Has the MG co-op fed Aussie dairy farmers to the wolves?

If $1 milk is unsustainable, how is the Coles deal locking in pricing with Murray Goulburn a good thing? Good question. Has MG made a giant mistake? Will it mean a mass exodus by NSW dairy farmers and will the big co-op do its socks on the deal, taking the hopes of dairy farmers down, down, down with it? Blair Speedy of The Australian certainly seems to think so.

I decided to ask some rather blunt questions of two men in the know: independent dairy analyst, Jon Hauser of Xcheque and Murray Goulburn big-wig and general manager shareholder relations, Robert Poole.

1. How can MG make a profit supplying fresh milk to Coles if Lion could not?
Robert Poole refused to comment on Lion’s circumstances but said the co-op’s new factories would be “purpose-built, state of the art and the most efficient milk processing plants in Australia”.

“We will make a good return supplying Coles and will have the capacity to supply other customers in time, too, making even higher returns.”

Jon Hauser goes further. “I can see how 10 cents per litre in costs can readily be taken out of the chain,” he says. “There is a view in the dairy community that milk should be sold for more than a dollar per litre when it’s being sold cheaper than that right now in the USA and the United Kingdom. The local processors have been retaining much more of the milk dollar than international processors.”

2. What risk is there to the $120 million of farmers’ funds that will be spent on the new factories?
Poole says quite flatly that the cost of the factories is well and truly covered by the 10-year Coles contract: “We have total security. There will be no cross-subsidisation of this investment – it will be fully funded by the agreement with Coles.”.

3. Why hasn’t MG sold fresh milk into supermarkets before?
“Historically, we would have had to submit a tender for milk supply. And what, build factories in the hope that we won?,” says Poole. “This was a golden opportunity. Nobody gets a 10-year contract like this but Coles came to Murray Goulburn because it wanted to work with farmers.”

4. How does it work for MG?
According to Poole: “Under the supply agreement, the price to Coles is based on a farm-gate price and the cost of processing plus a comfortable profit margin. There’s a rise and fall clause that means the price reflects the changing value of the milk on international markets.”

Hauser explains that the New Zealand and Australian dairy industries are “price takers”, unlike the Europeans and Americans, who have greater control over pricing.

“Australia can’t control the export price but, reading between the lines, Murray Goulburn is using the Coles deal to increase its control over the price it gets for its milk and will position itself for a much greater role in the 2 billion-litre fresh milk market. Because MG will slash the cost of delivering fresh milk to supermarkets, I predict the co-op will be selling supermarkets a billion litres of fresh milk a year by 2023.”

“Aside from milk, the deal also allows MG to range its cheese, butter and spreads in Coles, which makes it even more attractive.”

5. Has the Coles and Murray Goulburn deal devalued milk?
Poole was ever the diplomat on this one, saying the retail price of milk was “up to the supermarkets”. Hauser is a tad more direct. “For people to say milk will be devalued is absolute rubbish,” he says. “This is a great deal for MG’s farmer members. Is it MG’s responsibility to stay out of the market and let nonsense economics run the show?”

6. How will this affect NSW dairy farmers?
Hauser says many NSW dairy farmers will need to reassess their businesses. Milk price in both NSW and Victoria will be based on a mixture of domestic and export value with the export market being a major driver of that value.

The man himself, Robert Poole, says the NSW price will reflect “supply and demand, international prices and a premium that takes into account the added costs associated with supplying exact volumes of milk every month of the year”.

Will it shake up the NSW dairy sector, with its large number of very small farms? Undoubtedly, says Hauser. “NSW’s dairy farmers sold themselves into trouble when they handed over the responsibility for, and the value of, their products to private processors, who have no interest in their viability. Ironically, it is a Victorian farmer cooperative that is now reclaiming control in NSW.”

7. Why should Australians buy Devondale fresh milk rather than Coles homebrand milk?
“That you’ll have to wait and see,” teases Poole. “Seriously, it’s up to us to place Devondale in the market carefully, with the right price, packaging and provenance and other benefits that will appeal to shoppers.”

9 thoughts on “Has the MG co-op fed Aussie dairy farmers to the wolves?

  1. “NSW’s dairy farmers sold themselves into trouble when they handed over the responsibility for, and the value of, their products to private processors, who have no interest in their viability.”

    Says it all, really.

    MG have done exactly the right thing. As long as a decent farm gate price is paid, who gives a tinker’s dam what Coles does with the milk. They can give it away, paint it pink, or tip it out. Nothing matters so long as the deal eventually gives a profitable farm gate return. MG’s investment in the processing plants means farmers don’t have to spend that much making their boundary fences lean outwards under pressure and waiting for their neighbour to go out of business. There will be a rationalization of processors out of the industry and that’s where the rationalization needs to occur. In ten years time, the life of this contract, who will control the supply of milk? 🙂

    • That’s a very interesting question, John. I bet Coles won’t be letting MG get a good grip on the whip handle but a big co-op stands a better chance of dealing on an equal footing with a big supermarket than we do as individuals.

  2. Hi John,
    The sale of the Dairy Farmers business to National Foods aka 2008 Lion was a good business decision at the time and farmers got an excellent share price which allowed them to grow, innovate and employ. The playing field has changed considerably since then but Dairy Farmers never had and would never have had the clout of MG. There has been devastating considerable pain in NSW for the last two years and a lot of people are getting out or significantly reducing debt. Both are smart strategies. Let’s see what the future holds – I will be barracking for MG as well as Parmalat who look after us well.

    • Hi Lyn.
      My comment wasn’t meant to denigrate NSW farmers. I simply pulled that quite from Marion’s post and used it to highlight the fact that farmers gave up control of part of the supply chain when they signed up with proprietary companies. The same thing happened in Victoria when Bonlac hit the skids. When Bonlac first got into trouble, many farmers quickly deserted their own cooperative and sought to supply proprietary companies. Of course they made a good commercial decision that bought them higher returns. However, it was a short term view and their desertion sealed Bonlac’s fate. The result was loss of control of the supply chain post farm gate. Now have a look through the history of Parmalat’s rise as a dairy company in Australia. Trace it right back and you will see it includes the swallowing up of Queensland cooperatives. Lots of them. Gone. Eventually, over time, replaced and merged into what is now the Parmalat universe. Along the way, no doubt, good commercial decisions were made, giving all concerned the ability to grow, innovate and employ. Well, not quite, as it’s turned out. Farmers lost control of the supply chain. Now, MG have stepped back in. Way to go!

  3. The deal sounds good .Coles are very difficult to deal with and it’s impossible to believe that they have signed a deal with mg that is not in their best interest Have they had a pang of guilt over the now defunct business they have left behind in the last few years since wesfarmers took over .thats unlikely I would say.it all depends on Gary’s deal and how much it cost to build the plant .Lets hope that the unions don’t behave like they did at the desal plant then the deal will turn in a nasty direction .On the plus side it will be good go see mg milk on the shelf in a Coles store let’s hope the Devondale products are on the shelf in the store and not put the back in the warehouse

  4. Great interview MM. Jon Hauser is correct in Q1 ..it is easy to take 10c out of the costs, it will come from the NSW farm gate price! Q6 tells you exactly that. The Southern export processors have been trying to get rid of the “domestic premium” for a few years and cut 10c out of farm gate price and he quotes” align with the international market “etc (like VIC and SA) and saving made. NSW and QLD will have to go from 50c to 40c still giving a premium on export price most years. This is a deal to get rid of a processor(s). MG will do some innovation like 1.5 litre bottles and nice packaging to meet the consumer needs etc. Then UHT will move in saving Coles more money in refrigeration costs and cheaper product etc..
    Our Australian processors are so busy fighting each other like old tomcats that other countries are coming in to markets and taking away the business from under their noses. Our future is in value adding for the international markets. there are so many stories currently of opportunities that smaller active groups/processors are capturing that the big boys find too hard or too lazy to bother.
    We need to as farmers to control what we do, not expect that the processors are doing business for our benefit because they dont. Look at Dairy Connect, lobbying government to change some rules to shift fresh milk to China, not free trade but trade hindrances. If we as farmers start to support these inititatives and business’s and help drive value adding overseas markets the local market will have to increase its prices and contracts to get milk. Just imagine if MG couldnt get milk from NSW because the farmers have got a better deal and return overseas. It is the only way to a better, growing prosperous dairy in Australia. Forget base commodities, forget the domestic industry and its undercutting….Value add!!

  5. forgot to add. Profit in the Coles deal likely to come from efficient processing of branded Devondale milk which will be on the shelf cheaper than the competition, forcing the competition to lower their prices to compete and lowering the branded price. If MG can process cheaper and make the same profit as the others it becomes a winner. Sorry Jon but I will call it devaluing milk for market share and supposed? farmer wealth. Just another plan to see a processor leave the market. Remember when Nat foods, Dairy Farmers and Parmalat were all in the supermarket space and the supermarkets said it was too hard to do business and be better if consolidation happened? DF sell to NF leaving 2 players and now Coles introduce a third player?
    Been a part of co-ops all my life and sorry to say they operate in a commercial environment, competing with the private processors and dont get special treatment on the supermarket shelf, so they end up behaving the same in a level playing field. Being owned by farmers seems to cause them to take less profit and a you’ll be right atititude.

    • You are right rick and the big problem with them is if you keep telling the directors and management they then use the unions to force you out

  6. Pingback: Bittersweet as Devondale milk reaches Coles shelves | The Milk Maid Marian

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