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Murray Goulburn's milk collection sinks 21% in first half, outpacing Fonterra

Friday 24th February 2017

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 Murray Goulburn Cooperatives' domestic collection slumped by more than a fifth through the latter half of last year, outpacing the decline Kiwi rival Fonterra Cooperative Group faced, as record rainfall and a tougher fight for suppliers sapped its intake. 

Melbourne-based Murray Goulburn, Australia's dominant milk processor, collected 1.61 billion litres of milk in the six months ended Dec. 31 from 2.03 billion litres a year earlier, as Victorian production sank 9.9 percent due to record rainfall in September last year and an "aggressive competitive environment has resulted in substantial milk loss as all players seek to replace intake due to seasonal conditions", it said when reporting its first half result. 

The dairy cooperative said the seasonal reductions were broadly in line with the industry decline, although retirements had been higher than normal. 

Earlier this month Fonterra said its Australian production shrank 7 percent to 75.7 million kilograms of milk solids in the six months ended Jan. 31, saying milk supply was hit by "unfavourable pasture conditions". 

"Record rainfalls and high levels of competitor activity have reduced our milk intake, impacting revenue and our ability to fully recover fixed costs and overheads," managing director Ari Mervis said in a statement. "In addition, although the recent increases in global prices of dairy commodities are welcome, they have not recovered in time to impact on MG's first half sales volume."

The dairy processor was caught out by last year's slump in dairy prices, which persisted longer than expected as global supply outstripped demand. 

Murray Goulburn sank into the red in the first half, posting a loss of A$31.9 million from a profit of A$10 million a year earlier. That included a A$34.8 million increase in its impairment provision on milk supply support package, a finance line set up to help farmers get through last year's slump in dairy prices. 

Revenue dropped 15 percent to A$1.18 billion, and the dairy company's net debt jumped 72 percent to A$677 million, taking the gearing ratio to 37.8 percent from 25.6 percent a year earlier. 

The dairy processor affirmed its forecast farmgate payout for the current season at A$4.95/kgMS, following Fonterra's lead for its New Zealand suppliers yesterday.

Murray Goulburn's also declared a fully-franked interim dividend of 1.7 cents per share for its farmer shareholders and 1.7 cents per unit for investors in the unit trust it listed in 2015, using the format adopted by Fonterra where outside investors could gain exposure to the processor’s earnings stream via the unit trust. That's half the 3 cents per unit/share interim dividend last year. 

The ASX-listed units dropped 6.7 percent to 91 Australian cents, the lowest in almost two months. The units sold at A$2.10, the lower end of the target range, but plunged in April 2016 when Murray Goulburn downgraded its milk price forecasts and earnings outlook, blaming unfavourable currency movements, tepid Chinese demand and inventory writedowns. Managing director Gary Helou and chief financial officer Brad Hingle left the company as a result.

That attracted law firms to file a class action against Murray Goulburn as to whether the unit trust investors were misled, and is also subject to investigations by the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission over potential breaches of securities and competition law, which the dairy company acknowledged in today's interim report as a contingent liability. 

Separately, the ACCC is investigating the wider dairy sector after clawback provisions were triggered to recover processors’ over-payments when the forecast milk price was higher, which Murray Goulburn today said isn't expected to be completed until November this year.

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