coles

Bittersweet as Devondale milk reaches Coles shelves

/ dairymilkmaid / 12 Comments

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!

Dairy pawn

/ dairymilkmaid / 9 Comments

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.

What the cold, cold heart of Coles reveals

/ dairymilkmaid / 8 Comments

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.
 

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

/ dairymilkmaid / 9 Comments

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.”

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

/ dairymilkmaid / 5 Comments

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.

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.

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.”

How does it feel?

/ dairymilkmaid / 15 Comments

The sideshow continues: Coles claiming farmers are lucky to see milk sacrificed, animal activists making uninformed allegations of cruelty, vegans banging on about growth hormones (which are illegal here anyway).

Sitting in the stifling heat of the office and reading it all in one hit on one page tortured with anger, confusion and deceit, it is as if the world is against you.

So, with the kids asleep and only the crickets to keep you company, you step outside to fill your lungs with fresh, cool twilight air. And it feels like the world is yours.

My reality

My reality

No wonder so few farmers have an appetite to take their dairy lives beyond the farm gate.