April 15, 2013
Gary Helou, the man behind the biggest shake-up in the dairy industry in a decade, jokes that most Australians don’t know even what his Murray Goulburn Co-operative is. “Some people think it’s a fruit company, Goulburn Valley,” says the managing director of the nation’s biggest milk exporter. But come next year, one in every 10 cartons of fresh milk sold in this country will likely be processed at state of the art facilities about to be built by Murray Goulburn. It marks the most significant investment in dairy infrastructure since the market was deregulated in 2000. And that’s only the beginning. The farmer co-operative, established by a group of Victoria dairy farmers in 1950, has its sights set on doubling its $2.4 billion revenue as it targets hungry mouths in Asia. Helou is on a mission to reverse a stagnant Australian milk sector soured by $1 per litre wars, kicked off by retail giant Coles. He joined Murray Goulburn after more than a decade with SunRice, the monopoly rice exporter he transformed from a co-operative to a listed entity that snared a $600 million takeover bid from Ebro in 2011. Since taking on the job he’s become frustrated that New Zealand’s mega co-operative Fonterra has been able to enjoy stellar growth as the nation’s milk production soared 60 per cent to 18 billion litres in the past decade, while at the same time Australia’s milk production has fallen 20 per cent. A decade ago, Australia and NZ produced about the same amount of milk. Helou wants to double the amount his farmer co-op processes from 3 billion litres a year, about 30 per cent of the nation’s production, to 6 billion litres. His plan is to get big, which underpins a move to enter the nation’s fresh drinking milk market through a a strategic $2 billion coup with Coles, revealed last week. Murray Goulburn will take over processing Coles’ private label milk for its Victoria and New South Wales stores from July 2014, ousting Japanese-owned Lion and striking an unusually lengthy decade-long agreement. The headlines created by the deal provided a much-needed circuit breaker for Coles, demonised by farmers after its aggressive decision to sell milk at $1 a litre in 2011. By doing a deal with Murray Goulburn, Coles argues it is doing a deal with farmers, who will enjoy higher returns with undisclosed price premium. Even though Murray Goulburn is a milk processor – just like Lion – Coles argues it has cut out the middleman. In actual fact it’s simply doing a long-term deal with a farmer owned processor rather than a processor controlled by foreign company. The political benefits are obvious. Helou is attempting to strike similar arrangements with Woolworths, yet he’s found himself walking a tightrope. The two supermarket giants are locked in an aggressive pricing war and Woolworths is believed to be fuming over Murray Goulburn’s deal. Woolies had been attempting to win over farmers with a small trial at involving a group of farmers in New South Wales. What’s good for the farmer and the consumer may also be good for the retailer. When Coles managing director Ian McLeod unveiled a 10-year private label milk supply deal with Australia’s largest farmer co-operative on Wednesday, he called it a “win-win” situation. The agreement guaranteed a secure future for farmers supplying Coles-brand milk and ensured that consumers could keep buying milk for $1 a litre, Mr McLeod said. The deal will also be more lucrative for Coles, which threw the industry into a spin when it cut the price of private label milk to $1 a litre in 2011. Coles and Woolworths have been making no money on $1 a litre milk for two years, says Macquarie Equities. The retailers are paying between 85¢ and 90¢ a litre and selling milk for $1 a litre, making a gross profit of 10¢ to 15¢ a litre or 10 to 15 per cent. After costs of doing business around 15 per cent and wastage of 2 per cent, retailers are in the red on white milk. Coles hasn’t revealed how much it will pay Murray Goulburn and Norco co-ops for private label milk over the next 10 years, saying only that farmers will receive a premium to farm gate prices, currently 37¢ to 45¢ a litre.Farmers, consumers and Coles the winners The deals are a win for farmers, consumers and Coles, but a loss for Lion and Parmalat. The processors, who currently account for 85 per cent of the fresh milk market, are on tenterhooks. Lion will lose private label contracts with Coles in NSW, Victoria and south-east Queensland worth about 200 million litres from July 2014, and Parmalat will lose a contract worth 20 million litres in Victoria. Parmalat’s contracts with Woolworths are up for renewal this year and next. Both Lion and Parmalat are now expected to seek long-term deals with Woolworths which, like Coles, is looking for ways to deliver better returns to farmers.