Q and A with Philip Tracy

After years as a city-slicker in the finance industry, Philip Tracy is back on the family farm. He talks to Tony Featherstone about the challenges of transforming the Murray Goulburn Co-operative Co and capitalising on Asia’s “dining boom” amid soaring demand for dairy products in the region.

Milking cows at 5am on a cold Victorian morning seems a lot more peaceful than governing one of Australia’s largest organisations: the Murray Goulburn Co-operative Co.

In just over two years as chairman, Philip Tracy GAICD and his fellow directors have modernised the Murray Goulburn board and, in conjunction with the executive team, are overseeing a major transformation of the business that involves identifying a five-year $500-million investment program. So far, the program has delivered more than $100 million in efficiency gains and cost reductions.

The board has also helped shape a new strategy to produce higher-value products and has guided the co-operative through its aborted takeover of Warrnambool Cheese and Butter earlier this year (see p50). For good measure, Murray Goulburn is talking to shareholders about listing a unit trust on the Australian Securities Exchange (ASX) in the next few years that will allow it to raise hundreds of millions of dollars, while retaining full farmer control.

Pressure to transform Murray Goulburn is intense, as giant dairy multinationals race to capitalise on Asia’s “dining boom”, amid soaring demand for dairy products in the region.

Tracy was a good choice to chair Australia’s largest dairy foods company. He grew up on a dairy farm and his family has a proud history in dairying in South Gippsland, Victoria. After studying commerce at La Trobe University in Melbourne and working in accounting and investment banking, he returned to the farm in 1996 – a seachange of sorts to help the family business. He recalls milking cows before the sun came up, then heading to work at his accounting practice, where days were spent completing tax returns and providing small business advice. “At least my farming clients knew I understood what I was talking about,” quips Tracy.

Tracy and his extended family operate three dairy farms, milking more than 2,000 cows and employing more than 20 people. Tracy is also a partner in an accounting firm in Foster and in 2005, he started Southern Stockfeeds, which has grown significantly and employs more than 25 staff.
Tracy was elected to the Murray Goulburn board in 2009 and appointed chairman in November 2011, a rapid rise for a dairy farmer turned accountant who had limited governance experience at the time.

“It was a great time to join the board,” he says. “We knew the opportunity to supply dairy to Asia was moving quickly and that Murray Goulburn’s transformation had to start with the board. We needed world-class governance to oversee the co-op’s strategic change.”

Tracy has a critical role: Murray Goulburn employs more than 2,000 staff, had annual turnover of $2.38 billion in 2012-13 and helps set the benchmark milk price in the Australian dairy industry. By listed company standards, Murray Goulburn would rank in the S&P/ASX 50-100 companies and is one of Australia’s most important agriculture businesses.

The humble Tracy is keen to downplay his achievements and talk up the work of the board and management, and Murray Goulburn’s potential. It has had significant board and executive renewal since 2009. Most of the current 12-member board have joined in the past five years; a new managing director, Gary Helou, was appointed in October 2011; and several senior executive appointments have been made.

There is little time to waste. Asian demand for dairy products is booming as more people move from subsistence lifestyles to the middle- class and food consumption changes. On some estimates, the world will need an additional 35 billion litres of milk by 2020, or another 70 per cent on current levels. A significant portion of this increased demand is in Asia.

This opportunity has not been lost on global dairy giants that are acquiring businesses or forming joint ventures to create scale. Murray Goulburn, too, sought greater scale through an attempted takeover of Warrnambool Cheese, but withdrew its offer once Saputo achieved more than 50 per cent of Warrnambool shares after Foreign Investment Review Board approval in November.

The Australian dairy industry has plenty of ground to make up in Asia. Key rivals, such as New Zealand, have made bigger inroads into Chinese markets, thanks to free-trade agreements and less currency pressure compared to our persistently higher Australian dollar. Tracy believes Australian dairying could miss out on a once-in-a-generation food boom in Asia if it does not move quickly.

“This opportunity will quickly pass us by if Australian dairy does not respond aggressively or continues to see itself as little more than a bulk exporter of commodities, when the future is in supplying higher-value-added dairy products to Asia,” says Tracy.

“As an industry we have failed to invest in plant and equipment that operates at world-class levels of efficiency. This is required to capture the full value of the opportunity. The plant must be of sufficient scale to compete with the world’s best.”

Tracy is passionate about the power of innovation to transform Australia’s dairy industry. “Other countries have moved much further down the product innovation path and we need to catch up. The investment has to provide the capacity to customise the products for consumers in our chosen markets.” He believes that having nine directors who are dairy farmers on the Murray Goulburn board is a strength. “Every director knows what they are talking about and is deeply engaged, because their community’s livelihood depends on it,” he says.

Although he enjoys governing Murray Goulburn, the 48-year-old has no immediate aspirations to join or chair other boards. He has little spare time because the co-op is two years into a five-year strategic transformation program and there is an accounting practice, fast-growing stockfeed business and three farms to keep an eye on. Four children, aged nine to 16, also keep Tracy and his wife busy, and life on the farm at Yanakie, in south-east Victoria, is never dull when a calf suddenly needs to be delivered or an extra hand is needed with the milking.

Here is an edited extract of his Company Director interview:

Company Director (CD): Australia has an incredible opportunity to supply dairy to developing nations, particularly in Asia. Can you describe the scale of this opportunity?

Philip Tracy (PT): World demand for milk represented by the internationally traded milk pool is expected to grow to 85 billion litres a year by 2020, from about 50 billion litres currently. That is a massive deficit to supply – an extra 35 billion litres within six years. New Zealand says it can supply five billion litres of that deficit, Europe may be able to do the same and the US exports less than 10 per cent of its milk supplies. But it is not just Asia where demand for milk is rising rapidly; the Middle East, all the way up to Russia, is consuming more dairy.

CD: Is Australian agriculture generally doing enough to capitalise on this so-called “dining boom” over the next decade?

PT: No. It’s not until you visit Shanghai and other big Asian cities that you get a sense of what is happening in the region and the scale of opportunity. These countries want a higher standard of food consumption as incomes rise, and Australian agriculture needs to be at the forefront of that. When more people in the region move from a subsistence lifestyle to the middle-class, one of the first things they demand more of is dairy.

But our agricultural industry has not been aggressive enough in pursuing this opportunity. We have to move now to get our share of the global dairy prize, otherwise the opportunity will pass us by.
There is so much happening in the global dairy industry. I note that 19 of the world’s 20 largest dairy companies were involved in mergers and acquisitions, or joint-venture activity, in the past 12 months. The global dairy industry is rapidly changing – we can’t afford to sit back and watch it happen.

CD: What’s holding Australian dairy back?

PT: There’s been a general complacency in Australian manufacturing and it’s not unique to agriculture. European dairy suppliers, for example, have had to continually innovate, due to export supply quotas, and move up the value chain. They simply could not rely on the volume growth, as the New Zealand dairy industry and to a lesser extent Australia, has. Our major dairy competitors are being forced much further up the innovation path and we need to catch up. Australian dairying has underinvested for too long in value-added products. This is something Murray Goulburn is addressing through its $500-million investment program over five years, as part of the co-op’s transformation strategy.

CD: How can federal and state governments help stimulate this dining boom?

PT: The crucial missing element is a free-trade agreement between Australia and China, so our dairy industry has a comparable position to our major competitors, such as New Zealand. I recognise that free-trade agreements take a long time and are hard to achieve. Australia’s recent agreement with Japan did not provide the total prize our dairy industry sought, but was a step in the right direction. A lower Australian dollar would also help dairy exporters.

CD: Murray Goulburn wants to export value-added dairy products. What is the significance of that strategy?

PT: It is crucial. Australian dairy has to get out of the mindset of pushing bulk commodities to the rest of the world and focus on producing higher-value products. We can’t just keep exporting bulk milk powders, bulk cheeses and bulk butters; the key is to brand products and give Asian consumers a dairy product in the format they want. Murray Goulburn has estimated it can deliver a 20 per cent uplift in the milk price to farmers in its co-operative, over five years, by efficiently exporting value-added products, such as cheeses, spreads, infant nutrition and other dairy-based foods.

CD: Strong knowledge of Asia seems critical for the Murray Goulburn board and other Australian agricultural companies for that matter. Does the governance community need to focus a lot more on cultural skills diversity on boards?

PT: Yes. Murray Goulburn has learned a lot by having people on the ground in Asia. Our board also currently has two special directors in Mike Ihlein and Peter Hawkins, who both bring very strong financial and international experience to the board. In addition, our constitution has capacity to add a third special director. Someone with firsthand global food industry knowledge and particular experience in South-east Asia, including China, would be of significant benefit.

CD: What is it like leading a board during such a high-profile takeover attempt and what advice could you give other boards in a similar situation?

PT: It was intense. The board already had a heavy workload because of Murray Goulburn’s transformation strategy. Our co-op had a strategic stake – about 10 to 12 per cent – in Warrnambool and decided to increase that to 17 per cent once it was clear the company was in play.

It was a dynamic situation: the executive team and board assembled a very good team of advisers and we were absolutely clear in our thinking about how Warrnambool fitted into Murray Goulburn’s long-term strategy and how much we were prepared to pay for it.

It was a good lesson in the importance of a board and executive team being prepared for a takeover, either as an acquirer or a target. Events with Warrnambool unfolded incredibly quickly, but we were able to assess the situation because we had a clear strategy. The earlier work we did to modernise the board and introduce best-practice governance structures helped with the takeover work.

CD: Was Murray Goulburn disappointed to miss out on Warrnambool?

PT: Disappointed is not the right word. It would have been fantastic for the Australian dairy industry had Murray Goulburn acquired Warrnambool and built something of significant scale and efficiency. It was clear that Saputo (the Canadian company that acquired Warrnambool) was prepared to pay a higher price as a right of entry to this market.

But the critical thing is that Murray Goulburn had a disciplined approach to the takeover, knew what it was willing to pay and when it would walk away. I’m really proud of the work of the executive team, the board and our advisers during what was a very contested takeover.

CD: You mentioned the importance of greater scale and efficiency in Australian agriculture. Are there too many dairy farms in Australia and do we need to see much more rationalisation?

PT: I honestly believe that some of the most efficient dairy producers in Australia are the small farmers. The big corporate suppliers simply cannot compete with the small farmer who is willing to work long hours and knows how to work the land. The family dairy farm still has a huge role to play and has much to gain from Australia supplying more dairy products to South East Asia.

That said, the Australian dairy industry needs significant rationalisation of dairy processors. We have too many sub-scale processors and multiple processors for different dairy products. We can become much more efficient at processing and exporting dairy.

CD: What’s next for Murray Goulburn? Will you follow the Fonterra Shareholder Fund’s lead and list part of the co-operative on ASX?

PT: Murray Goulburn said at its AGM in November last year that it was looking at its capital structure and listing a unit trust structure on ASX, to raise capital and aid price discovery, in the next few years. I emphasise that no decision has been made, but there is merit in having a unit trust structure that can help raise capital to fund Murray Goulburn’s transformation, while not changing control of the co-op, which is fully owned by dairy farmers.
Investors could invest in a unit trust to gain exposure to Murray Goulburn’s income stream and receive the same dividend as farmers in the co-op. The future dividend stream would also allow us to better value Murray Goulburn, which is important as farmers buy or sell their shares.

CD: What is it like chairing a co-op?

PT: Like any board, it has its moments. But I grew up in the dairy industry and love it. I know the other farmers and special directors on our board feel the same way when I say it is a privilege to govern this organisation.

When you see the work Murray Goulburn does to grow the dairy industry, you understand the importance of having a strong co-op in the middle of this great industry and the positive flow-on effect this has to regional communities and “mum-and-dad” farmers.
I shudder to think what Australia’s dairy industry would look like if it did not have the co-op model at its core. The experiences of other industries have shown that when you lose your co-op, you lose that middleman whose motivation is to lift the price, protect farmers during a downturn and be there for the long haul.

CD: What is the board’s role in Murray Goulburn’s transformation strategy?

PT: The board recognised very early that for Murray Goulburn to transform itself, the board also needed to transform. We knew that to build a world-class dairy co-op, we needed a world-class board with world-class processes. We recruited a very experienced company secretary and general counsel in Fiona Smith (ex-BHP Billiton), and reworked our board charter, sub-committees and other governance processes, to ensure they were absolute best practice.

We put all the farmers on our board through the Australian Institute of Company Directors’ governance education programs. Our directors are very experienced in dairy and tend to be community leaders who are forward looking. But the board knew it had to better educate directors on governance matters, so that everybody knew what was required to be an effective, diligent director.

CD: What’s next for you? Will we see you on more boards?

PT: For now, I am very occupied by the Murray Goulburn role and my private businesses and farms. I’m not looking for more board roles, but I enjoy chairing Murray Goulburn and working with my fellow directors and the executive team.

CD: How do you relax away from work?

PT: With two boys and two girls, my wife and I have a busy existence, although it’s not very different to other busy households. Yanakie is a wonderful place for the kids to grow up. These days, I mostly go to the farm to relax and unwind after working in my other businesses.

The days of milking cows at 5am during peak times, then heading to the office for a full day of accounting work are, thankfully, behind me. I always intended to return to the family farm after my days of being a city-slicker in the finance industry were over. It happened sooner than I expected and I’m glad it did.