supermarket war and $1 milk

Co-op does fresh milk deal with Coles

/ dairymilkmaid / 4 Comments

Murray Goulburn, the co-op that processes our milk, sent out an email this morning that will have a huge impact on dairy farming: it will supply Coles fresh milk for the homebrand and our own Devondale milk. Here’s an excerpt from MG’s press release:

“• Devondale announces 10-year private label daily milk partnership with Coles
• The Co-operative will also relaunch Devondale branded daily pasteurised milk
• Devondale cheese will return to Coles’ shelves
• Deal will deliver additional profits to Devondale dairy farmers
Devondale (Murray Goulburn Co-operative Co. Limited), the Australian farmer Co-operative, today announced a landmark, ten-year partnership to supply Coles with daily pasteurised milk for its private label brands in Victoria and NSW from July 2014.

Separately, the Co-operative will also relaunch Devondale-branded daily pasteurised milk, through an initially exclusive agreement with Coles, and Devondale cheese will return to Coles’ shelves.
The milk price paid by Coles under this unique agreement locks in a premium that will deliver additional profits to Devondale dairy farmers over the life of the contract. The premium 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 premium farmers receive.
As a Co-operative, Devondale will return 100% of the profits from this agreement to its farmer-shareholders through higher farm-gate returns.

Devondale Managing Director, Gary Helou, commented, “The daily pasteurised milk segment is currently mainly supplied by foreign owned companies that repatriate their profits to overseas shareholders. The entry of Australia’s farmer owned Co-operative into this market segment cuts out the middle man and delivers profits directly to farmers.

“This is a logical growth opportunity that extends Devondale’s domestic presence in consumer markets and is expected to lock in returns that will be paid to farmers through higher farm-gate prices. These higher prices will benefit all dairy farmers.”

It goes on to say that:

“We appreciate that there has been considerable public concern about the pricing policy for private label milk. Under the contract agreed with Coles the retail shelf price for milk does not determine the profits that will be received by MG supplier-shareholders.”

“MG expects to receive returns that represent a premium over and above the price available in other markets such as commodity dairy ingredients. The contract is expected to lock in this premium for ten years, regardless of what is happening in international dairy markets or movements in the Australian currency. All profits on this contract will be returned to all supplier-shareholders through improved farmgate returns. This new revenue stream will also reduce volatility by providing an additional domestic earnings stream as a balance to fluctuating export earnings.

“As part of this expansion MG will be taking on new supplier-shareholders across existing and new supply zones to meet the growing demand on our milk supply. This includes growing a local milk supply in the Sydney region. The Sydney milk pricing arrangements are yet to be finalised but importantly, the arrangement provides sufficient flexibility for MG to offer a fair farm-gate price which will be supported by Coles. In other words it is expected that all profits from this project will be returned to our total supplier-shareholder base.”

Will have more on this for you later today.

Woolies the white knight unmasked by dairy defenders

/ dairymilkmaid / 12 Comments

Sometimes it’s what you read between the lines that’s the most important. In the cause of reporting about supermarket giant Woolworths’ formal announcement today confirming it’s arranging to directly contract dairy farmers to supply it milk, the most interesting comments are those that appear below the line.

Dairy farmers have shared their concerns about the move but now the ball is well and truly in the corner of Australian shoppers. If the comments from readers of Melbourne newspaper, The Age, are anything to go by, Woolworths’ attempt to mitigate the growing public distaste for supermarket ethics may have backfired.

I’ve picked out a few to summarise the tone of discussion online (my subheadings):

Squeezing the life out of the producers
“This is how they make the real money, had this explained by an insider recently to me. They find a producer and ask them to make their home brand for them along with their own branded premium product. People buy the cheaper version and the premium product disappears so they then just give them the second quality product in their packaging. Then supermarket owns them, they then turn on them and say, now we will pick it up, give u the packaging and labels you just give us the raw product. This means the producer the gets no profit on packaging, transport etc for the goods, and they are cut to the bare minimum of profit, this is how the supermarkets are squeezing the life out of the producers so they have no profit and no hope of improving. I won’t buy home brand, I like choice and supporting Aust companies.”
Commenter: Newcastle Gal

The admission of guilt
“Surprise, surprise I thought it was only several months ago that the supermarket giants (media) told us that the milk companies etc were not being disadvantaged and that the supermarket chains were picking up the losses, now it turns out that the supermarket chains are ripping off our suppliers after all..”
Commenter: Mik of Melbourne

Part of a bigger plan to screw consumers
“I ‘m sure the money that Woolies gets from their gaming machine can well and truly subsidies the milk (* bread). Instead, pay the real price for branded milk and cease this war. The only outcome will similar to Europe where fresh milk is now a luxury, mainly God awful UHT milk on shelves.”
Commenter: nm4047

It’s all about control
“Woolies and Coles will only rip off farmers because you let them. Note the success of Norco on the NSW North Coast, their milk is still selling for a fair bit more than $1 a litre and has withstood the “home brand” assault. Sales only dropped by 1-2% compared to the 25% drop of brands in the cities. Norco and the communities they support care for farmers, because they are farmers. Woolworths don’t care about farmers, by dealing directly with farmers they are hoping to break up the co-op models that are beating them in the rural areas and drive the farm-gate price down.”
Commenter: dude

And then there’s this from someone who obviously knows the dairy industry very, very well:

“Actually, it’s a combination of marketing ploy and the knowledge that Queensland and Western Australia are close to real domestic supply troubles if they keep losing dairy farmers.
Not being privy to Woolworth’s strategy in this move, this is what I suspect will occur.”

“(1) They’ll target large scale farmers or encourage investment in large scale farming for their direct supply. Good economics on their part but increases the exposure for the suppliers since return on their investment will be solely dependent on Woolworth’s assessment of a fair price.

“(2) They’ll concentrate on areas where they aren’t up against strong competition and where’s there’s excess manufacturing capacity available. Both WA and Queensland fit the bill here.
Victoria would be a less attractive option with its reliance on export markets and dominance by co-operatives and farmer owned supplier groups. South Australia has a small localised industry and is attracting interest from Victorian based co-operative Murray Goulburn. Tasmania has good production prospects but transport is an ongoing issue. So probably WA and Queensland.

“(3) Once they’ve got a foothold, it’ll be a balancing act. Do they squeeze their fresh milk suppliers or do they loss-lead and extend their range of products by trying to increase both their supplier base and their range of manufacturing options? More ‘supermarket own’ brands would probably be their ultimate goal but not at the cost of having to carry the brands for a long time before a return on investment. I’d say their ideal is complete vertical integration but they know that can backfire big time if you don’t control enough of the market.

“One thing for sure. This is about Woolworths not about the farmers. And let’s face it, that’s what all businesses are about- not just supermarket owners”
Commenter: David of Leongatha

All in all, I’d call it an unmitigated PR flop. On the other hand, those commenting online on a story in The Age are hardly a representative sample of Australians. It’s inevitable that farmers will be recruited by Woolies (and Coles, in turn, no doubt) but whether Aussies will buy either the rhetoric or the “fair” home-brand milk is far from a sure thing.

Is Woolies the dairy farmer’s white knight?

/ dairymilkmaid / 2 Comments

Woolworths has announced it plans to contract dairy farmers directly, with the promise of better farm gate returns. While a first for Australian dairy, this is not new in the UK where many of our supermarket executives earned their stripes. On a study tour of the UK, prominent Victorian dairy farmer Roma Britnell spoke to many English farmers about their experiences, so I was delighted when she agreed to answer a few questions for Milk Maid Marian.

Roma Britnell

Roma Britnell


MMM: What are the supermarkets proposing?
Roma: The supermarkets are thinking about setting up direct supply contracts with a select group of farmers in response to the public’s concerns that they are hurting farmers.

I saw a really good example of this in England after coops failed and processing companies became dominant. The supply contract I looked at was with Waitrose, a boutique up-market supermarket. Only a small number of farmers had the opportunity and got a few cents more than the rest of the English dairy farmers. They have to have a very flat supply and the quality standards are very demanding.

When I first explored this concept, the farmers were not too unhappy. Now, the supermarket’s demands are getting too difficult to accommodate. A lot depends on the relationship between the negotiators of the group and the company manager but because the group is small, the farmers are at a disadvantage.

MMM: Is this common overseas?
Roma: I didn’t see this anywhere other than in the UK. What I did see and look for were ways the farmer could maintain influence up the supply chain. I found the answer was simply to own as much of the supply chain as possible so long as this was managed efficiently and monitored carefully.

This is what has traditionally gone wrong, and the “co-op” model is wrongly blamed as the reason instead of the inefficiency and lack of the owners (farmers) making sure the business performed.

Co operation comes in many forms and I looked at companies like Glambia that are part co-op and part company.

I found many good businesses that were going well operating as a co-op, including Arla. Neither co ops or companies are immune from failure. The management rather than the structure is key. On the other hand, the farmers that sit on co op boards need to be highly skilled business operators at an international level.

MMM: What do you expect will be the opportunities and threats for dairy farmers who contract directly with the supermarkets?
Roma: The farmers who have a direct supply contract will earn more than the rest of Australia’s dairy farmers. Eventually, however, the increased costs are likely to match the added reward.

Consumers will buy the milk believing they are doing the “right thing” by dairy farmers but the reality is that direct supermarket contracts are rarely truly in the farmer’s favour. As with all things, the ones in early will initially get some benefits short-term but long-term it’s unlikely to be the case.

Such a small group of farmers has little chance of negotiating on an equal footing – brute strength is needed to deal with giants the size of Australia’s supermarkets.

MMM: What are the opportunities and threats for Australian dairy farming as a whole?
Roma: This opportunity for a favoured few poses enormous threats to Australian dairy. If the English experience is repeated here, the often unrealistic demands supermarkets impose on their contracted farmers will become the norm over time. They will say its customer driven. Its supermarket driven; to get the edge on their competitor and in turn the long-term costs to the industry are too large to keep the industry viable. Do we need more of this?

There are many other threats that take a long-term view of the situation to consider.
However the principle remains that dairy farmers are individual businesses who seem to struggle to work as a team. If we did, we would have the clout to position ourselves ready for the oncoming food boom. It has been a long time since the demand for food was greater than the supply. Dairy industries around the world are positioning themselves in readiness for this. Us …well I don’t think we are going to be in a position ready to pounce. Sad really to miss opportunity but a good strong group of focused farmers would be the way to achieve success.

My last comment to demonstrate my findings is cemented from my experience just this week whilst in New Zealand. The country has a minimal domestic market with a strong, well organised cooperative that exports a large amount of milk. So very like Australia in that respect. Yet they have the highest domestic milk price of any country in the world. Go figure!

The brains behind “The truth about the supermarket war”

/ dairymilkmaid / 10 Comments

Vet student, Cassandra MacDonald, launched her single-handed David vs Goliath battle against supermarket giant Coles yesterday and, already, her clever YouTube video “The TRUTH about the supermarket war” looks like going viral.

So, who is this talented young woman? Milk Maid Marian asked Cassandra a few questions to find out more.

MMM: Tell us about yourself – do you have a dairying connection?

I am a fifth year veterinary science student studying at Charles Sturt University in Wagga Wagga. I am not from a farm, I was brought up in the suburban South Coast of NSW for the first ten years of my life. My connection to the dairy industry started through showing dairy cattle at high school. Through the opportunities I have been given and the people I have met/connections I have made through this initial start in the dairy industry, I have been able to get where I am today, studying veterinary science, showing and breeding dairy cattle, milking on dairies, scholarships I have won, trips overseas that I have won. All because someone saw my interest as an eleven year old, who had fell in love with dairy cattle. I feel I owe it to the industry to promote it and share with others how great the industry is.

MMM: What made you decide to create your infographic?

I saw the Coles video, after seeing an article about it on FarmOnline and felt angry about the misrepresentations that presented in their video. I couldn’t believe or understand the way they tried to represent the different points just to spin them to their advantage and fool consumers into believing them. And believe they will! I wanted to reply and vent my anger. So I thought almost immediately- hey I can draw, why not use that talent and copy them and throw it straight back in their faces? Especially when they have obviously spent a lot of money and effort on it, and me being an absolute amateur, I wanted to make fun of their efforts and make it seem trivial in a way I guess.

MMM: How did you do it? How long have you been working on it?

I started by doing drawings and then realised I needed a plan, a path to follow so I scrapped that idea and started again by writing what I thought I would narrate over the top of the video. I wanted it to address the same issues as brought up in the Coles video but represent them properly and wholly. I wrote it off the cuff, after having written a letter to The Land for their editorial (after finding out it was way too long for what they wanted) which was researched using ABARE data and data and information from Dairy Australia as well as a few of my farmer contacts who are extremely experienced in the matter – I am always either text messaging or conversing with them either over the phone or in person about these issues.

I then went through the text I had written and wrote down a list of what I could draw to represent the points I was trying to make. It took me a couple of hours over two afternoons to make the drawings- of which I filmed on the floor with my iPad- and everything you see in the video is the first and only draft- there were no mistakes, no reshooting, or several tried at any of the pictures- they’re all the ones I drew off the cuff as I consulted my list I made. I think I made about 52 clips altogether.

I then had to work out how to record my voice (easy once I found the voice recorder on my computer), and then, compile and edit the clips to make the video. This is where I ran into a dead end. I didn’t think it was going to make it passed this. I had several ‘movie maker’ programs on my computer, didn’t know how to use any of them, and none of them did what I wanted them to do.

Two nights ago I finally found a program on the internet, downloaded it and spent the next 16 hours working on getting the clips to match the audio – which was not easy – especially when my ancient computer couldn’t deal with the needs of the program and wouldn’t let me preview anything before committing to making it a movie. And each time you commit, it took about one hour for it to process it, so after ‘making’ the movie 7 times, it was finally close enough to what I wanted and I was ready to post it! I even went as far as to looking up what the best time to post on Facebook was, and luckily my research told me the time I had planned.

MMM: How do you hope Coles, shoppers and dairy farmers will respond?

I hope it makes Coles realise that there are people out there ready to fight back against their sneaky spin. They will have to think harder to try and justify their moves, because if they lie or warp the truth again, I will be more than happy to come back at them again. Also, as I say in the video, I want them to stop denying that they are not having an effect on the price some farmers are getting for their milk, and on the industry as a whole. Because even if they are not having a direct effect, their effect is certainly indirect with the decreased sale in branded products and thus decrease in income and profits of the processing companies who ultimately need to pay the farmer.

I hope consumers will stop and think about what exactly is happening. I hope they think about the choices they make, and how it affects others. Ultimately it would be great to see more people boycotting generic brand milks and buying branded milk products, I think this is the only way we can combat the issue, as Coles is not going to budge anytime soon (unless they get done in the current investigation by the ACCC). I also want them to think about the information they are being fed, especially by such big powerful companies – not to believe everything they are fed!

For dairy farmers, I would like to see them agree with me as I hope I have done the right thing and represented them in a way that is honest and accurate. I want their approval basically. After their approval I would love them to all share the video around to everyone they know – why because it will get to more and more people, and most of them won’t be form a dairy background. And most of them do buy milk, and most likely buy it from a supermarket. Then we are educating our consumers for our ultimate benefit, for their support and hope that they will make conscious decisions at the supermarket and not just go for the cheapest alternative.

MMM: What has been the response so far?

So far the response has been somewhat unbelievable. It is what I wanted though. I want this to reach as many people as it can. One of my biggest passions is educating people about agriculture, especially about the dairy industry. At present I have had over 50 of my friends share the video on Facebook with who knows how many friends (and who knows how that keeps going), I have had numerous people share it on other pages on Facebook, and before I knew it, it had hit Twitter – I wasn’t even a part of Twitter (but I am now!). On YouTube itself, I have had 2788 views in not even 24 hours. The support has been fantastic as I was somewhat nervous, but the commendations have been all positive and really amazing!

The smoking gun: the numbers reveal Coles’ dairy damage

/ dairymilkmaid / 5 Comments

Please, just read this article by dairy analysts, xCheque, on the damage caused by the supermarket war. Some excerpts for you:

“The supermarket’s pricing strategy has squeezed the processors to near death and they have responded in the only way they can – attack their single largest cost of production – the milk price. In turn, the dairy farmers of northeast Australia have turned off the tap.”

“It is undeniable that Central & Northern NSW and Queensland milk production has dropped dramatically in the past two years.

“It is also undeniable that the southern exporting states are seeing no such effect – this is despite seeing a downturn in the global dairy industry over the last year.

“It is also undeniable that we haven’t seen a production drop like this since the period after dairy deregulation more than a decade ago.”

“Stop and think what you are doing Colesworths. You have taken a very blunt axe to the Australian dairy supply chain. In our view you are definitely in denial if you think that you and your shareholders have no responsibility for the long term social health and economic wealth of Australian agriculture.

“Editor’s note: Apart from the confirmation in milk production data, not much is new in this debate. Our subeditor (and all of us) were however particularly incensed at the most recent example of ignorance and insensitivity by Wesfarmer’s boss Richard Goyder. Clearly denial of responsibility goes right to the top of that organisation and there are no remaining traces of empathy with the company origins.”

The totem of $1 milk

/ dairymilkmaid / 7 Comments

Two years ago today, Coles offered up milk as a sacrifice in the name of market share. It’s now become totemic in Victoria.

The reality is that about two-thirds of Australia’s milk comes from Victoria’s cows but not a lot of my farm’s milk ends up in the supermarket fridge.

We supply the Murray Goulburn Co-op, which processes about one-third of Australia’s milk and has the technology to make a huge variety of dairy foods and ingredients. It sells to the highest bidder, so the percentage that gets exported depends on how well global commodity prices compare with local dairy markets. In 2011/12, 49 per cent was exported, which is pretty typical.

But Victorian farmers are demoralised. Many are in desperate financial positions. The effects of the collapse in global commodity prices, skyrocketing energy prices, high feed costs and the high Australian dollar are clear but shrouded in secrecy is the impact of the supermarket war.

While $1 milk gets all the attention, other dairy products like butter and cheese have also been hit by the supermarket price war. Murray Goulburn has invested heavily in relaunching its supermarket brands and CEO Gary Helou infamously got all hot under the collar last month about Coles’ refusal to stock MG’s Devondale cheese. But nobody can talk about how Coles and MG negotiate our livelihoods behind the tinted windows of “Darth Vader’s Castle” as the Coles HQ is fondly nicknamed by its suppliers.

We’ll probably never know just what the damage has been – only that our situation is very different from that in states like NSW and Queensland where there is pretty much total reliance on fresh milk sales.

But what those claiming to be “the voice of reason” dismiss is the effect ‘milk that’s cheaper than water’ has on the psyche. It signals to farmers that a fair go no longer matters. And that’s what hurts the most on Australia Day.