An unusually wet spring, plus low farmgate milk prices and a rush of suppliers quitting its ranks have hit Murray Goulburn’s (MG) earnings, also convincing it to temporarily axe its contentious payment “clawback” scheme.
MG, the business behind the Devondale brand, has confirmed its forecast net profit after tax of $42 million for 2016-17 will now be lower because of a likely 20 per cent slump in milk receivals.
The big dairy co-op has also been forced to cut its forecast seasonal farmgate milk price to farmers from $4.88 a kilogram of milk solids to $4.70kg.
The milk intake slide is attributed to a wave of farmer retirements and suppliers swapping to other processors in the wake of MG’s massive late season price cut early this year and fallout relating to the decision.
On-farm production had also been hit by “very wet” conditions since August, which the co-op said were likely to result in a 10pc to 12pc fall in milk output from its remaining 2200 dairy farmer members.
While all supplier regions in Victoria, Tasmania and NSW had been impacted, the north and west of Victoria were hit hardest, particularly where widespread flooding had impacted dairy herds and pastures.
Northern Victorian volumes fell almost 17pc in August compared with the same time in 2015.
The co-op’s total southern region milk intake is expected to be 2.7 billion litres this financial year.
The big wet follows a severe dry period in southern NSW and Victoria in 2015.
MG’s net milk losses because of retirements and suppliers transferring to other processors alone represented a 350m litre cut on 2015-16 production.
However, MG’s farmers will now receive an extra 14 cents/kg (milk solids) as a result of the co-operative’s decision to suspend its milk payment clawback program until next June.
The clawback has been drawing on farmers’ current milk earnings to repay a $183m milk pool debt created by above-market milk payments last season.
Its temporary removal will now lift MG’s average-weighted available milk price to $4.60kg for the rest of the financial year.
Suspension of the Milk Supply Support Package (MSSP) applies from the start of October, while results of a broader review of the program will be discussed at MG’s annual general meeting next week.
Acting chief executive, David Mallinson, said although until recently there was confidence about spring rainfall was setting the dairy industry up for an excellent season, all of south-east of Australia was severely impacted by “extreme wet conditions”, making lower farmgate milk pricing more painful.
He said milk supply across the board had fallen by 10pc, placing further pressure on the dairy industry supply chain.
MG subsequently now faced a lower-than-expected closing milk price of $4.70kg for the season - down from a predicted $4.88kg.
However, a 35c/kg “additional growth incentive payment” for butterfat and 70c/kg protein has been announced as an option for assistance, from November 1.
“While a disappointing outcome, this revised forecast with no MSSP deduction still provides farmers with a higher net milk price than their current estimations,” Mr Mallinson said.
He said the company appreciated the “severe financial strain” on its suppliers and thanked them for ongoing support.
MG’s cost efficiency drive to cut as much as $60m from operating costs next year was progressing well and savings worth $10m to $15m would be achieved this financial year.
MG was also “proactively managing” its factories to target extra savings, scaling back production plans to cater for the lower milk intake.
“We will continue to review options to enable this cost base to remain competitive,” Mr Mallinson said.