The truth about $6 cheese

I love a supermarket bargain as much as any mum trying to balance the family budget. But there’s one I won’t be buying and that’s a 1kg block of cheese for $6. Why? To explain, Zoe and I have made a quick video to explain the ugly truth behind $6 cheese.

It we don’t value the clean, safe, high quality fresh food that draws shoppers into our supermarkets, we’ll lose it.

CheeseTitlePic

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.

How to rescue dairy – from the nutty to the tricky

Dairy farmers gathered in their hundreds in south-west Victoria last night for a crisis meeting. What makes it a crisis? Very simply, dairy farmers are working seven days a week for free and petrified of losing our shirts.

Local agribusiness bankers tell me they are busy refinancing and arranging extra debt but land sales are at a standstill around here. Reporting on last night’s dairy crisis meeting, Simone Smith of The Weekly Times, described a “dire picture”:

“Warrnambool-based Coffey Hunt farm accounting specialist Garry Smith said across his client-base, farmers milking mostly between 450-500 cows, average feed costs were up 15 per cent – a $150,000 rise – with the cost of power for the first quarter of the year up 50 per cent.”

“He estimated across his client-base earnings would be 10 per cent down on last year with a combination of cash-flow and income down $260,000.

“Charles Stewart real estate agent Nick Adamson said better quality farms had dropped in value between 8-15 per cent, while others were up to 45 per cent down on peaks of several years ago.”

None of this is pretty and astonishingly, Peter Reith decided to appear on ABC’s The Drum website with a six-point plan that, at first, I thought was a spoof. Take a look and make up your own mind.

It’s not as simple as cutting petrol taxes and municipal rates. It’s tricky because of this conundrum: milk and dairy foods are considered so important that nobody wants to pay what they are worth to produce.

Every day I read comments on Twitter that go something like this: “My kids drink three litres of milk every two days, so I can only afford to buy $1 milk”. I know first-hand how tough it is to feed a family when you’re on struggle street, so I have a lot of sympathy for people in this predicament and it’s impossible to respond with anything other than compassion.

It’s hardly surprising, then, that there is no political appetite for an increased milk price. But the truth is this: dairy farmers should not and cannot fund an ersatz Australian welfare system by subsidising the cost of food. Welfare is the role of government.

So, while my dander is up, here’s a simple list of five tricky things that would make a big difference to this dairy farmer:

1. Deal with the supermarket duopoly
Down, Down, Down is not about you, dear milk drinker. The real reasons for the supermarket war are expressed in corporate ROIs rather than family budgets. At the end of the day, it will be the little people with the least market power – you, the shopper, and me, the farmer – who will pay.

2. Level the global playing field
Julia Gillard announced that Australia would be Asia’s food bowl but guess what? Unlike the world’s most powerful dairy exporters, the Kiwis, we do not have a free trade agreement with China, putting Australian dairy at an immediate 15% disadvantage. Nor do we receive the government subsidies that support our European and North American competitors.

3. Assist with the impact of the carbon tax
Australian dairy farmers are suffering a double whammy under the carbon tax. First, processors are passing the extra cost onto us in the form of lower farm gate prices (because the consumer won’t pay extra and nor will global commodity markets), reducing our incomes by around $5,000 each per year. At the same time, our costs – especially electricity and refrigerants – are rising in quantum leaps each quarter.

4. Support smart farming
Long exposed to the blow-torch of global export markets without subsidisation, Australia’s dairy farmers are among the most efficient in the world, according to research body, Dairy Australia. We can produce very high quality milk at a very low cost because we have invested in research and development. No longer. We are spending less and less on R&D and the Victorian government has just made massive staff cuts to our brains trust, the Department of Primary Industries.

5. Remember, I am the goose that lays the golden egg
I will not be able to continue to deliver high quality milk at such a low price while enhancing the environment and caring for our cows without sacrificing the basic wellbeing of my family and that, I refuse to do.

No fresh milk for Australians? Is UHT the next big thing?

It’s been an amazing week. First, milk processor Lion, came right out and said the unthinkable – that a milk price below the cost of production was “fair” and that there need to be fewer dairy farmers in Queensland and New South Wales.

Then, yesterday, Sue Neales (follow her @BushReporter on Twitter) of The Australian reported that “Desperate Australian dairy farmers are looking to fly fresh milk directly into Asia to deprive Coles and Woolworths of their unassailable market power.”.

In Sue Neales’ story, Dairy Connect farmers’ group president Adrian Drury said: “We are telling the supermarkets that they mightn’t always have easy access to fresh milk and that they take us for granted at their peril in their push to force milk prices down.”.

What does that mean for you, the milk drinker?

To put it bluntly, you might find yourself drinking UHT milk rather than fresh milk sooner than I expected. Rumours are rife in dairy-land that Coles is keen to shift you from the fridge to the aisles when it comes to picking up your milk. Coles has quite a contingent of European executives these days, where the move from fresh to UHT has been spectacularly successful for the supermarkets. According to Wikipedia, 7 out of 10 Europeans regularly drink UHT rather than fresh milk.

Why UHT? For supermarkets, the benefits of stocking UHT are huge. It lasts longer, it doesn’t need to be refrigerated and, best of all, it can be sourced from far away, increasing their range of supply.

What’s wrong with that, you may ask? After all, there’s evidence that UHT is greener (given it doesn’t need to be refrigerated) and it is still good for you (read more about UHT here, if you like). Question is, do you want to be able to choose?

PS: If The Australian won’t let you read Sue’s story, Google the headline Farmers’ bid to end duopoly milk run and you should be able to read the lot.

How do I know buying branded milk will mean better prices for farmers?

“I am concerned about the welfare of Dairy farmers and the ‘$2 dollar’ milk available at supermarkets. I just want to know which milk benefits the farmers the most and not overseas owned companies who are not passing on the money to farmers. I have been paying the extra buying Dairy Farmers, only to find out that they are owned by a Japanese company!…We are happy to pay extra if we know a fair proportion of the money is going to farmers.”

A fellow called Peter sent me this message in the wee hours and raised a really good point – one that was echoed by CC & Ruby’s question the other day, so I’ve decided to address this thorny issue head-on.

Almost all dairy farmers send our milk to large processing companies because Australia’s stringent dairy food safety laws make it very expensive and difficult to supply consumers directly.

Our farm supplies the Murray Goulburn Cooperative, which is owned purely by the farmers who supply it. If you buy Murray Goulburn’s Devondale dairy foods, you know 100% of the profits are being returned to dairy farmers. The wonderful thing about MG is that because it’s owned by farmers for farmers and processes around 35% of Australia’s milk, it tends to set a farmgate price benchmark for the other processors.

On the other hand, it doesn’t pick up milk from right around Australia, concentrating on the biggest milk-producing state of Victoria. If you’re a dairy farmer in northern NSW, for example, you don’t have the option of supplying the Co-op and are more likely to supply a privately-owned processor. These privately-owned processors sell dairy foods under their own brand names or package homebrand milk under contract to the supermarkets.

When Coles and Woolies embarked on their milk war, it hit the processors hard pretty much straight away because brand name milk sales fell.

The Coles spin doctors said it wouldn’t affect farmers because they deal with the processors, not the farmers. This defies common sense. If a multinational supermarket controlling a huge chunk of retail sales decides to cut its prices below a sustainable level (Coles denies this too but Woolies has gone on record saying $1 per litre is not sustainable), putting its multinational food processor supplier to in turn lower its own costs, how do you expect that processor to respond? By sourcing the raw milk more cheaply of course! And guess what? It buys from small family businesses (98% of Australian dairy farms are family owned and operated) who have the least bargaining power of all.

No, I can’t guarantee that if Peter buys Dairy Farmer branded milk rather than private label, farmers will be better off. On the other hand, it is guaranteed that if Peter buys unsustainably priced milk, someone else will have to pay. That will almost certainly be a farmer and her family in the short term. In the medium term, it will be her cows and the environment and, over the longer term, it will be milk drinkers because there’s no such thing as a free lunch.