Last week: With a 42% Crash in SP one day and a 4.8% drop in SP Friday, some would argue that MGC (read Board) has suffered enough! It's time for the SP to recover. To forgive, forget and move on?
This week (so far): a further 1.6% Fall in SP.
Next 2 weeks: As Murray Goulburn Board and Senior Management (those left) do a "Town Hall" tour of dairy farmer towns, it will be interesting to see what new information comes to light?
The counter-arguments to a short-term happy ending is much more and deeper pain and cuts. Why?
* The MGC "Business Model" was, is, and continues to be, fundamentally flawed. Two examples: first, Private Label Contracts (e.g Coles) of cheap cheap milk (Retail $0.90/carton) and MG borrowing money to invest in new factories to supply them beggars belief. Second, MGC's Farm Gate Price to farmers was never-past, present and foreseeable future- sustainable; it was excessively high. The "List" runs way past 10...
* No self-respecting Bank will fund further MGC debt to simply satisfy unrealistic farmer payouts.
* Board and Management's lack understanding of global markets-especially China-and timing of reporting makes one wonder what they've been doing around the table. (note: all retailers get Daily Reports).
* The global milk supply glut has existed for some time and shows no signs of going away. S>D = low prices. Again, Board did not take this into account.
* The ASX Float in 2015 enabled Murray Goulburn to raise funds to pay down excessive debt. Now approx 40% of the company is owned by External Interests (including Chinese, with JD.Com). That's effectively what Aussie dairy farmers have "given away." To what end?
* Senior Management negotiated, and the Board approve, short-term incentive payments based on a Business Model that delivered unrealistic high Farm Gate prices. Staggering.
* Dairy Farmers have been promised high Farm Gate prices for balance of 2015-16 FY, on further new MGC borrowed money, with the option of walking away in 2016 FY without, it appears, any repaying responsibilities.
The above-plus more more yet to be revealed-combined with drought, locked-in higher water prices and feed costs-means many farmers will go to the wall. The only Q's are how soon and how many?
PS: If there's any good to come from this, let it be lessons for other Farmer Co-Operatives/Entities considering Murray Goulburn's Business Model.
DYOR
MGC Price at posting:
$1.23 Sentiment: Sell Disclosure: Not Held
