The co-op does a deal with the devil and keeps its soul

I never thought I’d say this but some of my milk will be sold on Coles’ shelves in both homebrand and Devondale cartons from next year. And I’m pleased.

You see, the co-op we supply, Murray Goulburn, is a giant too. It processes around 35 per cent of Australia’s milk and earns $1.17 billion in exports, making MG one of the largest container exporters from the Port of Melbourne. In other words, it doesn’t have to sell to Coles and Woolies, giving it much greater leverage with the supermarket duopoly. It also has the scale needed to be an efficient processor. Most importantly, its number one goal as a 100% farmer owned co-op is to maintain the profitability of its farmers.

All the same, it is confronting when “our” co-op does a deal with the devil. Has it sold out on us?

I asked dairy analyst, Jon Hauser of Xcheque for his thoughts. “My view is the news is very, very positive,” he said. “This is one of the few things that has the potential to lift the returns for farmers by maybe two or three cents per litre and, perhaps more importantly, it can reduce the volatility of farm gate prices.”

The thing is, while Murray Goulburn exports around half of its milk, reducing our reliance on the supermarkets, that exposure to international commodity prices and the exchange rate can be painful, too. International commodity prices rise and fall like a cork in a bottle and the average Aussie dairy farmer loses about $9,000 (according to my back of the envelope sums) with every cent the Australian dollar rises against the US dollar. Of course, it’s at record highs right now and not looking like falling below parity any time soon. The uncertainty that comes with that volatility makes it very hard for farmers to attract finance and invest with confidence in their businesses.

On the other hand, I wondered why Murray Goulburn could make a profitable $1 milk deal with Coles when Lion, the company currently processing Coles’ homebrand milk, cannot. Jon Hauser thinks it’s largely an issue of supply chain efficiency.

“Leaving aside the aberration of $1.00 discount milk, branded milk retails at about $1.60 per litre and supermarket private label at about $1.20 per litre,” Hauser says.

“Farmers are getting 25 – 35 % of the consumer dollar. In the UK and the US farmer share is closer to 50%. Direct supply by a farmer co-op removes the middleman that is adding cost in marketing and collecting additional value from their brands.

“It is true that the supermarkets will become ‘the brand’ but the farmer co-op should also able to retrieve some of this value. In the case of the Coles/MG deal, MG will get part of that return from the ranging of their own Devondale brand.

“What is most critical in maintaining a balance of commercial power is the ability of farmers to sell their milk to a range of alternate customers. Murray Goulburn has the diversity of product and markets to do that and can now genuinely claim that they have a balanced portfolio of domestic and export sales”.

It all sounds very positive for existing Victorian Murray Goulburn dairy farmers like me. But what about for farmers near Sydney, who have been supplying Lion and Parmalat and who traditionally get so much more for their milk than we do yet depend almost exclusively on supermarkets?

Mike Logan, the head of Dairy Connect, which represents the NSW dairy sector, describes today’s announcement as a “game changer” and in a letter to farmers, had this to say:

“We have three big changes on the table at once;
1. The manufacturing milk price rise
2. The drop in production so that NSW and Qld are now short of fresh milk
3. New models of supply to the supermarkets

“This all adds up to change.

“For the NSW dairy industry it may mean:
1. Investment in new processing capacity
2. A new pricing model for the whole fresh milk industry
3. Re-energising brands such as Devondale and Norco
4. Relocation of a large number of farmer dairy suppliers from one supplier to another
5. Changing role of the processors and processing capacity
6. A risk for the milk vendors as the processing sector changes.

“…the supermarkets have been true to their word and have been looking for new ways to create a sustainable future for the NSW dairy industry. We have to look past the $1/litre milk and build a new future.”

“However, these changes will be at considerable cost to some people. We need to be careful and respectful of the impact of these changes. We do not want to create a situation of winners and losers.”

The reality is, though, that there will be losers. Commenting on the future of the current processor of Coles’ milk, Lion, prominent NSW dairy farmer, Lynne Strong (@CHDairies) said on Twitter that “They have lost QLD plus NSW Coles contracts Cant see them surviving this one #sadbutrue”.

Lion is almost certainly not going to be the only loser in what all agree will be massive upheaval in New South Wales. But there will be winners and maybe, just maybe, represented by an increasingly powerful co-operative, dairy farmers will claw back a little dignity. And you, dear milk drinker, will soon be able to buy 100 per cent farmer-owned fresh milk knowing that all the profits stay right here in Australia.

5 thoughts on “The co-op does a deal with the devil and keeps its soul

  1. I really do hope you are right and this is a good thing. At a minimum it shows they are reacting to pressure and trying to look good.

    But…I cant say that I share your enthusiasm. If the economics show that $1 per litre milk is driving farmers to the wall, then who supplies the milk might make a little difference around the edges but it doesnt address the issue that the base price is too low at retail. If anything it legitimises the future of $1 milk and locks in suppliers to lower returns than would be possible if $1 milk was not around.

    And for Coles, it is risk free. The promise of paying a ‘premium’ usually means nothing when you read the fine print. All the capital expenditure comes from MG (ie it’s shareholders). Is anyone at MG prepared to publish the numbers on the viability of such processing plants at a time when other processors are stuggling to make a buck? What happens if the other processors reduce their rates. Will the new plants still be vaiable? Will MG sharelholders receive with one hand (‘premium’ from Coles) and have to give with the other (losses at processing plants)?

    Now that $1 is locked in as normal, what’s to stop Woolies offering milk at say 75 cents a litre? And the spiral continues…

    • All really good questions, Ian. Can’t wait for the next MG suppliers’ meeting! To be fair though, the new plants are being built on the strength of a 10-year contract, which should provide some certainty.

      • Marian, I reckon the test will be how open MG are when you ask them the questions about the 10 year contract. If they dissemble or refuse to provide details then I’d be concerned.

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