Category Archives: supermarket war and $1 milk

When Old Macdonald retires, who should own the farm?

milk-carton-thumbnail

Him (distracted by his new iPhone 6): A litre of milk, please.
Me: That’s $1.20, thanks.
Him: $1.20? No way, I can’t afford that. We go through four litres of milk a week. I’ll get it at $1.00 down the road.
Me: But $1.00 isn’t enough!
Him (wanders off, still looking at the iPhone)

Me (in 10 years): I’m tired of trying to make ends meet. I’m retiring.
Him (looks up from new iPhone 60): You’re selling the farm?
Me: Yep. Got a good price from a guy who says he can see the farm’s potential. I’m finally able to retire.
Him: But where will I get my milk from?
Me: The new owner, I guess.
Him: But he might sell it to someone else!
Me: Just get it from down the road then, like usual.
Him: But what if they decide to retire as well and sell it to this bloke?
Me: Relax. Not everyone’s going to sell to the same bloke.
Him (waving arms, stamping feet): But what if they do? It’s not fair. You are not to sell to him. This is MY milk. I demand food SE-CU-RI-TY!!!
Me: Maybe you could just offer him $1.20 for it?

Banning foreign ownership of Australian farms sounds nice in theory but it’s just not fair. Not to the farmers who want a fair price for their land and not to international investors who appreciate the true value of our farms.

There are two main arguments against foreign ownership of farms: ethical practices and food security.

Ethical practices are important and Australia has stringent rules governing almost every aspect of farm operations. In 2014, I wrote about my concerns regarding an overseas firm publicly railing against those laws but, even so, am dismayed to see Milk Maid Marian used as a rationale for preventing any foreign ownership. Farming well, no matter who by, should be supported. Farming badly, no matter who by, deserves concern.

Food security, on the other hand, is a privilege, not a right. Australians – among the globe’s wealthiest people – are in a great position to compete for our share of the world’s abundance of food. And there is no place for a peasant underclass here in Australia.

It’s dazzlingly hypocritical to gleefully buy cheap, high quality electronics from poor nations on one hand but refuse to allow them to buy affordable, high quality food from us in return. If Aussies really want food security, they need to start putting their money where their mouths are.

 

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Who deserves the cream of Australian dairy?

“When we have to go to four different stores or supermarkets and still can’t buy a single tin of what I need … start looking after Australian babies first before sending all of our stock overseas for a ridiculous profit. Money hungry f****.”
– Australian resident angered by infant formula shortages

Australians do not expect to see bare supermarket shelves but the unthinkable has happened. Infant formula is in short supply. Apparently, it’s all due to people sending tins of the stuff over to China where parents certainly don’t take abundant high-quality food for granted.

Australians have not only been surprised but outraged, as illustrated so delightfully by the opening quote from an anonymous news.com.au interviewee. Why, there have even been “semi-riots” at the checkouts!

The industry is struggling to increase supply, which isn’t easy as an article by Dairy Innovation Australia explains. A petition demanding the supermarkets ration infant formula has attracted around 4000 signatures and both Coles and Woolies have increasingly tightened restrictions.

Then, today, the Greens and the government agreed to make it harder for foreigners to buy Australian land and water. According to The Weekly Times, “the screening threshold for foreign buyers of agricultural land reduced from $252 million to $15 million, and down to $55 million for investment in agribusiness”.

It’s great to see that what we produce here on the farm is treasured by Australians but why isn’t it valued?

It seems milk is so cheap and abundant, it is worth less than water. Except when the farmer is offered a fair price for her land by someone who really appreciates its true value. How ironic that this the only time Australian food is too precious to leave to market forces.

 

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The blueprint for NSW dairy

A week or two ago on Twitter, CEO of NSW dairy body Dairy Connect Mike Logan made an intriguing reference to a “blueprint for NSW dairy”. There’s only a limited amount you can learn from the 140 characters of a tweet, so I invited Mike to elaborate on Milk Maid Marian and here’s what he had to say:

Mike Logan, Dairy Connect CEO

Mike Logan, Dairy Connect CEO

In the NSW dairy industry the issue is that the value chain is not adding value at the farm gate. Since deregulation the farmers have descended from being strategic partners in the value chain, to an input that must be minimised.

Perhaps this is similar around the rest of Australia – I am not qualified to say. However, it is easy to assume that the dairy model in NSW is flawed as we watch our cousins across the ditch (dutch) grow their businesses, convert sheepmeat farms to dairy and build new kitchens. (The ‘New Kitchen Meter’ is a reasonable measure of success in agriculture.)

It is also easy for the NSW dairy industry to look at the New Zealand dairy industry and suggest we should emulate their model of ‘one big co-operative’. Without doubt that is the best model in the world at the moment. I call it the United Soviet Socialist Republic of Dairy (USSRD) and Barnaby Joyce says that Fonterra is a Maori word meaning ‘single desk’.

As much as we would like to, we shouldn’t emulate their model.

Firstly, because we can’t. The legislation required would make the current budget look easy. Between Clive Palmer and David Leyonhjelm it would be a nightmare.

Secondly, it is because we need to think about the next model after New Zealand. What is better than the USSRD?

Our current model of the value chain in NSW dairy seems to look a bit like this:
CurrentNSWdairymodel
Sort of messy eh?

The real problem with that value chain is that the farmer is held a long way from the representative of the consumer – otherwise known as the retailer. There are lots of ticket clippers, gatekeepers and a few value adders in the chain. There is not sufficient transparency and doubtful equity. The last person to make any money is the farmer.

So who is making the money?

Well, certainly the retailer. Here in Australia we have two of the three most profitable supermarkets in the world (Woolworths then Walmart then Coles/Wesfarmers).

Also the banks. The four most profitable banks in the Western world are right here. I needn’t name them. There are more profitable banks in China and Russia.

The distribution and transport sector is quite profitable. Linfox is not going out backwards.

Oddly, the processing sector in dairy is not making that much money. They are making more than the farm sector, but not an inordinate amount more. They only have about 25% of the capital invested when compared to the farm sector but they are mostly in control of the milk, its destiny and its value. They are the gatekeepers. The profit of the processors precedes the profit of the farmers.

So, what would a better model look like in NSW?

We suggest a value chain that is circular. We could call it a ‘value cycle’;

ValueCycle
The most important part of the value cycle is that the farmers and the retailers are side by side. The needs and values of the farmers and the supermarkets align. They align because the farmers have a secure supply of a high quality product and the supermarkets need a secure supply of a high quality product. Both want transparency and equity.

The first time I saw the value cycle work in NSW dairy was with the Woolworths Farmers’ Own brand and the group of seven dairy farmers in the Manning. The farmers were told by their processor that they couldn’t get any more money from the supermarkets for their fresh milk. They were told how tough it is dealing with the supermarkets. To their credit, the farmers took the challenge and decided to find out how tough it is to deal with the supermarkets.

The processor was half right. It is tough to deal with the supermarkets, but there was more money available. Both the supermarket and the farmers got what they needed because their values aligned. The system is transparent and equitable.

If that is right here in Australia, is it right in the export market?

Yes it is. Along with Norco and the logistics company Peloris Global Sourcing, the NSW dairy industry facilitated by Dairy Connect has developed contacts in the retail sector in China for the sale of fresh milk. Again, the milk is worth more with a direct deal with the consumers. The model does work.

It is easy to scoff at the volumes for fresh milk to China, I will tell you that they are small but they are invaluable.

If we can deliver albeit small volumes of fresh milk into the fastest growing dairy consumer market in the world at a profit by developing direct relationships with the supermarket sector in China, then what is next?

Can we develop those relationships to deliver other NSW dairy products without having to enter the export commodity circus that is mostly controlled by the USSRD?

Of course we can. The NSW dairy industry is actively seeking investment and partnerships with the Chinese retail sector to access the infant formula market. Again, the processors are right, it is tough. The farmers in the Manning too are right; it will bring value back to the farm gate.

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Bittersweet as Devondale milk reaches Coles shelves

Photo: The Weekly Times


Three men in suits – a prime minister, supermarket supremo and the MD of a dairy processor – stood drinking glasses of frothy cold milk on the steps of the first MG Co-op factory dedicated to supplying fresh Devondale-branded and private label milk to Coles. Beneath the froth, however, doubt among the very dairy farmers sponsoring the opening celebrations continues to simmer and bubble.

Ever since the Coles deal was announced, there have been skeptics. Plenty question whether it is possible to make money supplying milk that retails at a dollar a litre and the concept alone that milk could be priced cheaper than water offends many dairy farmers.

The speculation and anger reached new heights this week, however, after a scathing opinion piece in the Australian Financial Review that says MG managing director, “Helou ‘in a hurry’ has a reputation at MG, as he did at SunRice, for being hell bent on revenue over margins.”

The AFR also writes, “MG’s margins are non-existent and its deal has locked the whole industry into $1 milk for a whole, punishing decade, structurally squeezing the profit pool.”

All that gloom follows the journalist’s derisory comments about the Sydney factory being at least one month late, $30 million over budget and the trigger for contractual penalties that can only be imagined. And, yes, when the deal was announced, MG’s farmer shareholders were promised the factories would cost “just” $120 million. MG now puts that figure at $160 million, hinting at a cost blow-out of staggering proportions.

To top it all off, Coles ads pimping our cherished, premium Devondale-branded milk at just 75 cents per litre sent shockwaves through the Australian dairy community on Twitter yesterday.

This ad went viral on Twitter for all the wrong reasons

This ad went viral on Twitter for all the wrong reasons

So, I sent a list of questions off to MG’s executive general manager shareholder relations, Robert Poole, who to his great credit offered these explanations:

Q. What are the actual costs of the two factories?
A. Following our initial cost estimates for the two factories we decided to invest in additional capability and capacity to maximise efficiencies through automation and layout. This brought the total investment in our Melbourne and Sydney facilities to approximately $160 million. This provided for future operational cost savings.

Q. Has MG been unable to supply milk to Coles on time?
A. We have had some shortfalls, however contingency plans were promptly enacted . Laverton is ramping up towards its full capacity and at the moment is servicing Coles requirements in Victoria plus the Devondale Brand both in Victoria and NSW. Our NSW plant remains scheduled to commence production in early August, at which time MG expects to be able to be supplying all of Coles requirements in Victoria and NSW

Q. If so, what are the penalties?
A. This is a contractual matter between MG and Coles.

Q. Does MG have adequate raw milk supply for the Sydney factory now?
A. In New South Wales, we have already sourced more than 180 million litres of milk. This is more than enough to cover our initial requirements of approximately 100 million litres per annum in this market and allows for future growth.

Q. When do you expect the Sydney facility to be supplying milk Coles with its full requirement of milk?
A. The site is being commissioned through July with production scheduled to commence early August, reaching full capacity by the end of August.

Q. When will the investment break even?
A. Both sites are forecast to add positively to MG’s farmgate price from year 1.

If the Murray Goulburn deal with Coles can withstand a 33% cost-overrun and Coles’ penalties while adding to the milk price from year one, this must be an extraordinarily lucrative contract indeed. Who would have thought the Down, Down, Down folks could be so generous?

While you’re chewing that over, take a minute to look at the new Devondale ads via my fellow dairy blogger Lynne Strong, who tells me her post discussing the commercials has gone viral attracting around 1500 views in 24 hours. MG cannot be accused of being boring!

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Dairy pawn

Image from http://enos.deviantart.com/art/Cow-Chess-1353853 by enos of Deviant Art

These days, I feel a little like a chess piece; more pawn than queen.

The Australian federal government has rushed into a free trade agreement with Japan that does next-to-nothing to help Aussie dairy break through tariff barriers, even though Japan is hardly known for a growing dairy industry of its own that deserves protection. I don’t know why we were overlooked but a Sydney Morning Herald story quotes Warren Truss as citing “compromises”.

It’s been an interesting few days for dairy. Coincidentally, the ACCC forced supermarket superpower, Coles, to confess that it was lying when it claimed the $1 milk had not hurt dairy farmers.

At the same time, the media is littered with references to milk as “white gold” and so on, while our co-op, Murray Goulburn, contemplates a partial sell-off to raise capital.

And the milk maid? Yes, I’ve almost recovered financially from last year now but not emotionally.

A Kiwi who’s now dairy farming here in Victoria tells me that one of the differences he’s noticed is that there’s just not the “buzz” around our farmers in a good year that you get in NZ.

Why? First, we’re more battle-weary and risk averse after a decade of drought knocked us around. Second, we’re rightly a little more cynical. In NZ, dairying gets a lot of encouragement from a government that understands dairy’s huge economic impact on the entire nation. The sector accounts for about 3% of NZ’s GDP. Have a look at this economic statement:

“Rebounding dairy production drove a 1.4 percent increase in gross domestic product (GDP) for the September 2013 quarter — the biggest quarterly increase since December 2009, Statistics NZ (SNZ) said.”
The New Zealand Herald, 19 December 2013

Here in Australia, the dairy sector contributes $13 billion to our economy but that’s considered small fry, accounting for less than 1% of our GDP, which totalled $1451.1 billion in 2011–12.

If we are to realise our potential, we need a government that helps dairy grow rather than considering it as a tradeable concession. All eyes are now on the FTA negotiations with China.

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What the cold, cold heart of Coles reveals

The man who directs the face and voice of Coles must have become a little overconfident. In a breathtaking display of arrogance, Coles’ general manager of corporate affairs, Robert Hadler, addressed an audience of spin doctors with this presentation: http://www.documentcloud.org/documents/800088-reputation-coles.html#document/p5

Plenty of people have discussed why this presentation was in such bad taste. Callous, even.

But the part that really caught my attention was the role of our co-op, Murray Goulburn, in Hadler’s “case study”. The gloating Hadler describes the deal with Murray Goulburn as “The game changer”.

Hadler’s right about this but not in the way he means, I suspect. The Hadler case study goes to show just one thing: no matter how Coles tried to spin $1 milk, Australians knew it stank and none of their ads, infographics or appearances by Curtis Stone could fix it. Until, finally, Coles actually did something to address the damage caused by the milk war: an unprecedented 10-year deal that was too good for the co-op to refuse.

Now that’s not a case study in spin, Mr Hadler, that’s a case study in people power.

PS: If you would like to keep up the pressure for Coles to do the right thing, add your voice to this petition by Queensland ag teacher, Lisa Claessen, who was compelled act after her students became casualties of the ColesWorths milk war.
 

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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.”

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