Coles leads slash in milk prices; farmers fear

Posted by Nicole Eckersley on 27th January 2011

Milk splashBoth of Australia’s major supermarket chains, Coles and Woolworths, have slashed prices on their own-brand milk offerings, in a move which they claim will not affect farmgate prices for their milk suppliers, but which has nevertheless caused consternation throughout the dairy industry.

Coles led the move when it reduced the price of a 2 litre bottle of own-brand milk by 47c to just $2 – which was immediately matched by its competitor, Woolworth’s – in a ‘loss leader’ move aimed at reeling shoppers in from other supermarkets, such as Aldi and IGA.

Coles said that the cost of reducing its milk prices would be absorbed by the business, and formed part of the company’s “Down Down” campaign to reduce prices on staple items.

Woolworths said that they would also be absorbing the cost of the price drop, but couldn’t say how long the situation would last. “This wasn’t a move we particularly wanted to take, but we have to react to our competitors,” said a Woolworths spokesperson.

The Australian dairy industry has reacted with extreme concern, particularly at the possibility that the big two will begin passing the cost of the price drop on to farmers once the own-label products are established.

“We are now facing the bleak prospect of retail milk prices reaching a point that is unsustainable for the milk value chain. This will flow back through the processing sector and ultimately to farmers,” said Queensland Dairyfarmers’ Organisation President Brian Tessmann said. “Commodities around the world are rising – and so are farming costs – but milk prices are under unsustainable downward pressure from the retailers.

The uncertain future for the dairy farmers is compounded by a Senate inquiry last year which slammed the effect the two supermarkets’ buying power has had on the Australian dairy industry, with the ACCC requested to keep a close eye on possible misuses of market power on dairy pricing practices. The QDO said

“We know from a recent Senate Inquiry that the growing trend toward supermarket brand milk is putting a squeeze on the value chain and ultimately the farmer. This price drop will increase the price difference between large retailer ‘supermarket brand’ milk and milk processor branded milk. So of course shoppers will opt for supermarket brand milk and, with that, lower returns go to processors and that will flow on to the farm gate,” said Tessman.

“We know that already the price differential between supermarket-brand and branded milk sucks about $90 million from the value chain in Queensland alone every year.”

“There is no doubt that Coles and the other major retailers are the dominant force in the milk market. It appears they are using cheap milk to get people through their doors – but there is a very high risk that it is the farmers who are left carrying the loss. It is a loss they cannot afford, especially now.”

“It is kicking family farmers when they are down. This is happening at a time when the industry is battling the devastation of the massive Queensland floods. These floods are taking a heavy financial and emotional toll on farmers, and for Coles to give farmers this announcement on Australia Day is cruel and insensitive. We want our farmers to have confidence in the future and to be rebuilding their businesses after the flood.

“Major retailers like Coles are using cuts in milk price as advertising to chase customers. But it is the farmers that are ultimately paying for the advertising bill not Coles.”

Coles Merchandise Director, John Durkan, said on the announcement of the price drop that the company would be responsible for the price discrepancy on the product.

“In the same way that Coles is absorbing the higher costs of hormone growth promotant free beef, Coles is not reducing the price it pays to its milk processors either so this move will not impact them or the dairy farmers who supply them. In fact both farm gate milk prices and contract prices with processors recently increased,” he said.

“With the floods we have seen dramatic prices increases in other food stuffs due to shortages, however milk is still the same price to consumers even though the cost of production for farmers has gone through the roof. Farmers cannot carry the entire burden we need to be supported as well and the market needs to reflect what is happening at farm level.

“Coles needs to rethink its strategy and look to support the farmers whom supply them with the fresh products they need for their customers every day of the year.”

Tessmann said the move underscored the urgent need for Federal politicians to review and implement the recommendations of the recent Senate Inquiry – released in mid-2010 but so far not acted upon – in order to stabilise the industry.