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.”

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

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.

The totem of $1 milk

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.

Milk war myths

This story from the ABC News on the impact of the price war suggests exports will allow dairy farmers to make a living.

It says China and South-East Asia, particularly India, will provide “huge opportunities” for Australian dairy. True, the February Dairy 2012 Situation and Outlook shows China’s whole milk powder imports have skyrocketed (see page 10).

It’s pretty misleading of the ABC news report to suggest, however, that exports will be our salvation.

First, not all Australian milk can be exported. Queensland, for example, does not have manufacturing facilities capable of producing product for export and it looks like there won’t be enough dairy farmers left there to support a factory in any case. Almost all of their milk is sold as fresh milk on Brisbane’s retail shelves.

Second, Victorian dairy farmers have long exported around half our milk; only 9 per cent of our milk ends up in cartons on the retail shelf and the ABC News report suggests we are doing better than those who supply the domestic market. The prices farmers are paid for a litre of milk in different Australian states tell a very different story. In 2008/09, Victorian farmers were paid 39 cents per litre while Queenslanders received 57 cents. In 2009/10, it was 34 cents versus 56 cents in the Queenslanders’ favour.

I am not suggesting the Queenslanders have been living it up but these numbers paint a far less rosy picture when it comes to exports, don’t you think?

The ABC also says raw milk prices have doubled in the last five years. Maybe so, but costs seem to have pretty much kept pace and the surging Australian dollar has meant that the average Australian dairy farmer has missed out on a fat pay cheque. Most of the farmers I know are struggling.

As Julian Cribb wrote in his SMH article “Huge shift in what we eat” today:

“If cities and the resources sector continue to take water and land from farmers, and supermarkets continue to punish them economically, much of our future food may be grown in factories, rather than on farms.”

Is that what Australians want?

Big supermarkets, little farmers: the UK story

In the wake of the milk price war here in Australia, this story about the influence of supermarkets in the UK (click the underlined link) is a little unnerving. How can we prevent this happening here? Victorian farmers are less vulnerable to predatory tactics by big retailers for two reasons:

1. Much of our milk is exported; and

2. Victorian processing is dominated by a powerful 100% farmer-owned co-operative.

Having said that, we do share some concerns regarding the profitability of milk pricing.

Dairy Australia’s Australian Dairy Industry In Focus 2010 report says:

“At an average of approximately US$29 per 100kg of milk last year, Australian dairy farmers generally receive among the lowest prices compared to many major producing countries and so must operate highly cost-efficient production systems.  This is regularly borne out by international comparisons; where Australian farms consistently have costs of production in the lower cost category of all farms in such surveys. The fact that around half of Australia’s milk production has been exported over the last decade reflects this high level of competitiveness.

However, this has become increasingly difficult in recent years. Farm cost structures have increased in response to the need to adapt to drier conditions where rain fed pastures are regularly contributing a lower proportion of the total feed base available to the herd. Consequently, Australia’s share of international trade has trended lower as local milk production has contracted over the past decade.” (p. 10)