Sunday, September 11, 2016

Sunday Snippets - lessons from the Murray Goulburn affair

Its a beautiful day here in Sydney. First load of washing hung out, second in machine. It's birthday season. Eldest's birthday was on the second, youngest today. Where have all the years gone?  I don't feel much like serious thought, so a random chat while I wait for the washing.

I briefly mentioned  the Northern Territory elections in Saturday Morning Musings - a changing Australia. The thumping that former Chief Minister Giles referred too has indeed been a thumping, with the Country Liberal Party reduced to two seats not including Mr Giles' own seat which he lost by just a few votes. There is some angst among the five independents that the CLP has been awarded official opposition status with the perks that go with that, but I guess that's the price you pay for being an independent.

I thought that I had commented on the Murray Goulburn affair. Apparently not, although  I have certainly written on cooperatives. It seems that the discussion was in comments, that I meant to write.

On its web site, the big dairy co-op bills itself (among other things) as The "Aussi farmer co-op." Therein lies the rub. Under the previous CEO, Gary Helou,  Murray Goulburn admitted external investors to raise additional funds utlising a reasonably complex financial arrangement in which the new non-voting shareholders were effectively guaranteed a return.The company pursued an expansionist policy to grow the business. In doing so, it got the milk-price wrong, creating a conflict between the needs of the business, the external shareholders and the co-op members.

I'm not sure that I fully understand the maths of what followed. However, as I interpret it, Murray Goulburn sets a milk price based on the price they expect to receive. This is then adjusted based on actual prices received. Murray Goulburn was slow to see that the market had changed. Then, when they did adjust prices, they declared that farmers had been overpaid and that this amount would need to be recovered from dairy farmers via future prices. So farmers were to receive a lower price because market prices had fallen, a lower price still to recover the "over-payment". This allowed the co-op to shift the amount of the "over-payment" from the profit and loss statement as an expense to the balance sheet as a capital item, one to be repaid by the farmers. In turn, this allowed Murray Goulburn to declare a profit and pay a dividend to the new external shareholders.

Farmers were outraged. Those who could, and they seem to be the bigger farmers, began to shift to other processors. Murray Goulburn's milk supply fell as a consequence, affecting production but also leaving the $183 million "over-payment" to be recovered from a diminishing group of farmers.

The problem now for Murray Goulburn is that the "over-payment" can only be "recovered" via future lower milk prices to producers. There is no legal obligation on farmers to repay the "over-payment", something you would expect from a capitalised item. By capitalising the item, they kicked the problem down the road a little, but also increased the incentive for farmers to move. If have interpreted the maths correctly, sooner or later Murray Goulburn is going to have to write a substantial portion of the "over-payment" off, thus reversing the previous "gain." In all, it's a bit of a mess.

Former CEO Gary Helou was clearly a charismatic leader with grand visions for Murray Goulburn. No doubt if he had got it right, much would have been forgiven. However, he lost sight of the principle that a co-op's first responsibility is towards its members and this inevitably dictates a degree of conservatism in approach. Growing the business has value if and only if it benefits the members. The business is a vehicle, not an end in itself.  


2 tanners said...

Nailed it, Jim. There are things to be said for and against co-ops, by people with much more familiarity and/or economic expertise than myself, but they all start from the position that the co-op is intended to affect the market in such a way to benefit the members. People can then blather on about market distortions and anti-competitive behaviours (quite often with justification) but a farming co-op which distorts *its own market share* against the interests of its growers has lost the plot.

In 10 years in agriculture, I far more usually saw one segment of growers doing better than another and an intra-industry war about whether some people ought to be allowed to bail from marketing arrangements (often legal monopolies). In this case it appears that some have done worse than others, but just about no grower has benefited. I may be wrong, but I haven't seen a single grower leap to the defence of the co-op's performance.

You can't feel happy witnessing such a thing.

Jim Belshaw said...

That does seem to be the case, 2t.