How Murray Goulburn fooled both farmers and investors for so long

Late in the summer of 2016, the then chief executive of Murray Goulburn, the nation's biggest dairy foods company, had dispatched senior staff to China in a push to sell more infant formula.

Caught in the teeth of a global dairy rout, the company desperately needed its new plan to push formula in China to work.

Things were not going well. Albert Moncau, Murray Goulburn's general manager of dairy foods, was struggling to get attention from locals due to Lunar New Year.

"Not good Albert. Need to gain physical distribution ... three months ago," says an email from Helou quoted in court documents lodged last week by the Australian Competition and Consumer Commission (ACCC).

He had a tough message for the man leading sales on the ground.

"We have to get more aggressive in our approach. [He] is up there now and he must focus on this task. He shouldn't come back until he has put in place BIG and IMMEDIATE DEALS!!!"

Those deals didn't arrive. Within months, Helou, the man who had taken the job in 2011 and guided the co-operative through a partial listing and a record run of prices at the farm gate, was gone. So too was Bradley Hingle, the company's chief financial officer. Both men, alongside the company itself, are now subject to ACCC prosecution.

Helou's spray at his Chinese team is just one of the extraordinary revelations in the regulator's detailed statement of claim lodged this week in the federal court.

The document gives an unprecedented insight into the unravelling of one of the Australia's biggest agricultural companies and a collapse that sent reverberations through both the investment community and dairy towns around southern Australia.

For its part the company says it will not comment on matters before the court and will respond to the allegations in the ACCC documents when its defence is filed at the end of August.

A key issue is the company's monthly Revised Income Forecast (RIF), prepared to help track financial performance, especially the all-important "final milk price".

At the start of every financial year, Murray Goulburn would provide two prices to its supplying farmers - the opening and final milk price. The opening price, usually, is about 90 per cent of the final price at the end of the year. Murray Goulburn followed this pattern every year, bar a hiccup during the global financial crisis.

In the unpredictable world of farming, this is a way of trying to introduce a measure of certainty.

The production of the RIF is a key focus of the ACCC in its pursuit of the executives and company it claims misled farmers about what they might expect.

There was a RIF in the background when on May 1, 2015, Helou wrote to farmers saying the company forecast a final price of $6.05 per kilogram of milk solids.

It was built on assumptions about the volume of whole and skim milk powders, butter and cheese Murray Goulburn could sell and the prices it would get. The company was betting on increases through the coming financial year.

Yet court documents reveal that the prices Murray Goulburn was accepting were already dropping sharply by the end of May. By August, the price for whole milk powder had fallen from $US2500 a tonne to $US2050 a tonne, skim milk from $US2100 a tonne to $US1720 a tonne, and butter from $US3500 to $US3000 a tonne.

From the get go, there was nervousness in the ranks. Aditya Swarup, executive general manager of strategy, wrote to Hingle on the same day the letters went to farmers, saying the budget for the dairy part of the operation was "already very aggressive".

Despite some wobbly signs in the markets, the company doubled down in June, even as forecaster Rabobank cut expectations for prices by about 20 per cent.

At a board meeting on June 24, Helou and Hingle recommended the board set an opening price of $5.60 per kilogram of milk solids after working backwards from their final price promise of $6.05 a kilogram. That day, the company announced the price.

"While commodity dairy markets remain subdued and exchange rates unpredictable, we are confident that demand growth for dairy foods will remain strong over the medium to long term," Helou said.

The ACCC says Murray Goulburn already knew that markets were moving against it and should not have made such representations without qualification.

By July, the sales division was running numbers that came up short of the budget from May. In fact, they felt that every quarter would miss its target and the gross profit for the division would be $200 million south of where it needed to be.

Enter the RIF. The message was bleak. The "low" case was a final price of $5.06 per kilogram milk solids and the "high" case was $5.33 - well shy of the $6.05 promised to the world. There was talk that seizing "opportunities" could lift the top case to $5.66.

By the end of the month, Helou was acknowledging internally there was a "gap". The ACCC alleges this was another moment to come clean. It wasn't taken.

Alarm bells were ringing though as prices in August were hitting record lows. The response? Management came up with a series of "stretch targets". In effect, this meant massive increases in production and sales goals. For example, the new targets would require the sale of 49 per cent more 1 kilogram milk powder packets, or "sachets", in the financial year.

A RIF was prepared using the stretch targets and the result was a top-case scenario at $6.05.

The company's head of group finance had seen enough.

"These forecast/prices do not look like they are based on reality - rather purely a goal to seek to achieve a certain outcome," he wrote in an email to Hingle.

"Not putting realistic forecasts to the business/board, including high opportunity targets, does not serve any purpose in actually getting a realistic picture on the true prospects currently around the milk price."

It was at about this time that Murray Goulburn's arch rival, Fonterra, had called out prices in Australia as being too high in the middle of a global dairy rout.

Nevertheless, the RIF was taken to the board a couple of days later on August 28 and subsequently Helou presented the company's results to investors. "We think the market has bottomed," he said.

The company did suggest there was a chance prices might slide but maintained confidence of hitting the $6.05 benchmark. Investors lapped it up and the share price jumped 5.8 per cent in a day.

In the ACCC's eyes, it was all digging a deeper hole.

Murray Goulburn held meetings with farmers in Victoria and South Australia looking for good news amid unusually dry conditions that had seen some culling stock. The company line was maintained.

By now it was RIF time again and the September edition told management that the stretch targets weren't being hit and the most likely price was $5.67. The public result was the same. No change.

The dose was repeated in October when the RIF predicted a recovery in global prices that would secure the $6.05 as a "high" case but that $5.73 was most likely.

The ACCC says the numbers were based onunrealistic commodity prices and stretch targets.

Another public examination was on the horizon in the shape of the company's annual general meeting. There Helou stuck to the $6.05 pledge but warned it could slide to about $5.60.

Within weeks, another big rival, Warrnambool Butter & Cheese, was publicly complaining that the prices being paid to farmers couldn't be maintained when global prices had halved.

By November, some of the stretch targets were being ditched and a new plan was put to the board to go after the Chinese infant powder market. This underpinned a slightly new-look RIF aimed at filling a building profit hole despite - as the ACCC puts it - there being "no contracts or firm commitments for the sales". For the record, the RIF's best guess on the final price was $5.69.

The baby formula plan was ditched just before Christmas and a new plan hatched. Murray Goulburn would try to sell 58,000 tonnes of sachets at a price that would produce $150 million in gross profit. This second stretch target would help produce a final price of $6.04. (Murray Goulburn had sold just 11,872 tonnes of sachets between July and November of that year. Its previous annual record was 15,000 tonnes.)

"Murray Goulburn did not know whether it would be capable of producing enough sachets to meet the second target," the ACCC says.

Executives were nervous. There was talk of logistical problems reaching the targets.

Helou was not about to start the year without a plan. He wrote to senior executives saying his targets were "clear, simple and bold".

The company, which had only once before produced more than 4000 tonnes of sachets in a month, would count on producing almost double that to churn out 42,000 tonnes over the first six months of 2016. Not only that but, starting in February, it would produce 200 tonnes a month of infant formula.

Yet again there were no contracts in place to buy the additional product. The board by now was sceptical. Ken Jones, a director, sent an email to the board, Helou and Hingle stating he was "extremely concerned about Murray Goulburn's half-yearly accounts and future prospects for profits getting anywhere near the PDS advice and suppliers' expectations".

Executives too were asking difficult questions.

February sales were well short of the RIF and both the "sachet volume and price are at risk" according to an internal message.

It was at about this time that Helou sent his China pep talk.

Undeterred, in late February the already ambitious sachet targets were upped again.

At the half-year results Murray Goulburn told farmers $5.60 would be the final milk price unless something went badly wrong. It told investors there were no material risks on the horizon. But within days, Moncau wrote to Helou to say the likely price was more like $5.37.

On April 27, the game was up. Helou and Hingle stood down. The final price would now be between $4.75 and $5.

Farmers who had been expecting substantially greater payments were confronted with demands for a clawback. Shares in Murray Goulburn's listed offshoot fell 42 per cent in a day. The whole sorry saga represents unconscionable conduct says the ACCC. The court will get the final say.

This story first appeared on The Sydney Morning Herald.