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Potter's View: "He has laid all the dirty washing and bad news out so the members know where he is starting from"

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This month, Ian Potter takes a look at the current position of First Milk and ponders whether its new pilot can save it from a devastating nose dive, and on the wider front looks at the current prices in the industry and the prospects for recovery.

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Just as the crisis in milk prices is proving to be a pressure point to drive on-farm change and efficiencies, I hope the same will be true for First Milk. I make no apologies for returning to that business because, along with appalling milk prices, it is the second most popular talking point among farmers.

 

Mike Gallacher is the new pilot on the First Milk flight deck. He has checked the instrument panel and realises he is in a storm, is low on fuel, with poor engine performance, a demotivated crew and disillusioned passengers. He also has far too much milk for his tea, and it is slopping around the cabin and dripping through the floor. It’s up to him to land this plane.

 

He has inherited a loss-making business, with loss-making assets, and with resigning members – more of whom will go when other companies start recruiting (if they do). Normally such circumstances would trigger a merger, but First Milk’s historical track record in this area of business is poor.

 

Credit to Gallacher so far, though, he has laid all the dirty washing and bad news out so the members know where he is starting from. He has informed members the business lost in excess of £16 million in the year to March 31, so despite paying one of the lowest farmer milk prices in the country it still paid too much for its milk. What was the previous administration doing?

 

He realises engagement and honest straight talking with members is essential if they are to stay on board and trust him. He has not been brought in as the change-andfix- it person or the maintenance man – he is the turnaround person and he needs results quickly. He will have to ignore noisy protestors and those who get in his way and simply do what must be done, and quickly.

 

Gallacher’s problem is the co-op has limited free cash (if any), hence without the help of a partner like Adams (aka Ornua Foods) and investment in First Milk’s cheese plants, the co-op simply cannot, and will not, find money to invest or reinvest for several years. That is something many of its members will relate to, sadly. Many of its hard-working, honest, family suppliers are also struggling for exactly the same reasons – they don’t have the cash either.

 

Accompanying Gallacher’s first announcement of about 70 job losses and differential pricing came the news from chairman Jim Paice of an independent review in to the co-op’s governance (its board) and commercial learnings from its ‘recent disappointing performance’. That’s an understatement if ever there was one. The independent review is the board’s brainchild, and I hope it will be a hardhitting Lord Myners’ type review as into the Co-operative Group business.

 

In his 2014 review Myners ruffled feathers stating the Co-operative’s board ‘isn’t up to the job’ and he recommended the board of farmers, nurses etc, be replaced with people who had the right skills and experience to run the organisation. He said none of them had the ability, with one member’s experience extending to only the local golf club. Myners also stated it was ‘a cosy board’, with several who simply didn’t want to give up their pay and power. He confirmed they were stuck in denial as to their near ruinous failure of governance which led to the Co-op’s near collapse. “The board’s directors have to accept responsibility for what has gone wrong,” he said.

 

Myners also rejected the idea the board could be trained, going on to say ‘being led by eager, earnest but unqualified amateurs is no way to run an organisation’. I can see First Milk members rolling back their eyes knowing the current board is unlikely to escape conviction for the current dire situation, despite the fact one or two would like to create a smokescreen dense enough to cover up their failures. However, the last thing First Milk needs now is a post-mortem or a witch-hunt.

 

I will be keen to see how hard hitting (or cosy) the First Milk review is. Let me nail my colours to the mast. I have no desire to see First Milk fail and end up like its predecessors DFOB, Westbury or Amelca who exited the industry in spectacular style having clocked up catastrophic losses and taking heaps of farmers’ money with them. Gallacher and this review could be a turning point, but to make an omelette you have to crack eggs, and while I recognise one or two First Milk board members have skills beyond the farmgate, some are enthusiastic amateurs. First Milk needs hard-nosed commercial expertise on the board who can assist with the turnaround.

 

Now prices. There are glimmers of hope global milk production is slowing down in response to very low prices (although not in the UK just yet). It’s a step in the right direction, but significant product surpluses have built up in the last 18 months, and these will be slow to clear to bring the market back into balance.

 

Going forward volatility will be a permanent feature in world dairying, and to cope with it farmers will have to refrain from unnecessary spending in the good times.

 

Those who are highly geared and made significant investments in 2012-2014, many having stress-tested their milk price at 30p (and failed), are in serious trouble. Those who have prepared for the worst and squirrelled away some emergency money will come out of the end of this very long tunnel in a reasonable, if not a good, position.

 

For the borrowers I say take note of comments made by New Zealand’s Federated Farmers chairman Andrew Hoggard about NZ farmers’ debt levels. In 2003 average debt levels were NZ$9.50 per kg of milk solids, and at the end of last season it had doubled to NZ$18.90/kg. Almost 25% of dairy farm debt is owed by farmers who are in debt to the tune of NZ$30/kg or more.

 

At the time they expanded such a dramatic turndown was not foreseen and, let’s face it, the banks who loaned them the funds to expand didn’t see it coming either!

Ian is a specialist milk quota and entitlement broker. Comments please to ianpotter@ipaquotas.co.uk

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