The lower farm gate prices are a boon to Coles, which has a 10-year contract with MG based around the farm gate prices, so the lower they are the higher the profit for the retailer.
MG boss Arvi Mervis is a former beer executive, where margins are around the 35c-a-bottle mark; now he is playing in milk, where at best he is talking a couple of cents.
After roughly 100 days on the job he yesterday unveiled a strategic review to look at just where the co-op will play and how it will survive.
The move was taken badly on the ASX, with its listed units falling more than 12 per cent to a low of 75c a share, down from $2.24 at its opening in July 2015.
The co-op has already said there will be no dividends this year or next.
Farm gate prices, which now stand at $4.92 a kilogram of milk solids, will open the financial year at $4.70 a kilogram and close at $5.30, according to MG. Fonterra has yet to unveil its opening price but its closing price for the year will be $5.70 a kilogram.
Some farmers will struggle to produce milk at less than $4.80 a kilogram, which means they will be dropping money to supply MG at the start of the new financial year. Last year MG was paying farmers $5.60.
MG has already lost 700 million litres of production, with some 400 farms either going out of business or swapping to another processor, leaving it with 2000 farms and 2.7 billion litres of milk to process.
It has already shut three of its 10 plants and further lost production would doom other plants.
The battle over farm gate prices is about how much it can pay to keep farmers happy and how much it can afford to keep its bankers at bay.
The company has $500 million in debt through a syndicate that includes Rabo Bank, Westpac and NAB and gearing of about 29 per cent.
Per-litre prices are worked out by dividing the farm gate price by 13.3, which at the forecast closing price of $5.30 gives you 40c a litre, on top of which MG’s processing margins add another 37c to bring the cost of milk to 77c a litre.
Coles claims it makes no more than 4.5c a litre on its $1 litre milk once its costs are included, but it certainly makes more on the house brand milk it buys from MG for Victoria and NSW than it would if farm gate prices were higher.
Murray Goulburn also faces a class action, an unconscionable conduct claim and an ASIC investigation.
The Mervis review will be updated at its results in August.
Brand resets have become the norm in corporate Australia with Foxtel’s Peter Tonagh following AGL and BHP in revamping his name plate as part of a package to boost sales.
In 22 years Foxtel (controlled by The Australian’s parent company News Corp and Telstra) has grabbed 30 per cent market penetration but seemingly stalled.
While viewers are falling at a fraction the rate suffered by free-to-air TV, it has faced increased competition from video streaming products like Netflix.
Tonagh last night launched Foxtel Now in a program aimed at taking the product to everyone in the country through better programming and more functional streaming.
A Foxtel app on your mobile device can be used to plug in and out of programming depending on what you want, while mainstays like sport can be accessed more easily and cheaply.
The company is now spending $100m on local content outside sport, which is double the spend of five years ago. It’s a tough media market but Tonagh has positioned Foxtel to meet the demands of all viewers of all ages.
Praise for power plan
Environment and Energy Minister Josh Frydenberg is seemingly doing the impossible on energy policy by winning broad approval for his plans to introduce a lower emissions target.
The policy part of Chief Scientist Alan Finkel’s electricity report, to be released at Friday’s COAG meeting, has corralled a broad spectrum of support, from big business to the ALP.
The only recalcitrants so far are a handful of people from Mr Frydenberg’s own party, who are plainly living on another planet.
AGL, Energy Australia and Origin, the big three electricity retailers, are devoting all their marketing to renewable energy use, even if they are still the biggest users of coal-fired power.
The reason is their customers want to know they are using renewables and support them while the retailers don’t worry so much about higher prices.
Strangely this message hasn’t fully got through to Canberra, based on the reported concerns within the Liberal Party.
The bottom line, according to the electricity companies, is that the great majority of Australians support a push to a lower carbon policy and if the LET is the best way of achieving this, then let’s go for it. That’s the attitude voiced by everyone from the ALP to the Business Council.
Origin’s Frank Calabria confided yesterday: “We believe a low emissions target can be a workable solution. Origin looks forward to working with the government to get the design and settings of the scheme right, and to ensure it is complemented with a policy that encourages the orderly closure of coal-fired power stations over time.”
The state energy ministers have a phone hook-up tomorrow ahead of Friday’s leaders meeting and states are yet to voice their opinion. But depending on what else Frydenberg has planned, they should be broadly supportive.
The aim of the review is to get more cheap, reliable electricity and that is best achieved through more supply.
Generation accounts for just 35 per cent of the cost of electricity, with distribution 40 per cent, transmission 10 per cent and retail costs 15 per cent.
There are other costs to consider than actual energy inputs, but of course renewable energy certificates must be added to the final cost.
The good news is more supply is coming by the bucket-load, with more than $8 billion worth of renewable energy being installed, with potential power totalling four gigawatts, or nearly three times the output of the doomed Hazelwood power station in Victoria.
For the sake of clarity it should be noted wind power operates a third of the time and solar 25 per cent, so the actual energy output from a wind-based generator would be a third that of a coal-fired plant.
Finkel has set an intensity level of 0.7 tonnes of carbon dioxide per megawatt hour, which is roughly the output of a black coal generator. The lower you are — by, say, using gas at 0.35 tonnes — the more credits you earn.
In simple terms the LET is the same as the renewable target, except it is open to more sources of power, including coal.
It is also not a million miles away from an emissions intensity target, which is considered too risky because it is closer to putting a price on carbon.
Business is already putting a price on carbon in internal calculations as a screening device.
The ballpark is $40 a tonne.
In time Canberra will catch up to the fact the market is moving well ahead of policy once again.
Source: The Australian