That surprised me because the rise and fall of MG contains some salutary lessons for the NZ dairy industry.
MG is a co-operative no more having been bought earlier this month by Canadian corporate dairy giant Saputo.
Fonterra had made an offer for MG to form a super co-operative and to retain the co-operative ethos but that was rejected in favour of an offshore corporate bid.
Suppliers had obviously had a gutsful of co-operatives.
MG co-operative was formed in 1950 by “passionate dairy farmers seeking a better deal for their milk”.
Dozens of small factories laterr joined the co-operative.
Its original headquarters was in the heart of the Victorian dairy industry at Cobram, on the Murray River 262km north of Melbourne.
The head office is now in the plush South Bank in the gold-plated heart of Melbourne.
MG had more than 2500 shareholder suppliers, revenue of A$2.4 billion and has more than 2000 employees processing over 35% of Australia’s milk.
In 2007 MG China was formed. It produces a range of infant nutrition projects. It wasn’t a successful venture.
In 2015 in an effort to raise capital MG unit trusts were listed on the ASX.
That funded some expansion including the acquisition of Caboolture Cheese and Tasmanian Dairy Products.
Considering the reasons for the MG capital structure is interesting.
Suppliers were assured they’d retain 100% farmer control. Debt funding would be reduced and suppliers would be guaranteed a market price for their shares. It would strengthen farmer balance sheets and fund the co-ops growth strategy. Finally it would ensure MG would remain competitive, both nationally and internationally.
At the time of the capital restructure former MG chairman Ian MacAuley said “We are stealing from the graves of our founding fathers and the cribs of our children.”
He was to be proved correct.
Comparing the MG unit trust outline with Fonterra’s Trading Among Farmers summary sheet was interesting.
It reinforced farmers’ 100% control and ownership of the co-op, more so than today. It removed the redemption risk under DIRA and locked in the farmgate milk price as a robust and transparent process. It lets farmers share up when cashflow is strong and redeem when times are tough. Finally, TAF provided a solution to Fonterra’s capital structure needs for the foreseeable future.
As the Fonterra chairman John Wilson said at the time “It reduces the redemption risk once and for all.”
What it did was to shift it off the Fonterra balance sheet and on to that of the shareholders.
There was one major difference in that MG guaranteed investors it would link the dividend yield to the milk price.
That created several major problems with the primary issue being if the price of milk goes up the profit goes down.
Margins are squeezed when the milk price rises.
In addition MG’s senior executives were paid short-term incentives to keep the milk price high. That proved unsustainable and burdened the trust with high debts.
Murray Gouldburn came to grief in April 2016 when it admitted it had overpaid farmers and wanted its money back, all A$200m of it.
The drop in price from $A6 to $A5 meant the payout was less than the cost of production. Soon after that Fonterra slashed its price to its Australian producers and was accused of sheer opportunism.
Farmers culled herds and left the dairy industry. Others lost their farms.
In the 2015-16 year MG collected 3.5 billion litres of milk. Two years later that dropped to just over half at 1.9 billion.
The less milk MG collected the less profit it made.
This meant it became impossible to pay a high milk price and remain competitive.
So MG had gone from being a strong co-operative to a basket case.
It went onto the market with the preferred bidder being Saputo.
Ninety six per cent of shareholders in MG agreed to sell to the Canadian owned corporate for A$1.3b.
One farmer described it as sad but the best outcome.
Australian mates describe the demise of MGC as a self- inflicted wound.
The board and management had become arrogant and removed from grassroots farmers.
When governance and management fails the co-operative will invariably follow.
MG didn’t have a shareholders council to ask the hard questions but I’d argue neither has Fonterra.
As one described it: “Poor governance, bad decisions and the milk walked.”
I believe there are several lessons for NZ from the MG demise.
The first is that co-operatives aren’t sacrosanct. Things can go wrong.
Board and management need to keep their feet on the ground and the farmer shareholders on side.
Co-operatives have to be wary of increasing debt.
Finally, if Fonterra shareholders want their co-operative to grow and prosper they need to become more involved and be prepared to ask the hard questions.
