How could Murray Goulburn's chairman and board have been so blind to the realities?

Gary Helou had a grand vision - to create a global dairy giant that would grow and prosper on the back of the seemingly insatiable demand from Chinese consumers for better food.

Unfortunately, that vision blinded him to the reality of what was unfolding in front of him and has cost him his job as chief executive of Murray Goulburn and plunged the dairy co-operative he led into crisis.

Murray Goulburn slashed its full-year earnings forecasts by 40 per cent last week and said it would cut the price it would pay to farmers for their milk from the promised A$5.60 per kilo of milk solids to just A$4.75 to A$5. It blamed lower commodity prices and adverse foreign exchange rate movements.

What's striking about these downgrades is how quickly they appear to have snuck up on Helou.


Just two months ago he was telling farmers they would still get A$5.60 a kilo. In fact, the week before the downgrade, Helou was reportedly touting a A$6 price.

By contrast, back in February Fonterra cut its farmgate milk price from $4.15 a kg to $3.90.

Fonterra might have known that things weren't all that rosy for the dairy industry but that same month Helou was predicting a net profit of A$63 million. Less that three months later Murray Goulburn is expecting a profit of as little as A$39 million.

As Helou stood by his forecasts and reiterated the farmer milk payout, things were turning sour in the milk business. Global dairy prices had collapsed and the Chinese economy was slowing down. China also recently changed regulations governing the online sales that are so important to this market. Finally, the Australian dollar has risen strongly against its US counterpart this year, reducing the amount exporters earn.

What has really hurt the company is its sales of adult milk powder in China not getting anywhere near Murray Goulburn's bullish forecasts. The company ramped up its production of this commodity and now is left with a large stockpile of powdered milk as prices fall.

Once it became aware of the problem, the board acted quickly, letting Helou go and informing the market. But board members have their own questions to answer about why they too were taken by surprise.

The week before the downgrade, Helou was reportedly touting a A$6 price.


Even a cursory knowledge of what was going on in global dairy markets should have prompted the board to question the company's financial forecasts and if they didn't receive satisfactory answers " and how could they have " then they should have acted much earlier.

Chairman Philip Tracy insists the board was vigilant, but then goes on to tell reporters: "The sheer size of the miss between the forecast and the actual outcome caught us all by surprise, including Gary."

But this is the point " the "sheer size of the miss" means it should not have been missed by the board.

The cut in milk payouts is the first mid-season cut since the global financial crisis and illustrates just how flimsy the forecasts were.

In an attempt to limit the damage the cut will do and hold on to its milk suppliers, Murray Goulburn is introducing a Milk Supply Support Package, which sees the farmers actually receive A$5.47 for their milk.

But Murray Goulburn will have to borrow A$165 million to make the additional payments and farmers will have to repay that money with reduced milk payments for up to three years thereafter, so it might not buy a lot of loyalty after all.

The farmers will be annoyed to learn that Helou and other senior executives were to receive bonuses based on keeping the milk price high.

Those farmers will be even less impressed that Helou earned over A$10 million in pay and bonuses in the past four years.

Murray Goulburn listed a year ago and the experience has not been good for shareholders. The shares floated at A$2.10 and were languishing at around A$1.25 at the end of last week.

In the end, Helou's vision and forecasts were little more than wishful thinking.

Ironically, the strategy that Helou pursued of taking the co-op from being a commodity-based supplier towards consumer products and high value-added milk products appears to be working.

Murray Goulburn said the cut to the farm gate milk price wold have been much deeper if it were reliant on the raw milk price alone instead of the higher and more stable prices that consumer products attract.

We need dreamers. But Gary Helou dreamed a little too hard for a little too long.