Retrospective step‑downs in 2015–16 milk pricing
The retrospective farm gate milk price step-downs in the Southern Milk
Region in the final two months of the 2015–16 season resulted in dismay
and despair across the entire Australian dairy industry, not just to the
suppliers of Murray Goulburn and Fonterra. This chapter outlines the events
that led to the retrospective step‑downs and examines the response by the
processors and Australian Government.
Although Murray Goulburn and Fonterra have attempted to atone for their
actions almost a year after the step-downs, the damage to the industry has
already been done with many farmers reducing production, changing processors
(or considering changing processors when fixed term contracts expire) or exiting
Murray Goulburn's strategic change and capital restructure
Murray Goulburn (MG) is Australia's largest dairy foods company and is a
100 per cent dairy farmer controlled cooperative run by approximately 2200
farmer-suppliers, with all suppliers holding shares in MG.
In 2015–16, MG received approximately 3.5 billion litres of milk, representing
around 36.6 per cent of Australia's total milk production. Approximately 60 per
cent of MG's revenue was generated from the domestic market with the remaining 40
per cent of revenue coming from international exports; MG is Australia's largest
In 2011, Mr Gary Helou was appointed Managing Director of MG and set
about changing the strategic direction of the cooperative. Mr Brett Findlay, a
MG supplier and shareholder, provided his perspective of the subsequent events:
Gary Helou suggested a new direction for the co-op, moving
toward more high value branded product and reducing emphasis on commodities.
2013 saw MG signing a 10 year contract with Coles to supply their private label
milk in Victoria and New South Wales. This involved MG taking on suppliers
throughout NSW. MG expanded its geographic reach significantly during this
period, also extending further into SA and buying out its joint venture
partners in Tasmanian Dairy Products to take on suppliers directly in that
Mr Findlay further explained how the capital restructure was beneficial:
To build the new state of the art bottling plants in
Melbourne and Sydney for the Coles contract and its own private label milk, the
co-op sold and leased back its tanker fleet and warehousing, and increased its
bank debt to near maximum prudent levels. Further investment would require a
significant injection of capital and it was decided to follow the example set
by Fonterra and several large European co-ops in conducting a partial float to
list non-voting units on the ASX [Australian Stock Exchange]. This occurred in
July 2015 and significantly strengthened the co-ops balance sheet...
Under Mr Helou's leadership, the MG Board undertook a capital structure
review of which the outcomes were presented to supplier shareholders at the
Annual General Meeting in 2013. That review proposed a funding model that
maintained 100 per cent farmer control, but allowed external investors to
invest in MG. This approach was deemed to be a more flexible capital restructure
than traditional bank debt.
The proposed capital restructure would enable MG to simultaneously meet
the following key objectives:
retaining 100 per cent supplier control of MG;
reducing MG's reliance on debt funding;
creating a market value for supplier's shares through the
operation of the Shareholder Trading Platform as opposed to the $1 value that
had historically existed prior to the capital structure;
strengthening supplier's balance sheets by facilitating the
recognition of the value of their shares as an asset;
helping to fund MG growth strategy of operational excellence and
innovation to deliver over time a sustainably high Farm Milk Price (FMP); and
ensuring MG not only remained competitive with other processors,
but became the first choice dairy foods company for its suppliers, customers
The capital restructure was approved at an extraordinary general meeting
8 May 2015, and on 3 July 2015 the MG Unit Trust was listed on the Australian
Stock Exchange. Of the $500 million raised, $438 million was raised
through the Unit Trust—which was the main vehicle for external investment. The balance,
some $62 million, was raised from supplier shareholders through the
Supplier Share Offer (SSO).
As noted in at paragraph 3.20, suppliers were offered discounted MG shares if
they signed supply agreements with MG for between one and three years.
The capital restructure implemented a profit sharing mechanism (PSM)
that aligns unitholders' and suppliers' economic interests by linking the
dividend rate to the FMP. In summary:
when the FMP is relatively high, MG will allocate a higher
proportion of the Milk Pool to Net Profit After Tax (NPAT) available for
dividends to shareholders and distributions to unit holders; and
when the FMP is relatively low, MG will allocate a lower
proportion of the Milk Pool to NPAT available for dividends to shareholders and
distributions to unitholders.
Figure 5.1 provides an illustration of how the PSM operates.
Figure 5.1: MG's Profit Sharing Mechanism
Source: MG, Submission 8, p. 24.
In certain abnormal circumstances, there is also a provision for the Board
to decide that, for the benefit of all stakeholders, the PSM should be deviated
from when allocating the milk pool to milk payments, income tax and NPAT.
Examples of abnormal circumstances may include extreme prolonged drought
conditions, prolonged levels of materially increased competition for milk
supply, or other circumstances determined with the unanimous consent of MG's
Special Directors to warrant deviation to protect MG's milk supply and
profitability and support its supplier base.
Fonterra's milk pricing structure in the Southern Region
Although Fonterra was aware of the difficulties in the international
dairy market and the impact that would have on its production (that was highly
skewed towards skim milk powder), it was not able to reduce its farm gate milk price
due to its agreement with the Bonlac Supply Company:
Fonterra Australia has an agreement with the Bonlac Supply
Company to pay farmers no less than the price paid for that season by the
leading Victorian processor (by milk volume), which for the term of the
agreement has been Murray Goulburn. This guarantee operates for the benefit of
farmers and was insisted upon by them to ensure Fonterra did not pay them a
price that was too low. It reflects the trust farmers have traditionally placed
in Murray Goulburn, as the leading processor and a farmer-owned cooperative, to
protect farmers' interests in setting the milk price that it pays, and to
exercise good corporate governance and be realistic in making price forecasts.
According to Fonterra, they warned farmers of the possibility of a milk
price step-down as early as August 2015:
Fonterra shifted from bi-monthly to monthly price reviews in
August 2015 to provide more regular price advice to suppliers, and warned
suppliers that a step down was possible if the global market did not materially
improve. In late August 2015 Fonterra Co-operative CEO Theo Spierings made
public comments that the Australian domestic milk price was too high...prompting
widespread criticism that Fonterra was talking the Australian industry down.
And despite Fonterra's warnings, Bonlac Supply Company farmers knew that
Fonterra was obliged to pay not less than the price paid by Murray Goulburn and
so Fonterra could not act until Murray Goulburn revised their price down.
Events leading to the milk price step-down in 2015–16
A chronology of events leading the milk price step-down in May 2016 is
June 2015—MG announces opening milk price of $5.60/kgMS
and reconfirms full year FMP of $6.05, consistent with that provided in the MG
Unit Trust prospectus.
August 2015—MG announces that FMP was likely to be the
range of $5.60 and $5.90 unless there was a strengthening of commodity prices
in the balance of 2015–16.
February 2016—mixed trading conditions lead MG to advise
that the full year forecast for FMP was now $5.60 subject to there being no
further material deterioration in dairy commodity prices or unfavourable change
in exchange rates.
April 2016—MG Board meets to review sales figures and
requests management to review sales expectations for the full year. Unit Trust is
placed in a trading halt while a review of the impact of market conditions on the
2015‑16 outlook is conducted. On 27 April 2016, MG makes a trading update
announcement which outlines the need to reduce the 2015–16 FMP to $4.75 for the
Southern Milk Region only.
MG introduces a Milk Supply Support Package (MSSP) to lessen the impact of the
price step-down (see paragraph 5.41 for more detail).
May 2016—Fonterra reduces the FMP for its suppliers to an
average of $5/kgMS, effective 5 May 2016.
This corresponded to an average milk price of $1.91/kgMS for milk supplied
between 5 May and 30 June 2016.
According to MG, dairy farmers and processors around the world were hit
by a series of unprecedented conditions that have seen the commodity price for
dairy remain lower for longer than ever before:
During FY16, a surge in European dairy production following
the removal of dairy quotas for the first time in 30 years, a continuation of
Russian trade bans and a slowdown in demand out of China converged to create a
'perfect storm', driving commodity prices down to historic low levels, where
they have remained for a longer period than expected or predicted.
However, significant and important questions remain about whether the
management and Board of MG understood the ramifications of not adjusting their
expectations regarding final milk price earlier. Many of these questions are
finally being answered in a case being brought forward by the ACCC against MG,
Mr Helou and former Chief Financial Officer Mr Bradley Hingle. The ACCC claims
that MG, Mr Helou and Mr Hingle engaged in unconscionable conduct by not
updating the forecast final farm gate milk price in 2015-16 to reflect changing
During testimony to the committee, Mr Helou was adamant that announcements
made regarding farm gate milk pricing in 2015–16 were appropriate during his
tenure, noting that he resigned before the retrospective step‑down was
announced. Mr Helou was also adamant that $5.60/kgMS could still have been
achieved for the 2015–16 season if not for the issues in China which removed
the products that were driving profitability and mitigating against low
It was gettable up until the interruption of that e-commerce,
cross-border regulatory announcement, which basically removed our two
bestsellers off the selling platforms.
Accusations have been made that the executive management of MG stood to
gain financially from a high milk price, and that every effort was made to keep
the price artificially high until it was apparent that the expected final price
could not be feasibly realised.
Mr Helou admitted that short and long term remuneration incentives were linked
to the farm gate milk price and that had the price been reduced earlier, there
would have been an impact on his overall remuneration, along with the rest of
the management team.
Views on the retrospective price step-downs
A variety of views were expressed by farmers, processors and other
stakeholders regarding the actions of MG and Fonterra. Most stakeholders did
not look favourably on the retrospective price step-down. However, a number of
MG farmers did voice support for the MG model. Examples of these competing
views are discussed below.
Criticisms of MG and Fonterra
Despite facing similar challenging market conditions, other milk
processors in the Southern Milk Region did not lower their prices. A number of
dairy processors spoke out strongly against the actions of MG and Fonterra. For
example, Lion submitted that:
Retrospective changes in milk price, including price cuts,
are anathema to Lion as they undermine trust, drive volatility and damage
farmers' ability to plan for and invest in their business. That is why, unlike
some processors, Lion has not imposed retrospective cuts in response to recent
market conditions and does not support them as a matter of principle.
Parmalat was particularly critical of MG's actions given its role as
price setter in the Southern Milk Region:
...the wider southern region knew in mid to late 2015 (the
Fonterra CEO identified it in late August 2015) that the Murray Goulburn prices
set for 2015/16 were unrealistic. Murray Goulburn as the largest dairy
co-operative holds a systemically important role in the southern dairy industry
and our national dairy export ambitions. Murray Goulburn and its board and
management therefore has an obligation to act with great responsibility and
transparency. The ambition to succeed is essential but must be balanced with
sensible and mature corporate behaviour.
Similarly, Bega Cheese noted that:
The decision by Murray Goulburn and then Fonterra to cut
prices so late in the year created turmoil for the entire industry...
...Bega Cheese was vocal in its view that such an action was something
that could not be managed by dairy farmers. Bega Cheese believed that given the
time of the year, the risk and the outcome of aggressive competition was the
companies to manage and should not be shared with its suppliers, the new
financial year was two months away and opening prices are traditionally the
time downward trends are reflected in price and equally it is the time that
dairy farmers make their management plan for the coming year which is based on
the newly announced prices.
Bega Cheese went on to conclude that:
Bega Cheese remains of the view that the late announcement of
price decreases and the failure by Murray Goulburn to clearly communicate that
price reductions late in the year or indeed anytime in the year were likely and
the decision by Fonterra to follow Murray Goulburn's lead caused great
financial harm to their suppliers and affected confidence in the whole
While defending the actions of MG, Mr Brett Findlay was scathing of
Fonterra which, he believed, could have maintained prices and foregone paying
Fonterra used MG's woes as an excuse to savagely cut it price
in May and June to $1.90/kgMS. This caused its suppliers immense hardship and
put a number out of business. Bizarrely, some of these farmers blamed MG for
their hardship due to MG's position as price setter for the industry. However,
Fonterra had plenty of choice in the matter.
Of more pertinence is the behaviour of Fonterra whose savage
price cuts to their Australian suppliers caused great hardship including
putting farmers out of business. Fonterra's large reduction in corporate debt
last year clearly indicates there was little financial pressure on them to
pursue such a move, or indeed for them to pay such a low price to their
struggling suppliers in New Zealand. Frankly their behaviour appears nothing
short of despicable.
Ms Karrinjeet Singh-Mahil and Mr Brian Schuler were also critical of
Fonterra's actions regarding the lack of notice given for the milk price drop,
the spreading of loan repayments and interest across the supplier base, and the
lack of specificity in milk statements about loan balances, terms and
conditions, interest charges and the milk price. Regarding the two loan
mechanisms Fonterra put in place for affected suppliers, Ms Singh-Mahil and Mr
Schuler asserted that:
In neither case has Fonterra been transparent about what the
loan balance is, what the terms and conditions are etc. It is all bundled into
the total milk price and we are unable to work out what our actual milk price is,
what repayments are being deducted for the autumn offset and what interest is
being deducted for loans we didn't take out.
Further, Fonterra's communication about the price step-down and
associated support arrangements left much to be desired, as many farmers took
action immediately following the step-down but were not told of the support
arrangements until much later. Ms Singh-Mahil explained her experience:
...we were invited to a meeting at Warrnambool with Fonterra,
where they explained to us what they had done. We said, 'Do you realise what
you have done to autumn calvers? You have affected us disproportionately,
compared to the rest of your supplier base.' Soon after that, they sent us a
note saying, 'We realise we have done this and we will fix it. We are going to
give you $2.50 a kilo extra for the milk produced in May and June, but we are
not going to give you that until August and September and you have to be still
with us to get the money.' It was too late for us, because we had already
trucked a whole stack of cows..., so that impact was already there. But we were
indentured then. We could not leave until August and September, if we had
wanted to, because otherwise we would not get that money.
Many farmers were also scathing of MG's actions. Mr Michael Stapleton
believed the MG Board and management used unrealistically aggressive forecasts
when setting the opening milk price in 2015–16:
My opinion is that the board knew, or ought to have known,
that the forecast for FY16 was unachievable based on their Q1 outcomes.
The board of MG would have known the key drivers of the
budget and hence should have understood whether the business was on track to
meet its plans. For example, they could have tracked the:
Volume of milk intake each month.
Revenue/litre of milk each month.
Product mix each month.
USD exchange rate.
Commodity price index.
movement in these measures would have informed the board as to whether the
earnings forecast remained underpinned by valid assumptions, or whether it
needed reviewing and possibly changing.
Mr Stapleton was also critical that the MG Board did not implement a
one-off deviation from the profit sharing mechanism:
I cannot imagine a more abnormal "other
circumstance" than the FY16 year and a need for MG to protect their milk
supply and profitability and support its Supplier base. The exodus of suppliers
from MG since the revision to the FMP in April is tangible evidence that
Suppliers do not believe their interests have been considered adequately.
Mr Peter Laverty noted that:
...before the 2015–16 season started almost all dairy industry
observers noted the market was weakening and held the view that farmers would
be lucky if they received $5.00/kg solids, notwithstanding the (then) Murray
Goulburn managing director's claims. Despite this, it was not until April, when
the international market had deteriorated much further, that the Murray
Goulburn board reacted. It is totally inexcusable for the board to have only
come to a realisation of this situation at such a late stage. It is symptomatic
of the complete lack of collective commercial judgement.
Mr Laverty was particularly critical of the lack of commercial
experience on the MG Board with only two of the eleven board members having the
requisite skills to guide such a large company in a complex environment. Mr
Laverty made the comparison with the governance structure of Fonterra, where
there is a fully professional main board comprising two farmers and ten members
with commercial backgrounds, and a 'Shareholder Council' elected by farmers to
advise the Fonterra Board on matters affecting farmers.
Given the nature of the dairy industry in the Southern Milk Region,
Parmalat Australia noted that:
The system of opening price and step-up may not be ideal but
in all of 2 of the last 30 or more years, has given southern dairy farmers a
clear 12 month price signal that enabled reliable business planning...
The key to the success of the opening price and step-up
system or the NZ version is in the fact the prudence and good governance of
systematically important processors such Murray Goulburn. The alternative is to
adopt a price system which a much shorter horizon which farmers find unworkable
for their agricultural businesses.
Indeed, Mr Barry Irvin noted that competition between processors within
the Southern Milk Region may have contributed to the retrospective price
So what happens when competition gets a little out of hand?
Probably what you saw last year. I certainly would never want to downplay it, because
it was terrible. But what happened was that there was aggressive competition
for milk actually pushing the price up above what could be returned. Farmers,
for a period, benefited from that competition, but it was, quite frankly,
irresponsible. We could deal with it, but the competition was too aggressive,
and the price went down for the farmers and there was not enough shared risk
management or shared pain.
Parmalat Australia highlighted what it considered to be MG's problem:
Nowhere in the world has a dairy model worked where it's half
listed and half cooperative without some form of pre-agreed formula that
defines the farm gate price...and delivers transparency in price signals. Murray
Goulburn wanted what Fonterra had, but never recognised the leadership,
education, price setting practices and the continuous and early communication
of price risk that underpinned the NZ story.
Transparency of global market information constantly
communicated to farmers in terms of forecast and outlook is essential. Murray
Goulburn did the opposite.
Support for the MG cooperative from
Despite the actions of MG, a number of the cooperative's farmers
expressed confidence in the cooperative model. For example, Andrew and
Christine Sebire submitted that:
Without the co-operative having set and maintained prices as
high as was possible until this year, there is little doubt that other
multinational processors would have cut farm gate prices substantially. The
co-operative keeps the industry honest and should be supported by Government to
ensure that the structure is able to continue to be the farmer advocate and
That said, Andrew and Christine Sebire were understandably concerned
that management and the MG Board did not take action earlier in the season:
We are extremely disappointed that the Murray Goulburn Board
and management did not see the need to reduce the milk price earlier, and with
the way they then managed the situation by imposing retrospective debt.
Some MG farmers questioned whether MG's price step-down was indeed
retrospective. Mr Brett Findlay argued that:
The announcement of the MSSP occurred on 27 April. A round of
supplier's meetings and further written communications to suppliers continued
until 10 May. The co-op continued to pay at the level announced at the start of
the season until this point. On 11 May the new price, supported by borrowings,
commenced. It is this borrowed money which is the subject of the repayment. The
MSSP is controversial, unprecedented and deeply unpopular, but MG told us what
was going to happen before they did it. It is not retrospective.
Similarly, Craig and Rachel Dettlling noted that:
This price adjustment was placed only on milk supplied in the
future, which therefore is not retrospective, and had no effect on the price of
milk supplied previous to 11th May 2016.
However, the fact that the final farm gate milk price for the whole year
was reduced in May 2016 and this meant that milk supplied in May and June 2016 was
paid at a price that effectively reduced the average price for the whole year
would seem to meet the definition of retrospective.
Mr Findlay also considered that the introduction of the MSSP, while
unpopular, was an appropriate option:
At the Supplier's Meetings...Executive General Manager for
Supplier Relations, Robert Poole, described the MSSP as; "All of the options
we had were bad. This looked like the least bad one." It is difficult to
see that this too far wrong.
Support for affected farmers
In response to the late retrospective step-down, MG, Fonterra and
the Australian Government all sought to support dairy farmers affected by these
Given the timing of the step-down announcement, the full impact of the step-down
on MG farmers would have resulted in a weighted average price for the final two
months of 2015–16 of $1.30/kgMS, or about 10 cents per litre. MG noted that:
For some suppliers this would have meant no financial returns
in these months, which would have been particularly devastating for Autumn
calving herds who would have been entering two of their higher milk production
Recognising the potential impact on suppliers, the MG Board introduced
the Milk Supply Support Package (MSSP). The MSSP was a $183 million advance to
suppliers. It was intended to provide a milk support payment so that suppliers
received payments for the 2015–16 season equivalent to an estimated weighted
average available FMP of $5.47/kgMS for the full year.
The support provided through the MSSP was intended to be spread across the
three financial years following 2015‑16. In 2016–17, for example, the
initial FMP of $4.31/kgMS included an initial MSSP repayment amount of $0.14/kgMS.
MG also noted that structure of the MSSP allows suppliers to move to another
processor, contingent on any separate fixed term contract arrangements that may
be in place.
Indeed, many suppliers have moved to other processors as reported by MG in
their 2016–17 half yearly results (see below)
In its submission of October 2016, MG noted that:
Since the introduction of the MSSP it has become very clear
that it is not considered by suppliers to have addressed their most significant
concerns and is reducing MG's competitiveness whilst the sector continues to
experience low commodity prices.
Subsequently, MG undertook a review of the operation of the MSSP and, on
27 October 2016, decided to amend the MSSP by:
suspending MSSP recoupment in 2016–17 from 1 October 2016 in
recognition of climatic conditions and low 2016–17 FMP;
extending the recoupment period for the MSSP from three years to
reducing the annual recoupment to 1c per litre from 1 July 2017,
with the option to accelerate recoupment in high FMP years;
capping recoupment from suppliers, meaning recoupment from
individual suppliers will not exceed individual support received during 2015–16;
a $31.8 million impairment of the MSSP asset reflecting MG's
estimate of future recoupment; and
step-up payments in 2016–17 to suppliers totalling $0.25/kgMS,
reflecting a forecast 2016–17 FMP of $4.95/kgMS.
In addition, MG announced an $81.8 million deviation from the PSM to
allow MG to pay a competitive milk price, regain supplier confidence and arrest
the decline in milk supply.
The impact of the 2015‑16 price step-down was reflected in MG's 2016‑17
first half year results, where MG announced that milk received by the company
had reduced by over 20 per cent compared the first half of the 2015‑16
season. Increased competition was responsible for around 60 per cent of the
milk intake decline during this period with retirements and 'seasonal
reduction' responsible for 15 and 25 per cent respectively.
Indeed, it could have been far worse for MG had suppliers not been
locked into supply contracts through the SSO and other processors had the
capacity to take more milk. Some suppliers have indicated that they would have
left MG if they were not contracted through the SSOs to supply milk.
Bega Cheese also noted that, while other processors in the Southern Milk
Region did have some capacity to accept requests from suppliers to transfer
processors, this excess capacity was limited, and many farmer suppliers had
limited or no choice but to accept the price cuts and claw backs from MG and
Recognising the impact on its milk supply and supplier base, MG
announced on 2 May 2017 that it was undertaking a number of measures to address
its cost base, improve efficiencies and ultimately, increase earnings and the
farm gate milk price. Most notably, MG announced that it would forgive the
MSSP, meaning that all future repayments would cease and MSSP contributions
made between July and September 2016 would be repaid to continuing and retired
suppliers and to any suppliers that recommence supplying Murray Goulburn by 1
Following their retrospective price step‑down, Fonterra put in
place a number of support measures to assist suppliers following the price
Fonterra Australia Support Loans—a low-interest loan program that
offered suppliers a loan of up to $0.60/kgMS, repayable from 2017–18 onwards,
to assist with cash flow in the short term. Approximately 40 per cent of
suppliers have taken out these loans.
Extension of the Employee Assistance Program to all suppliers,
their staff and families, so that they could access free, independent and
confidential counselling services.
Additional offset of $2.50/kgMS for milk supplied between 5 May
and 30 June 2016, payable in July and August, to recognise the
disproportionate effect of the price revision on autumn and split calving
Fonterra did not consider the value of the MSSP in determining the final
price it was required to pay under the Bonlac Supply Agreement. Some Fonterra
farmers were critical of this decision given that MG suppliers actually
received $5.53/kgMS with the MSSP compared to the $5.13/kgMS that Fonterra
suppliers were paid.
Following MG's announcement to forgive the MSSP, Fonterra announced that
it would make an additional payment of 40c/kgMS on top of the milk price for
the 2017–18 season to all current, retired and recommencing suppliers. Fonterra
considers that the additional payment does compensate suppliers for the
retrospective price step‑down in the 2015–16 season, even though it will
be applied prospectively on future milk production. Fonterra has also indicated
that it will reimburse the interest charge of 0.85c/kgMS for milk supplied in
the 2016–17 season.
Government's Dairy Support Package
On 25 May 2016, the Australian Government announced a Dairy Support
Package to help dairy farmers affected by the MG and Fonterra decisions to
reduce farm gate milk prices. The key elements of the package are:
new concessional loans specifically for dairy farmers;
more rural financial counsellors in dairy regions;
more staff to process new claims for income support (Farm
a new Dairy Liaison Officer;
Mobile Service Centres redirected to affected dairy regions; and
additional funding for Dairy Australia's Tactics for Tight Times
Dairy Recovery Concessional Loans are available to assist commercially
viable dairy farm businesses affected by the retrospective decisions of MG and
Fonterra to reduce farm gate milk prices in 2015–16. Loans are available for a
maximum of 10 years, for up to 50 per cent of a farm business's final debt
position to a maximum of $1 million in total.
From 2 May 2016 to 30 September 2016, the number of dairy industry
customers receiving Farm Household Allowance increased from 255 to 476, with
the majority of this increase attributable to dairy farmers and their partners
A variety of views were expressed by stakeholders about the concessional
loans and access to Farm Household Allowance. For example, Mr Brett Findlay
The Federal Government's efforts to help dairy farmers have
been significant and appreciated. The low interest loan scheme can cause some
challenges, particularly if existing lenders are reluctant to free up security,
but the benefits are substantial if farmers are successful.
Mr Findlay went on to relay the concerns of some farmers about accessing
the Farm Household Allowance:
The Farm Household Allowance is a good concept, however, most
farmers regard dealing with Centrelink as extremely stressful. The glacial pace
of progress, excessive bureaucracy and sometimes limited physical access to
Centrelink offices involved are problematic.
Mrs Sarah Parker was also critical of the administration of the Farm
Household Allowance, which she considered to have 'been disaster in its
planning and implementation'.
Mrs Parker went on to explain that it was often easier to find an off farm job
cleaning or stacking shelves, rather than wait for up to six months and/or get
constantly harassed for paperwork that had already been submitted.
Australian Dairy Farmers commented that very few dairy farmers had taken
out concessional loans:
...partly because of the complexity of the conditions that are
applied...in terms of who can have access to the equity that is there to be held
against a loan, for example.
At the hearing in Shepparton, Mr Patrick Nicholson explained why farmers
were reluctant to access these concessional loans:
The problem was it was just...more debt for a business. A lot
of people chose not to go into more debt and either got out of the industry or
reduced their business to a size where they did not actually have to go into
further debt. I think that was the problem. The answer to the problem was not
just to increase your debt load. A lot of people just did not have the opportunity.
They were already in debt to a high level and they did not want to go further
I believe you had to change from your old bank to rural
finance to actually qualify. So that is a problem in itself. If you have had a
long relationship with your own bank and if you are with the way you have been
treated and with the dealings you have had, why should you have to change who
you bank with just to have access to support?
While some stakeholders were supportive of the government's effort, the
majority of stakeholders considered that the best way the government could
support dairy farmers was by creating an environment whereby the farm gate milk
price reflected a level that is sustainable and encourages farm investment.
There is no doubt that the imposition of retrospective price step‑downs
had a devastating impact on farmers supplying Murray Goulburn and Fonterra, and
had broader consequences for other dairy farmers and the surrounding businesses
and communities that support dairy farmers.
Murray Goulburn has recognised that its actions in April and May 2016
were inappropriate and caused significant damage to its reputation. While it
has attempted to make amends through a range of measures, including forgiving
the MSSP, it is likely that it will take a long time for the nation's largest
dairy cooperative to regain the trust of its suppliers. The committee is
concerned that a considered and measured response that limited the impact on
farmers was not devised earlier and steps taken to prevent the initial crisis.
While the intense competition for milk in the Southern Milk Region may
have contributed to the setting of an inappropriate opening price in 2015–16,
responsibility ultimately rests on the executive management team who it appears
were overly ambitious and self-motivated in their attempts to grow Murray
Goulburn quickly. The Murray Goulburn Board must also take responsibility for
not providing appropriate oversight to the actions of the executive management
team. The committee believes that Murray Goulburn should consider adopting a
board structure which has greater reliance on business acumen.
The committee considers that the dairy industry benefits from a strong,
industry leading cooperative and urges Murray Goulburn to reconsider whether
its current capital structure, as a partially-listed cooperative, is in its members'
best interests moving forward.
In relation to the actions of Fonterra, the committee notes that its
decision to reduce the farm gate milk price late in the season was within the
terms of its contract with its supplier group. However, the committee is
concerned that the way Fonterra undertook to impose the retrospective step-down
without due regard to the impacts this would have on suppliers showed poor
judgement and has broken the relationship of trust with many suppliers. Given
the competitive nature of dairy industry in the Southern Milk Region, dairy farmers
should consider whether they wish to be associated with a company that
willingly takes opportunistic measures at their expense.
Given that the farm gate milk price has been retrospectively reduced
twice in the last decade but only once in the preceding 40 years, there would
appear to be issues in the current price setting mechanism. Accordingly, the
committee recommends that processors set opening prices conservatively to
ensure that any downward pressure from market forces will not result in
retrospective price step-downs that have devastating impacts on dairy farmers.
As noted in chapter 3, the committee also considers that the industry,
as a whole, should take measures to stabilise farm gate prices and restrict the
circumstances in which processors can impose retrospective price step-downs.
The committee is disappointed that the government support package has
failed to deliver meaningful outcomes for farmers affected by the dairy crisis.
By not understanding the true issues faced by farmers, the government support
package cannot provide assistance that is relevant and accessible, and, as
such, does not have the potential to make a real difference. Indeed, many
farmers already have significant debts and do not want the government to assist
them to increase these debts further. Further, farmer access to income support in
times of need should be relatively easy and the associated administration
requests not burdensome.
The committee recommends that dairy processors set opening prices
conservatively so that any downward pressure from market forces will not result
in retrospective price step-downs that have devastating impacts on dairy
The committee considers that an independent review of the
government's dairy support package be undertaken to determine whether it has
been effective in improving outcomes for affected dairy farmers and whether it
has delivered value for money.
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