Shareholders in the MG Unit Trust, which is the listed vehicle for the Murray Goulburn milk business, have reason to be nervous following the decision to conduct a strategic review of the co-operative's capital structure.
While new chief executive Ari Mervis says he cannot pre-judge the outcome of the review, it is highly likely the farmers will come out ahead of the shareholders in the public entity.
CEO Ari Mervis inherited a mess from his predecessor Gary Helou. But in the space of four months he has made key appointments to the management team, put the microscope on costs and set a milk price suited to market conditions.
He has worked hard on the operational challenges at Murray Goulburn while several legacy issues have bubbled away in the background, including a case brought by the securities regulator, a case brought by the competition regulator and a class action.
The company has benefited from the appointment of a new chairman, John Spark, who has a long experience in agriculture through Ridley Corp. Also, he worked at Ferrier Hodgson as a turnaround expert.
It is now clear in hindsight that the decision by the Murray Goulburn Co-operative to introduce a new capital structure and raise $500 million in 2015 was a mistake.
The reason given for the change from a pure not-for-profit organisation to one that shared its profits with public investors in the MG Unit Trust was to provide a strong balance sheet, the funds to pursue growth and higher farmgate returns.
But since the listing in 2015, shares in the MG Unit Trust have fallen from $1 to a record low of 84¢ each. The company has had to prop up its diary farmer suppliers through a debt forgiveness package.
Manufacturing facilities have been closed and there is concern among farmers about the farmgate milk price announced on Tuesday of $4.70kg, which is at the top end of the range forecast earlier this financial year. Murray Goulburn has forecast a milk price range of $5.20kg to $5.40kg for fiscal 2018.
History shows that whenever the interests of farmers at the Murray Goulburn Co-op have come up against the interests of investors in the unit trust the farmers have come out on top.
Mind you, the concessions made to farmers through deviations from the current capital structure, including the debt forgiveness, have been done with the approval of an independent expert, Grant Samuel.
It would not be surprising if any changes to the capital structure are detrimental to the interests of the shareholders in the unit trust.
An analyst at Morgans warned of this in a recent note to clients. He said there was a misalignment between the interests of farmers and investors.
The suspension of the dividend was confirmation to many in the market that farmers will always come first at Murray Goulburn.
