Murray Goulburn (MG) chairman Phillip Tracy has told a Senate inquiry the co-operative had started a review of its milk price payment mechanism.
Mr Tracy, and interim chief executive David Mallinson, appeared before the Senate Economics Reference Committee into the dairy industry, in Melbourne.
“Currently MG pays 90-92 per cent of the forecast milk price at the beginning of the season,” Mr Tracy said.
“The review will determine whether this approach remains fit for purpose, amid ongoing volatility in commodity milk price index.”
He acknowledged volatile market conditions, a subsequent milk price reduction and introduction of the Milk Supply Support Package (MSSP) in April had affected farmer confidence.
“We had to respond immediately and transparently to evolving circumstances including; falling international demand for adult milk powders; and volatility in exchange rates and commodity prices.
“In responding we had two options – we could have sought to reduce the price by the full amount required which would have seen an average price paid to suppliers in May/June of less than 10 cents per litre.
“Instead we chose what we believe was a much fairer option – the introduction of the milk supply support package. “
He said the current situation MG found itself in had nothing to do with the co-operative’s structure.
“If we didn’t have the $500 million in capital, we would not have been in a position to offer the support package, to the level we are.”
MG believed the MSSP had been a fair option but it had not met expectations.
“It became clear the MSSP was not operating as it was originally intended,” Mr Tracy told the inquiry.”
There would be no further re-couping of the MSSP during this financial year.
Mr Tracy told the inquiry, headed by Queensland Labor Senator Chris Ketter, the co-operative had recognised bulk commodity markets “were facing strong headwinds.
‘Demand in China was subdued, Russian trade sanctions still existing, so once again, a hit on demand and we had seen European quotas removed for first time in 30 years, delivering significant new supply onto the world markets, which was depressing bulk commodity markets.”
“We were being open and transparent in what we saw in the market.”
From February to the April revision of the milk price, had seen a dramatic change in circumstances.
“The circumstances did not stay the same, volatility in exchange rates, in adult milk powder sales, in particular within that dairy food segment, did not continue in the same vein as it did in the first half,” Mr Tracy said.
“No-one could have forseen the deterioration that had occurred in that period, in that segment of the business.
“No-one could have forseen the circumstances and the sudden impact of those changes.”
“External analysts were expecting increased supply to come from Europe, including Ireland and that was factored into our forecasts.
“We were expecting increased supply to come on line, but we were also expecting markets to stabilise and recover, it just didn’t happen in the same time frame that we – or other commentators – were expecting.”
Mr Tracy was criticised by South Australian independent senator Nick Xenophon, who said MG had “locked itself into a dud deal with Coles” over dollar milk.
“People were saying this was a train wreck in slow motion, so when you say you had to respond immediately and transparently, to changing circumstances and no-one could see the deterioration, aren’t you, in fact, misleading the committee by saying that ?
“The board should have seen it coming, given the commentary that was out there, isn’t (saying sorry) really weasel words, in that you should have seen it coming, for the best part of three years ?” Senator Xenophon said.
“Can you concede you did see it coming, and it’s been coming for the past two and a half years.”
Senator Xenophon said the price was not sustainable, as the co-op had to borrow money to maintain the price.
“You paid a profit, by virtue of borrowing more and more money, in financial year 2015.”
Mr Tracy said the money was used to invest in increased plant capability and operating efficiency.
“We were renewing our operations, that was core to our strategy – we needed to invest, we needed capital to invest.
“No-one could forsee the deterioration, the sudden impact on the dairy food segment, particularly on adult milk powders, going into China.”
Mr Mallinson said the Coles 10-year agreement was not linked to dollar a litre milk, but that it was supplied at a weighted average.
“That is the price Coles elect to put it on the shelf at – it’s the weighted average basket returns from all our products, being milk price, our conversion costs, associated in converting to product and the agreed margins.”