The effect of major retailers on the raw milk price
4.1
The introduction of $1 per litre milk in 2011 was controversial then and
continues to be over 6 years later. Indeed, during this time, the relative
importance of private label dairy products has extended well beyond just milk,
and, as a result, has significantly reduced the value add of the entire
domestic dairy industry.
4.2
The committee investigated the impact of $1 per litre milk soon after
its introduction in 2011.[1]
That inquiry concluded that $1 per litre milk had benefited consumers and that
these types of free market outcomes should not be a matter for government,
especially in a deregulated industry. That inquiry also concluded that dairy
farmers in a diversified dairy product market like the Southern Milk Region
would not be significantly worse off because of the lower milk retail price.
That said, the committee did recognise that in Western Australia and
Queensland, where there are few processors and production is primarily limited
to drinking milk, pressure on retail prices could potentially impact the farm
gate price.
4.3
This chapter explores the effect of dairy pricing decisions by major
retailers on consumers, farmers and processors.
Lower dairy prices give consumers choice
4.4
Intense retail competition between major supermarkets and relatively new
market entrants has driven the prices of many consumer staples lower over the
last decade. Dairy products have been at the forefront of much of the price
deflation, not only with the advent of $1 per litre milk, but also through
other private label dairy products, including cheese and cream. Increased competition
from imports of cheese and butter from New Zealand has also contributed to
reduced prices.
4.5
Lower dairy prices have the potential to increase the purchasing power
of consumers, particularly low income consumers where dairy is an important
staple and source of nutrition. Coles sought to bring the committee's attention
to the benefits to consumers from lower dairy prices:
We hear a lot what customers should want and what they should
be able to afford...Most of our customers feel the impact of cost-of-living
pressures every week...[2]
4.6
Both Coles and Woolworths emphasised the range of dairy products offered
across their stores. Woolworths noted that:
When it comes to the dairy section...our shelves are reflection
of what our customers want to buy. We compete by offering an extensive product
range. In dairy alone, our customers can choose from more than 270 different
fresh milk products...over 400 different cheeses, 650 yogurts and 80 creams.[3]
4.7
Coles highlighted that:
...we are a customer-first driven organisation and we provide a
very wide range of choices for our customers—in this case, in the milk range
that we offer. This is a range based on the types of milk we provide and the
types of budgets that we cater for. That ranges from the Coles brand anywhere
up to the $5.69 range for branded milk. We let our customers decide what they
want to choose and we stock appropriately.[4]
4.8
By providing a range of private label and branded dairy products, the
major retailers contend that consumers have choice in how they support the
Australian dairy sector. Indeed, following the announcement of the
retrospective price step-down in May 2016, many consumers chose to purchase
branded milk instead of private label milk. Dairy Australia reports that:
The market share of branded fresh white milk was 34% in April
2016, before rapidly increasing and peaking at 49% in early June. Since then,
branded milk's market share has fallen, and now sits at 42% in March, which is
still around 8% higher than in the period prior to the 'Milked Dry' segment on
The Project. [5]
Private label branding initiatives
also provide choice
4.9
In addition to working with local dairy suppliers, both Coles and
Woolworths have developed specific initiatives to support dairy farmers either
directly or indirectly.
4.10
Since 2013, Woolworths have supported a private label range of milk that
is sourced directly from farmers and is available in five states. According to
Woolworths, contracts for Farmers' Own branded milk are negotiated directly
with farmers and these longer term contacts provide greater transparency and
certainty, while also delivering a higher farm gate milk price.[6]
4.11
In relation to the Farmers' Own initiative, Woolworths noted that:
The relationship gives the farmers end-to-end transparency
from shed to shelf, a longer term contract and a closer relationship with the
customer.
...
It has proven very popular with customers, eventually. In the
initial years...it did cost us many millions of dollars, but we saw fit to honour
our arrangements that contracted with...[7]
4.12
The success of the Farmers' Own initiative has led Woolworths to
consider further initiatives to continue to develop and grow partnerships
directly with dairy farmers.[8]
While this initiative may be beneficial to the small number of farmers
involved, it is of no benefit to the vast majority of farmers who cannot access
these arrangements.
4.13
Coles has established relationships with industry bodies in Western
Australia, South Australia and Victoria, whereby a margin from specifically
branded private label milk is placed into 'industry funds which farmers can
obtain access to for additional assistance'.[9]
For example, the Victorian Farmers Federation has partnered with Coles to raise
money for the Farmers' Fund, which is designed to increase the resilience and
sustainability of dairy farmers through the provision of grants. The initiative
raises money through the sale of Farmers' Fund milk, where 40 cents from every two
litre bottle is directed into the Farmers' Fund. Dairy farmers can apply for
grants up to $10 000 for programs, training or infrastructure that
enhances productivity, builds resilience and stimulates sustainable growth.[10]
4.14
While the approach of Coles does not increase the farm gate milk price
directly, farmers do benefit indirectly from the sale of this milk.[11]
Reflecting on the Farmers' Fund initiative, Ms Alana Brennan contended that:
Dairy farmers do not want grants from supermarkets but rather
a fair price for the produce. These organisations are all reluctant to speak
out against factory behaviour for fear of upsetting the milk companies. They do
not represent dairy farmers. Trying to stay loyal to two opposing masters is
impossible.[12]
Wider effects of lower dairy prices
4.15
While there is no doubt that lower retail prices have benefited
consumers, the effect on processors and farm gate milk prices is more complex
due to contracting arrangements for private label dairy products, cost
allocations between private label and branded products, access to shelf space, and
the devaluation of dairy products in the minds of consumers.
Profitability of private label
dairy products
4.16
Stakeholder views were mixed on the profitability of processors
supplying $1 per litre milk to retailers. The different views on the
capacity of $1 per litre milk to support the farm gate milk price reflect
variations in the costs of the production across dairy producing regions. For
example, Parmalat Australia, a processor with operations across different dairy
regions, explained the financial viability of $1 per litre milk across the
different production areas:
With a long term farm gate milk price of circa 45cpl
($6/kgMS), milk collection of 3cpl and processing costs (including packaging)
of approximately 25-27cpl, it is more than obvious that a Victorian, Tasmanian
or SA retailer can expect to source local fresh milk from processors and sell
that product for $1/litre. That price will cover the retailers own distribution
cost plus achieve a real in-store margin on sales albeit at [a] lot lower level
than other chilled dairy categories...
But in central NSW and WA where farm gate milk price is
closer to 52cpl and milk collection 5cpl or Qld with a farm gate of 57cpl and
collection also at 5cpl the economics of $1/litre Private Label must be even
more questionable and the market distortion against branded milk and
independent retail channel even more pronounced.[13]
4.17
A number of processors stated that private label contracts for milk were
a positive influence on the milk price paid to farmers. For example, in
relation to its 10 year contract with Coles, Murray Goulburn stated that:
The milk price paid to MG by Coles locks in a margin that
delivers additional profits to MG farmer-suppliers over the life of the
contract. The margin is not affected by price fluctuations in international
dairy markets or movements in the Australian currency and the contract contains
rise and fall provisions to protect the margin farmers receive.
...
To clarify, MG has received a better return for the milk
solids sold via daily pasteurised milk than it would have received if these
solids were sold into many of our other dairy markets.[14]
4.18
Norco, a cooperative operating out of northern NSW and southern
Queensland, has been able to strengthen its financial position and the farm
gate milk price while also having contracts to supply $1 per litre milk through
retail channels.[15]
4.19
Indeed, Coles stated that their contracts for private label milk are
priced at levels that they considered to be sustainable for processors and
farmers:
...we pay a range of production costs...as well as a margin back
to the processors to ensure their sustainability and the sustainability of
their farm base.[16]
4.20
But WA Farmers were critical of the defence used by supermarkets that
contracts are with processors, not farmers:
Because the processors are being screwed and that is where
Coles and Woolworths say, 'We don't have contracts with farmers. We don't make
the farm gate price. The processors do that.' We are at the end of the chain
and we are the weakest in the marketplace, so it ends up coming our way.[17]
4.21
Mr Greg Dennis, a dairy farmer from Queensland, outlined his experience
following the introduction of $1 per litre milk in 2011:
Immediately following the price war on milk, Australia Day
2011, as dairy farmers in Queensland were coming off existing contracts for
that first year or so, our big milk-processing companies wore the losses as
they negotiated new contracts with particularly Coles and Woolworths. The year
following that, our contracts were renegotiated and we saw immediately a loss
of between 20 and 25 per cent, which took us back to 1990s farm gate milk
prices.[18]
4.22
And it appears that price pressures on farmers persist, predominately in
drinking milk production areas. The QDO provided some anecdotal insight into
the cost of supplying private label milk in Queensland:
Anecdotal evidence suggests that in some regions the cost to
get milk to stores is around 73c/L if not lower, some like Queensland are very
close to $1/L while other markets are reportedly $1.25/L. These costs of supply
do not include a reasonable apportionment of retailer costs or a profit margin
for retailers.[19]
4.23
At the Brisbane hearing, the QDO elaborated:
The price we are being told in Queensland is that the milk
sent to a distribution centre is at least 95c[/L]. You have the biggest
decentralised state in Australia and to suggest that it costs less than 27c to
move around Queensland would be a joke. By getting it at 95c to 98c, plus 27c
[for distribution] and probably plus another few cents as well, and then
selling it at $1, you can see what effect that is having in the marketplace.[20]
4.24
Similarly, at the hearing in Perth, Western Australian processor, Brownes
Dairy, confirmed that private label milk supply was not profitable for them:
...I can tell you we make nothing on selling the $1 milk to
Woolies. In fact, if I do a full value attribution on it, we probably lose
money on it. It certainly does not pay for my salespeople or any of the sort of
support services that we provide.[21]
4.25
It is worth noting, however, that the relative profitability of private
label dairy, particularly in the Southern Milk Region, is linked to the export
price for dairy commodities. The prices of other dairy commodities play an
important role in determining how $1 per litre milk affects farm gate milk
prices. Mr Barry Irvin reflected on the dynamic nature of pricing:
The thing that I am always careful to say is that there are
actually a lot worse returning products in the dairy industry than $1-a-litre
milk and so it needs to be held in perspective in terms of how much of the
volume there is. For example, last year, in the pit of the commodity price
crash, whole milk powder was worth 34c. Bulk cheese was lucky to be worth 40c.
Of course, at the other end of the spectrum infant formula was quite nice to be
involved in. That has all changed around this year.[22]
Cost allocations and pricing
transparency
4.26
Consistent with the evidence to the 2011 Senate inquiry into supermarket
prices, the QDO was critical of the cost allocations and margins between brands
of white milk which are applied by supermarkets:
...retailers apply different cost allocation methodologies and
margins for different products they sell. For their own milk brands they sell,
the allocation of retail costs and margins is often low or zero to make these
products attractive to consumers and to gain market share. For processor
branded milk, there are usually a higher allocation of retail costs and
significant retail margins, reported to be between 24 and 40% which makes the
price of branded milk higher and less attractive to the consumer.[23]
4.27
Processor margins on dairy lines are also reduced through promotional
activity. Brownes Dairy outlined the impact of supermarket promotions on
processors:
Promotions are mostly funded by the processor, in other words
the retailer's margin is nearly always protected. This can be very detrimental
to the processor if there are multiple and frequent promotions between
competitors, effectively all competing for a smaller share of shelf. For
example, during 2016, flavoured milk promotional activity in one of the major
supermarkets increased by 40%, significantly eroding processor margins through
effectively reduced volume share on crowded shelves.[24]
4.28
Pricing transparency issues extend throughout the value chain. Harris
Farm Markets explained their difficulties of finding an ethical source of
drinking milk due to the limited options to move outside the existing supply
chain:
As a retailer we now find it difficult to find any supply that
give certainty that farmers are not being held over a barrel. We also fear that
the milk we are selling is coming from farmers who are underpaid regardless of
how much we pay for the product.[25]
4.29
Despite wanting to, Harris Farm Markets are not able to inform consumers
about whether more expensive branded milk results in higher farm gate prices.
They highlighted the transparency issues that many small retailers and general
public face when interested in knowing the price paid to farmers:
We were told by the major multinational processors that the
farm gate price was confidential and would not be disclosed. No matter how we
tried we were not able to influence the price or even ascertain the price that
farmers would get and hence we could not provide this information to a public
that wanted to do the right thing.[26]
4.30
In response to claims that higher branded milk sales do not increase the
farm gate price, Lion commented that:
...claims that farmers do not benefit from increases in branded
milk volumes are a gross over-simplification and are focussed on short-term
market dynamics. It is precisely because Lion is a branded milk player focused
on sustainable margins and profitability that it can offer the sort of price
premiums, contract security and choice to farmers...Any further erosion in
branded milk and dairy volumes will only compound margin compression in the
processing sector, which is already struggling to generate sustainable
commercial returns.[27]
4.31
And processors have adjusted their business models to take account of
private label milk with relatively low returns. For example, Lion stated that:
We are committed to creating sustainable partnerships with
our dairy suppliers and this premium on milk price comes as Lion continues to
lose money on our white milk business in Australia. Throughout the past year we
have again experienced a decline in modified white milks—this is offset by our
performance in other dairy categories namely milk based beverages and yoghurt.[28]
Access to shelf space
4.32
A number of stakeholders highlighted the link between supply of private
label dairy and better access to supermarket shelf space for branded products.
For example, Brownes Dairy noted that supply of private label dairy had led to
other opportunities:
...the nature of dealing with these people [supermarkets] is
that it is a portfolio of products.[29]
4.33
Similarly, Mr Ben Govett, a farmer supplying Parmalat, commented that:
...my company was one of the companies involved in the liquid
milk market and, when Murray Goulburn decided to get into that market, our
company actually lost the contract and they were actually happy about it...
Our company was in that market because they got better deals
on paying for shelf space and advertising in the supermarkets for their branded
products.[30]
4.34
When asked about the Norco‑Coles supply arrangement, the QDO
considered that:
...the real reason Norco does that deal is to get all its other
products into those Coles stores, and make sure they can sell the other
things—where they make more out of them—in those stores, whether it be their
own-branded white milk, flavoured milks, and other manufactured products. And I
think for the other people that do deals with those larger supermarkets, I
think it is also the case for them: the deal is done because you need to sell
other products.[31]
4.35
However, Norco disputed this claim saying that it was continued demand
that ensured shelf space:
It is never guaranteed. You have to have a product that is
desired by the consumers. It has to have turnover and it has to provide margin.
They are not going to place a product on the shelf which does not sell. So you
actually have to have an active marketing campaign, a product that suits the
needs, and generates the turnover that supports its position on the shelf.[32]
4.36
That said, Norco acknowledged that relationships with retailers are
important for value creation:
Business is all about relationships, and we need to have a
strong relationship with retailers to be able to access that channel. Their
strategies may not necessarily be aligned to ours, but our strategy needs to
be: how do we access that channel to get the best value for our members?[33]
4.37
Access to shelf space for smaller milk processors can present challenges
not faced by the larger processors. Mr Greg Dennis from 4RealMilk conveyed his
experiences:
We have made a decision to only sell milk into independent
retailer outlets. We have been approached by Coles and Woolies. We have chosen
not to go there. There is still a lot of pressure within the independent
sector. We have found that coming from large milk companies, who are choosing
to turn our bottles around so customers cannot read labels. They are shifting
milk into poor locations in the shop and narrowing our facings. That has had a
negative impact on our milk sales, despite the fact that we have grown from 60
stores to over 300 stores in the past three years. It is not just one sector of
the market that is creating a problem here; it is both retail and processing
that is concerning me.[34]
Devaluation of dairy products in
the eyes of consumers
4.38
Many stakeholders outlined that private label dairy, and the low prices
associated with it, had effectively devalued the dairy industry in the eyes of
the consumer. For example, the United Dairyfarmers of Victoria noted that:
Devaluation of milk is not confined to drinking milk. This
devaluation has spread throughout the dairy supply chain to products such as
yoghurt and cheese. This means less value for dairy products across the
industry.[35]
4.39
Similarly, the Australian Food and Grocery Council commented that:
The $1 milk—and it has just ticked over six years since it
came in—really had nothing to do with the cost of production of the milk. It
was about driving foot traffic into the supermarkets...Of course, milk is at the
furthest point from the entrance, so the consumer attracted by $1 milk walks
right through the supermarket and they pick up sales along the way...but we had a
concern at the time, and we still have a concern, that when the retail price
drops that sharply it reduces the profit pool right back through the whole
supply chain.[36]
4.40
Reflecting on the ethics of using a $1 per litre price point, WA Farmers
considered it was not appropriate to place the blame on the consumer for their
purchasing decisions:
It does not reflect value, it does not reflect the cost of
production, it does not reflect the cost of transport, retail or any of those
things. It is just a marketing ploy. And then they say the consumers wanted it.
If you asked a consumer, 'Do you want to pay $1.50 or $1?' they are going to
say $1. That is a cheap way to get out of the question, and I think it is an
irresponsible way to get out of the question. If you asked a consumer, 'Do you
think the price of milk should be what sustains a sustainable industry and
enables farmers to farm sustainable long term? Do you think the price should
deliver that action or not?' I think the consumers would answer 'yes'. So it
depends how you ask a question. You cannot blame the consumer for picking up a
dollar-litre milk. It is there in front of them. We would argue that it should
not be there in front of them.[37]
4.41
Australian Dairy Farmers cited research by Dairy Australia that
$1 per litre milk had not increased per capita consumption:
...$1 per litre milk has failed to deliver on Coles' claim that
their marketing strategy has increased dairy consumption. Their strategy has
failed to increase milk consumption, has seen millions of dollars taken out of
the value chain and has severely impacted many dairy farmers.[38]
4.42
Dairy Connect considered that the effect of domestic competition from
private label dairy across the entire product range had reduced the farm gate
milk price by $0.70/kgMS or about 5–6c per litre:
The marketplace has pushed a lot of pressure back down onto
the farmers. We, as farmers, believe that the current supply agreements put us
in a very weak position. We are not able to go out into the marketplace and
take out milk to other suppliers because of the conditions and perishability of
our commodity.[39]
4.43
Many stakeholders commented that $1 per litre milk had devalued milk as
a commodity and this has adversely affected farmer confidence and self-worth:
The way the farmers feel about it [$1/L milk], which I
absolutely understand, is that they feel devalued by it and they feel like,
when they look at water and they see that as more expensive, which is
inevitably always mentioned, it does affect confidence. It does affect the way
they feel that their work is viewed.[40]
There is no doubt that the introduction of $1/L pricing has
had a significant impact on predominantly processors. Further, processors
suddenly found their biggest wholesale customers have turned also into their
formidable competitors, with considerable leverage over other dairy products
supplied by processors, not just milk.[41]
4.44
Relatively low retail prices have led to underinvestment in value-adding
manufacturing capacity in regions where farm gate milk prices are relatively
high. In Western Australia, for example, Brownes noted that:
The erosion of processor margins have been of such scale that
capital investment in research and development as well as upgrading plant and
equipment, beyond maintenance capital, have become unviable.[42]
The underinvestment in processing equipment to manufacture
stored milk products is presenting challenges for processors in times of
significant surpluses.[43]
4.45
The QDO questioned the overall sustainability of $1 per litre milk in
high cost production regions:
It is clear that the current use of milk as a close to or
below cost 'advertising agent' by major supermarkets is having a direct
cumulative and detrimental impact on the domestic fresh milk dairy industry. It
is progressively undermining the viability and sustainability of the domestic
dairy industry.
...
Because of dollar a litre pricing, farm gate prices in Queensland
are below farm subsistence levels—they do not allow the necessary and normal
range of business expenses to be incurred...[44]
4.46
The QDO further submitted that, in the long term, this may have adverse
price implications for consumers:
It is short sighted to believe that forcing retail milk
prices down is in the interests of consumers. In the short term, consumers do
benefit from lower milk prices. In the longer term though, as retailers wipe
out other retailers and milk brands, consumers will pay for the lack of
competition.[45]
Committee view
4.47
While there is no doubt that an increased volume of private label
products has affected processor margins and farm gate milk prices, there have
also been significant benefits to consumers from the expansion of private label
dairy products. Given the intense competition between retailers, it is unlikely
that private label dairy prices will rise significantly anytime soon. Indeed,
it is more likely that there will be further pressure on processors to continue
to lower prices even further.
4.48
The committee does not consider that it is the role of government to
intervene in the contracting and marketing decisions of supermarkets and the
relationships that they have with their suppliers. The proposed introduction of
an effects test is considered in chapter 6.
4.49
The committee does, however, recognise that many consumers are willing
to support farmers through the purchase of branded products which have the
potential to increase farm gate milk prices. In the interests of fairness and
equity, it seems inappropriate that private label products should have
relatively low retail margins compared to branded products, as consumers who
would like to support higher farm gate prices are disproportionately supporting
the profit margins of supermarkets and processors.
4.50
Increased consumer awareness has the potential to make a difference,
particularly if pressure can be placed on retailers and processors to be more
transparent about how different products affect farm gate milk prices and the
role of branded products in supporting the industry and dairy farmers. Accordingly,
the committee considers that all stakeholders in the industry need to take a
proactive role in educating consumers about the dairy industry so consumers can
make an informed choice when purchasing dairy products.
4.51
In addition, retailers need to ensure that supply contracts for private
label and branded dairy products continue to be set at levels that ensure farmers
receive a fair and sustainable price. Consistent with the recommendations in
the previous chapter, the committee encourages retailers to enter into
contracts that, in principle, seek to reduce the volatility in farm gate
pricing and provide sustainable outcomes for dairy farmers.
Recommendation 4
4.52
The committee recommends that representative organisations of the dairy
industry, together with retailers, develop an education campaign to promote
awareness about the dairy industry so consumers can make informed choices when
purchasing dairy products.
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