Murray Goulburn to close three facilities

By Jim Cornall

- Last updated on GMT

Following a review, Australian co-operative Murray Goulburn plans to phase out three of its facilities.
Following a review, Australian co-operative Murray Goulburn plans to phase out three of its facilities.

Related tags 2016 Dairy farming

Murray Goulburn Co-operative Co. Limited (MG) has announced it is closing three of its facilities after an asset and footprint review.

The closures are expected to affect 360 staff.

The Australian company said the recent review was a response to reduced milk intake across the network, as it continues efforts to address its cost base, improve efficiencies and increase earnings and farmgate milk pricing.

The company said it will close its Edith Creek facility by Q2 FY18, the Rochester facility by Q3 FY18 and the MG facility at Kiewa by Q1 FY19.

The Rochester and Kiewa closures will begin in August 2017.

MG said that once completed the closures will deliver an annualized net financial benefit of A$40m-A$50m (US$30m-37m).

MG expects to spend A$60m (US$45m) of capital expenditure to enable the closures, which will be largely funded by maintenance capital expenditure no longer required at the sites.

MG will write-down assets of A$99m ($US74m) and expects to incur cash restructuring costs of approximately A$37m (US$28m).

Forgiveness of the Milk Supply Support Package (MSSP)

In order to mitigate the risk of further milk loss, MG also announced it will forgive the MSSP. All future repayments of the MSSP, due to recommence in July 2017, will cease.

As a result, MG will record a write-down of this asset of A$148m (US$110m).

Suspending payments

Following the completion of the review, MG said it does not currently intend to proceed with the proposed major capital investments in dairy beverages and nutritionals.

MG said it has also suspended dividend payments with immediate effect including the final FY17 dividend, in order to generate additional capital to support the balance sheet.

Rebuilding

MG’s chief executive, Ari Mervis, said that while the company was aware of the impact the decisions would have, the changes were necessary.

“They are necessary steps on the journey to ensure the future strength and competitiveness of Murray Goulburn,”​ Mervis said.

“A strong MG is of fundamental importance to the Australian dairy industry and these decisions are necessary to lay the foundation for the future.”

ACCC takes action

MG’s announcement comes shortly after the Australian Competition and Consumer Commission (ACCC) instituted proceedings in the Federal Court against MG, alleging it engaged in unconscionable conduct and made false or misleading representations in contravention of the Australian Consumer Law.

The ACCC also alleged former managing director Gary Helou and former chief financial officer Bradley Hingle were knowingly concerned in MG’s conduct.

“The allegations relate to representations made by Murray Goulburn  to its Southern Milk Region dairy farmers between June 2015 and April 2016 about the average farmgate milk price (FMP) it expected to pay them during financial year 2015/16 (FY16),”​ ACCC chairman Rod Sims said.

“The ACCC alleges that Murray Goulburn’s conduct had an adverse impact on many farmers who, as a result of Murray Goulburn’s representations regarding the farmgate milk price, had made business decisions.”

Unrealistic expectations

The farmers relied on MG’s representations, and were not expecting a substantial reduction in the farmgate milk price, Sims said, noting that as it was close to the end of the season it was not possible for them to practically readjust their expenditure.

The ACCC alleges that Murray Goulburn:

Knew that farmers relied on information about the opening FMP and forecast Final FMP to make significant business decisions during the financial year;

Was aware that many farmers were unable to easily switch milk processors, particularly those contracted to MG;

Created an expectation that the opening FMP would be set conservatively and would be a minimum price, and that the final FMP would be higher than the opening price;

Knew that farmers expected that it would update the forecast Final FMP regularly to reflect material changes;

Provided and maintained FMP forecasts despite knowing that these forecasts were overstated and unachievable in FY16 and that farmers were making decisions in reliance on these forecasts.

The ACCC alleges that from June 2015 until February 2016, MG misled farmers by representing that it had a reasonable basis for setting and maintaining an opening FMP of A$5.60 (US$4.19) per kilogram of milk solids (kgms) and a forecast Final FMP of A$6.05/kgms (US$4.53), and that it considered the forecast Final FMP of A$6.05/kgms was the most likely outcome for FY16, when that was not the case.

Further, the ACCC alleges that from February 2016 until April 2016, MG 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.

Penalty could affect farmers

The ACCC is seeking orders against MG that include declarations, compliance program orders, corrective notices and costs.

The ACCC said it will not seek a pecuniary penalty against MG because, as a co-operative, any penalty could directly impact affected farmers.

The ACCC is seeking declarations, pecuniary penalties, disqualification orders and costs against Helou and Hingle.

MG said in a statement it is considering the proceedings, however noted that ACCC has decided not to seek a pecuniary penalty against MG.

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