It hasn't been a great year for shareholders of dairy giant Murray Goulburn. The MG Unit Trust (ASX: MGC) shares were already down by over 50% at yesterday's close, but they look likely to drift even lower now following a disappointing market update.
In morning trade the shares dropped as much as 6% before recovering to be down by just 3% at the time of writing.
The update revealed that due to a revised forecast for milk prices and milk intake it expects FY 2017 net profit after tax to fall short of its previous forecast of $42 million.
According to the release milk intake is expected to be approximately 20% lower year on year because of milk losses and wet conditions reducing production.
Net milk losses are now 350 million litres, which represents 10% of FY 2016 production. Retirements from the industry and supplier departures are largely to blame for this.
In addition to this, wet conditions are expected to reduce production from Murray Goulburn's 2,200 suppliers by around 10% to 12% year on year. Whilst all regions have been affected, North and West Victoria have been worse hit with widespread flooding impacting dairy herds and pastures.
The company is working with industry stakeholders to ensure its supplier base and industry are taking appropriate action to address these conditions.
It's not all bad news though. Murray Goulburn has been acting to address the challenging market conditions. So far it has identified a cost efficiencies program that it expects to deliver $50 million to $60 million per annum in savings by FY 2018. This is progressing well, with the upper end of $10 million to $15 million in savings expected to be achieved in FY 2017.
Furthermore, the company's planned working capital release this year of up to $110 million is on track to be delivered.
But despite the silver lining on this dark cloud, I wouldn't suggest investors rush into an investment today. The way things are going I wouldn't be too surprised to see things get worse before they get better.
For this reason investors might be better off taking a look at Bega Cheese Ltd (ASX: BGA) as an alternative investment.
