia. Deregulation has disenfranchised dairy farmers of the means to gain a fair price for their product in the wake of the supermarket duopoly.”[15]

Deregulation of the dairy industry and the exorbitant price farmers are forced to pay for water following reallocation of water from agricultural use to increasing “environmental” river flows as part of the Murray Darling Basin Plan (MDBP) is a major cause of dairy farmers going to the wall. Water barons who buy, hold and sell water rights but have no farming interests accentuate the problem of a drastically reduced pool of water available to farmers. In times of drought water traders make big profits, with farmers and Australia’s agricultural industry the ultimate losers.

Currently, the ACCC is conducting a broader inquiry into the competitiveness, trading practices, and transparency of the Australian dairy industry. A key focus of the inquiry is FMP pricing transparency. The ACCC will submit its report following the inquiry to the Treasurer before November 1, 2017.[16]

Let’s hope the recommendations deal with some of the root causes of the decline of the dairy industry. One that shouldn’t be ignored is the over 900 per cent increase in the cost of water since the introduction of the MDBP in 2012.

With volatile global prices for milk solids and low prices for fresh milk domestically, the status quo in deregulated water rights with its majority of water storage set aside for environmental flows, could mean the next drought sees many more farmers and processors go broke.



[1] Aaron Langmaid, “Murray Goulburn to shut three factories, 360 jobs lost”, Herald Sun, May 2, 2017.

[2] ibid

[3] ibid

[4] Jared Lynch, “Weak global dairy prices hit Murray Goulburn’s profit”, The Land, February 29, 2016.

[5] Andrew Marshall, “Drastic action to fix MG’s ‘fundamentally unfair’ situation”, The Land, May 2, 2017.

[6] Patrick J. Byrne, “Crisis in dairy industry escalates to new level”, News Weekly, August 27, 2016.

[7] “ACCC takes action against Murray Goulburn”, April 28, 2017.

[8] ibid

[9] Tim Mazzarol, “Murray Goulburn saga has roots in deregulation”, The Conversation, May 23, 2016.

[10] Brett Worthington, “Dairy crisis: Understanding why the bubble burst and what it means for milk in supermarkets”, ABC News, January 30, 2017.

[11] Patrick J. Byrne, “Crisis in dairy industry escalates to new level”, News Weekly, August 27, 2016.

[12] ibid

[13] ibid

[14] Dairy Australia “Cows and farms”; Dairy Australia, “Production and milk”.

[15] Patrick J. Byrne, “Crisis in dairy industry escalates to new level”, News Weekly, August 27, 2016.

[16] “ACCC takes action against Murray Goulburn”, April 28, 2017.

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