BASIL Ryan has been farming too long to believe that Murray Goulburn's $500 million capital raising plan will secure a bright future for the Australian dairy industry.
Still, he thinks the nation's biggest dairy group has no choice but to bring non-farmer investors into the fold for the first time.
"We've got to be realists," says Ryan, whose family has been selling milk from its dairy near Warrnambool in Victoria's south-west since 1939.
"The reality is they [Murray Goulburn] need the finance if they are going to remain competitive ... [but] I've been hearing for the last 35 years that this or that thing is really going to get us going and in that time production and prices go up and go down. It is the revolving door."
On May 8 Ryan and the rest of Murray Goulburn's 2500-plus farmer shareholders will vote on a major capital restructure which, if approved, will see the company list a unit trust on the Australian Securities Exchange by July. Murray Goulburn, known in the industry as MG, hopes to raise up to $500 million in equity by selling units in the trust to non-farmer investors.
This cash injection will fund growth projects, such as new plants and plant upgrades, that underpin MG's promise to deliver a higher milk price for its farmers.
The investments form the bedrock of MG's strategy to shift its sales mix away from commodities like milk powder towards high value products such as cheese and infant formula.
"At stake is our ambition for MG to be a world-class dairy foods business for generations to come," MG chairman Philip Tracy said at last week's announcement of the vote.
In the fragmented and highly competitive Australian dairy industry, MG is the last major processor owned by Australian farmers.
Lion is owned Japan's Kirin; Parmalat is a subsidiary of French group Lactalis; Fonterra is owned by its New Zealand farmers; Bega Cheese is a public company and owned by its shareholders; Warrnambool Cheese & Butter (WCB) is owned by Canada's Saputo. Prior to listing on the ASX, both Bega Cheese and WCB were farmer-owned businesses.
Some Bega farmers have become millionaires as the company's modernisation has led to growth and a soaring share price since it floated in 2011.
Danny Blake, a farmer with around 500 cows in Victoria's western district, used to supply WCB and now delivers his milk to Bega Cheese. He is not convinced that either company has done the right thing by farmers.
"Time will tell with Bega because they have to answer to their shareholders. When WCB and Bega floated they gradually moved from farmer-shareholders, to investor shareholders," he says. "I don't think they [Murray Goulburn] have much choice in the matter [but to restructure]. They have to evolve. You need capital," Mr Blake said.
In 2014 WCB farmer had the opportunity to cash out when Saputo beat MG and Bega in a three-way bidding war for the company.
"I suppose we sold our right to have a say," WCB supplier Nick Brenyard says.
"Since the takeover it has really been business as usual. Both models [of ownership] can work. If MG can get this to fly and they direct the funds well it could be good for them and for the whole industry," he says.
MG's farmers sent a clear message to the board during consultations that they will not follow Bega and WCB and give up farmer ownership.
"I'd be very disappointed if farmers lost ownership," Ryan says. "It is important to me".
The co-operative's advisers Macquarie Capital and Lazard have created a structure that not only provides MG access to external equity for the first time, reducing its reliance on debt, but critically keeps control of the business in the hands of its farmers.
MG will list with a dual-share structure that retains voting shares for farmers and offers units with economic rights but no voting power to third-party investors.
Restricting voting units to farmers in this way is what New Zealand dairy giant Fonterra did when it floated the Fonterra Shareholders' Fund in Australia and New Zealand in 2012.
But there are some key differences to the Fonterra fund.
Fonterra created the fund to help manage the equity on its own and its farmers' balance sheets rather than to raise capital. In fact Fonterra returned all of the $NZ500 million of equity it raised in the float to its farmers. Aside from this different motivation, the pay off to investors will also be different.
The milk price Fonterra pays farmers in New Zealand is regulated by commodity prices and when prices rise its milk payments, which are a cost of goods sold, also rise.
This means the dividend is counter-cyclical to the milk price and dividends are lower when milk prices soar.