Capital concerns for Murray Goulburn suppliers

12 Dec, 2013 10:30 AM
MG supplier concerns: Tadgh,7, Jock O'Keefe, Des, 5, and Giselle O'Keefe, and the new calfs. Picture: ROB GUNSTONE
MG is known to set the milk price, so what happens here is at the core of the dairy industry
MG supplier concerns: Tadgh,7, Jock O'Keefe, Des, 5, and Giselle O'Keefe, and the new calfs. Picture: ROB GUNSTONE

THE nation's biggest dairy company Murray Goulburn has indicated a figure of $200 million capital is planned to be raised through a share-up trading system and partial stock exchange float, at private meetings in Gippsland and South West Victoria this week.

However, following the meetings several attendees raised concerns to Stock & Land about the survival of the Australian co-operative, believing it was the beginning of a whole company share market float that will take power out of the farmers hands.

Many were fearful the move would spark a drive on capital instead of a drive on milk price; drawing away from the co-op's advantage, which is known to set the farmgate milk price.

Attendees said a $200m capital target figure was "bandied" about, which will come from external investors through a shareholder fund, floated on the Australian stock exchange, as well as a farmer "share-up" system, similar to Fonterra's Trading Among Farmers structure.

Attendees also heard the hybrid-ASX listing system would allow suppliers to remain full shareholders with voting rights in the unlisted MG co-operative, while partially floating on the stock exchange that will give increased market value to suppliers' current $1 per share holdings.

Meanwhile, the share-up system will mean for every kilogram of milk solids supplied to the co-op, farmers will need one MG share.

"Once MG open the doors to external investors, the capital investment will require capital gains and dividends (needed to attract investors), which will eventually start to gobble up the co-operative until it ends up being fully-listed," said one Gippsland attendee, who wished to remain anonymous.

"When you start chasing value of the shares and dividends, the milk price becomes another cost to the co-op rather than what drives the business and irrespective of the controls, the capital will draw the business towards it."

While still in the teething stage, the company has toured through supplier hotspots garnering support for the initiative, which final model is expected to be officially announced in March 2014.

The bait of the plan is that the current $1 value of each share milk suppliers own has estimated to be worth closer to $3 – based on equity of the company divided by number of shares – an attractive windfall for many dairy farmers.

One of the attendees said the major problem with the increased value was that if a farmer was producing 100,000kgMS and needed 100,000 shares to provide this, the cost could vary from $50,000 to $300,000, depending on value of the stock market shares.

In MG's 2013 annual report, the co-op had 315,000 shares, of which 261,000 are wet (milk suppliers) and the balance being dry (retired or investment) shares and picked-up nearly three billion litres of milk; which equates to roughly 280 million kgMS.

Therefore it is expected the co-op will release a potential 20 million more shares to top-up the farmers supply quota.

One of the early challenges debated at the Maffra meeting was the increased value of shares for younger farmers entering or expanding as MG suppliers and joining the share-up system.

Comments from MG made at the meeting assured the co-op would make it possible for young people to borrow money at a low interest rate, according to attendees, however were cautious of the vulnerability and share risk that would be dependent on the floating price.

One of the comments made in a Gippsland meeting was that milk price would be slightly lower based on a basket of commodity products on the global market but would be bumped up with any dividends paid.

"Murray Goulburn is known to set the milk price, so what happens here is at the core of the Australian dairy industry and will impact every dairy farmer," one attendee said.

Winslow dairy farmer Jock O'Keefe milks up to 750 cows and has provided MG with about 300,000kgMS annually since he joined the co-op in 2011.

He said if the plan was executed, he would need to buy substantially more shares to continue to supply at his current production level.

"I suppose the concern I have is that if the shares fall in value and you have borrowed in order to purchase the shares and they drop by 10-15pc then you will obviously be in a situation that you have a lack of security," Mr O'Keefe said.

"The way (MG) tried to explain it was that you would be better off to buy discounted shares at a discounted prices and they be worth a lot more than you pay for them."

While he said the idea had the potential to be exciting for the industry, risks with the co-op entering this into a partial float grey area was a concern.

MG were contacted for comment but said they had no new information to share about the consultation workshops.

Annabelle Beale

Annabelle Beale

is a journalist for Stock & Land


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