Why did Murray Goulburn, Australia’s largest dairy co-op, collapse?

Murray Goulburn (MG) had 3.5bn litres of milk. In 2015, MG announced an opening milk price of $4.31/kg (20c/l) which was below the cost of production and 80c/kg behind competitors. This resulted in a rapid loss of milk supply for the co-op as farmers left. In 12 months, MG had lost an extraordinary 1bn litres in milk supply. In 2016, MG’s milk price was still behind other dairy processors and this saw another 600m litres of supply leave in the following six months meaning in just 18 months MG’s milk pool had fallen from 3.5bn litres to 1.9bn litres.

Where did the MG milk supply go?

The MG milk supply went everywhere. Fonterra Australia gained 400m litres of supply in a single year. However, in the first three months of this milking season, Fonterra has lost all of that 400m litres of supply. In Australia, the competition authorities ruled that co-ops can’t sign farmers up to long-term milk supply agreements as it’s deemed to be predatory behaviour.

What happened to the MG co-op?

MG initiated a strategic review and closed three processing sites after losing milk supply. However, we couldn’t downsize capacity at the rate the milk was leaving. The assets of MG co-op were sold to the private Canadian company Saputo for $1.3bn last year.

As a board member at MG, what are your key learnings?

Co-op boards must have a culture of questioning their CEO. The co-op chair has got to create a culture at board level where there should always be a private session before every board meeting where board members can put their issues on the table prior to the CEO and management joining the board meeting. The co-op chair must be totally independent and follow through on those concerns.

What questions should board members be asking their CEOs?

It’s really important that boards are benchmarking their co-op against others. They can then question if the product mix is delivering the best value for farmers. It’s also important to ask whether value-add strategies are actually adding value. Value adding often adds cost but does it add profit? Board members also need to be sure the co-op is investing in new technology with retained earnings. If a co-op has gone five years without investing in the business, it’s in trouble.

What’s the biggest challenge of being a co-op board member?

The biggest challenge in a co-op will always be the need for capital. This creates a conflict for co-op boards in terms of retaining earnings for investments versus paying out a higher milk price. If you don’t invest in your business to be world competitive, you won’t survive in global markets.

What is your advice for Irish co-op board members?

They need to sell the concept to farmers of investing in their co-op and the benefits of owning the supply chain. Farmers will have no input in how a plc company invests its money and how much milk it will take. Therefore co-op board members must explain to farmers at every opportunity the concept of a co-op and what investing in a share in your co-op today will mean for the future.

Kelvin Jackson will be speaking at the ICOS conference in Dublin on Thursday 8 November.