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.

Cranky questions for the NFF about Woolies and the Blueprint

The NFF has “welcomed a new major partner in the Blueprint for Australian Agriculture: Woolworths”. Yes, one of the two giant supermarket chains that has slashed the value of milk to less than that of water is now helping to chart our farmers’ futures. My future, my children’s futures.

"It’s a matter of funding..."

In a media release, NFF president Jock Laurie said: “Having Woolworths on board will ensure that what consumers believe are the key issues for Australia’s food producers are captured in the Blueprint”. I felt betrayed. After the red mist settled, I wrote a list of six cranky questions and called the NFF. Admirably, the NFF’s Ruth Redfern has responded.

Would love to hear what you think! You can also participate in the Blueprint at http://www.nff.net.au/blueprint.html

1. How do you anticipate farmer reactions will be to Woolworths’ involvement as a “major partner” in the Blueprint for Australian Agriculture?
We hope that farmers see Woolworths’ involvement in the Blueprint as positive. From our perspective, having Woolworths on board as a partner means that we can reach more farmers and more people in the supply chain with what we believe is a very important project.

Importantly, being a partner in the Blueprint does not mean that Woolworths has any more input into the outcome than any other single participant in the process. They have the same amount of input and the same opportunity to contribute as you do – so if you’re a farmer or anyone else with an interest in, or involvement with agriculture, and you haven’t attended a Blueprint forum or completed the online survey yet, please do so – as the more input we get, the stronger the outcome will be for our sector.

2. What is the rationale for such high-level involvement of Woolworths?

Having Woolworths (and Westpac, our other major partner) on board will allow us to take the Blueprint to as many people as possible. It’s a matter of funding – running a project like the Blueprint requires money, and as the NFF is a not for profit organisation, we couldn’t do this without support. By sponsoring the Blueprint, Woolworths and Westpac are actually putting money back into agriculture by supporting a project that will help us achieve a strong and sustainable future.

The important thing is that the agricultural sector makes the most of this opportunity. Blueprint is about giving everyone that has an interest in agriculture the opportunity to say what they believe the sector should look like in the future, and what we need to change or do now to get there. If you don’t contribute, you’re missing the chance to say what you think our future should be, or to raise the issue/s that are of most importance to you and/or your business.

3. Has Coles been invited to participate and, if so, what has been its response?

Earlier this month, we posted letters about the Blueprint to 500 organisations and businesses in the agricultural sector – including Coles as they are part of the agricultural supply chain, and all the banks that work with agricultural customers – encouraging them to participate in the Blueprint and to pass information on to their staff, customers, suppliers and networks.

At this stage we haven’t heard back from Coles, but we do hope that they participate – just as we hope that all other people and organisations in agriculture and the supply chain participate. If they do chose to take part, they will have an opportunity to contribute that is equal to every other participant – be it a farmer, the owner of an agricultural supply business, a truck driver, a food manufacturer, or a retailer, like Woolworths.

4. Aren’t we already painfully aware of the demands supermarkets place on suppliers?

The Blueprint provides an opportunity for suppliers to raise these, and any other issues they see as critical for agriculture to overcome.

5. Why should a supermarket have such an important role in setting the agenda for Australian agriculture when so much of our produce is exported?

There are two important things to take into account here. The first is that Woolworths will have no more input into the Blueprint than any other single person, business or organisation that chooses to attend a forum or complete a survey. They are simply helping us make the Blueprint a reality. Setting the agenda belongs to everyone who takes part – so the more input we receive, the more representative and inclusive the outcome. It’s up to us, as an agricultural industry, to set our own agenda – that’s really what Blueprint is all about.

The second is that while 60 percent of our produce is exported, 40 percent of what our farmers grow is consumed domestically – so both the export and non-export supply chains are important stakeholders in the Blueprint process.

6. The two supermarket chains control 40% of Australia’s retail sales and are in the midst of a price war. How can Aus ag resist the push for lower and lower prices?

Having a strong and competitive retail sector is very important – for suppliers and for consumers. Ensuring farmers receive competitive prices for their produce – be it those farmers who are supplying their produce to supermarkets or those farmers who are shipping bulk commodities off-shore – is expected to emerge as one of the key issues in the Blueprint process.