The MG Unit Trust IPO, which is linked to Australia’s largest dairy group Murray Goulburn Co-operative, has shone the spotlight on the milk sector across the Tasman.

The trust has a similar relationship to Murray Goulburn Co-operative as Fonterra Shareholders’ Fund has to Fonterra Co-operative Group.

But the Murray Goulburn offer illustrates that the Australian co-op has a different milk price-setting structure to Fonterra and returns to non-farmer investors will be determined on a totally different basis from the NZX-listed Fonterra Shareholders’ Fund.

Murray Goulburn was established in Victoria in 1950. The dairy co-op opened its first factory the next year in Cobram, 260km north of Melbourne.

It has grown steadily since then and now has 10 facilities – seven in Victoria, two in Tasmania and one in New South Wales.

Fonterra completely dominates the New Zealand dairy sector, although its share of the country’s milk supply has fallen from 96 per cent to 87 per cent since 2001.

Australian milk production has declined in recent years, from 10.1 billion litres in the 2005/6 season to 9.2 billion litres in the 2013/14 year.

This has been due mainly to extremely dry weather conditions which reduced water storage levels and affected water allocation in irrigated dairy regions.

Over the same eight-year period, New Zealand’s milk output soared from 14.7 billion litres to 20.7 billion litres.


Australasian dairy co-ops; Fonterra dwarfs Murray Goulburn



Murray Goulburn




Milk collection (Million litres)



Milk payout (per kgMS)



Milk intake market share



Dairy farmer suppliers/shareholders









Financial performance



Revenue ($m)



Milk payment to domestic farmers ($m)









Net profit after tax



Fonterra’s figures are in NZ dollars and Murray Goulburn’s in Australian dollars


There are a number of important differences between the Australian and New Zealand dairy sectors, including:

• Australia has 1.7 million dairy cows with an average herd size of 268 while New Zealand has 4.9 million milked cows with an average herd size of 413.

• Victoria, with 66 per cent of the country’s dairy cows, dominates the Australian industry whereas it is more evenly spread throughout New Zealand. The North Island has 61 per cent of the country’s cows and the South Island 39 per cent, with the latter dramatically increasing its share in recent years.

• Only 38 per cent of Australian milk production is exported compared with 95 per cent of New Zealand’s output. Dairy accounts for 26 per cent of New Zealand’s total exports compared with only 1 per cent in Australia.

• Whole milk and skim milk powder represent approximately two-thirds of New Zealand’s dairy exports by value compared with only 37 per cent in Australia. Cheese is Australia’s biggest dairy export earner but represents only 12 per cent of New Zealand’s overseas dairy earnings.

• The Murray Goulburn prospectus proudly states that Victoria “is the second-lowest cost milk-producing region in the world”. Argentina is the lowest cost producer and New Zealand is in third place.

But one of the biggest differences between New Zealand and Australia is their regulatory regimes.

Fonterra was created in 2001 through the merger of the New Zealand Co-operative Dairy Company Limited and Kiwi Co-operative Dairies Limited.

Because of the dominant position of the new company, a regulatory framework was established to ensure the domestic dairy market remained contestable and efficient.

These regulations include the following requirements: Fonterra must accept all milk offered to it, and it must allow farmer shareholders to supply up to 20 per cent of their weekly production to independent processors; new entrants are offered the same terms of supply as existing farmer shareholders, and milk payments to farmers are subject to regulatory oversight including Commerce Commission involvement.

By contrast, the Australian fresh milk market was fully deregulated in 2000 and the sector is highly competitive, with a large number of participants including Murray Goulburn, Fonterra, Lion, Italian Stock Exchange-listed Parmalat, Nasdaq-listed Mondelez International and Toronto Stock Exchange-listed Saputo. The latter recently acquired the former ASX-listed Warrnambool Cheese and Butter.

There is no legislative control over the price paid to Australian farmers for their milk.

Murray Goulburn is 100 per cent dairy farmer-owned and will remain 100 per cent farmer-owned after the issue of units in the MG Unit Trust to external investors.

The MG Unit Trust will invest in Murray Goulburn through notes and these will provide unitholders with an exposure to the profitability of the Victorian based co-op on the same basis as farmer shareholders.

The distribution to unitholders will be equivalent to the dividend paid to farmer shareholders.

This is a fairly similar structure to the Fonterra Shareholders’ Fund, with a number of notable exceptions.

Firstly, the MG Unit Trust board is exactly the same as the Murray Goulburn board, comprising nine farmers, two non-farmer directors and the managing director.

The Fonterra co-op board comprises nine farmer directors and four independent directors – Sir Ralph Norris, John Waller, David Jackson and Simon Israel.

By contrast the Fonterra Shareholders’ Fund has five directors, including Norris and Nicola Shadbolt from the co-op board. The latter is a farmer representative on the co-op board.

However, the biggest difference between the two organisations is how the milk payment to farmers is determined and the surplus available for distribution as dividends to farmers and unitholders.

As far as Murray Goulburn is concerned, a milk pool is derived by deducting total expenses (excluding milk payments and income tax) from total revenue with the residual sum called the milk pool.

This milk pool will be large or small depending on the performance of Murray Goulburn’s businesses, general market conditions and commodity prices.

If the milk pool is large, 92.5 per cent of it will be allocated to farmer milk payments and corporate tax with the remaining 7.5 per cent designated as net profit after tax.

If the milk pool is small, 96.5 per cent will be allocated to milk payments and corporate tax with only 3.5 per cent designated as net profit after tax.

Murray Goulburn’s stated policy is to distribute 100 per cent of its net profit after tax as fully franked dividends to farmer shareholders and unitholders. By contrast, Fonterra does not pay fully imputed dividends.

The Australian co-op has very clear milk payments, net profit after tax and dividend distribution structure. By contrast, Fonterra’s milk payments are determined by a more complicated process as set out in the Farmgate Milk Price Manual.

Fonterra’s milk payment to farmers is based on the price an efficient processor of Fonterra’s scale, and one that only produces certain commodity dairy products, could sustainably pay for the milk collected.

Fonterra’s milk payments are based more on notional figures, rather than actual figures under the Murray Goulburn milk price formula.

Under the Murray Goulburn structure, Fonterra unit holders would have received a substantially higher dividend than the 10c per unit they received for the 2013/14 year.

However, there will be periods when the Fonterra dividend could be substantially higher than its 2013/14 payout, particularly when commodity prices are low and Fonterra’s non-commodity earnings are high.

The MG Unit Trust IPO has directed attention to these unit trust structures and milk price settings on both sides of the Tasman.

It raises the issue of whether the interests of the farmer shareholders and external investors are fully aligned through the Fonterra Shareholders’ Fund and Farmgate Milk Price Manual.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds units in the Fonterra Shareholders’ Fund on behalf of clients.