Woolworths announces 10-year milk deals, but Lion is the loser in Victoria and WA

Posted by AFN Staff Writers on 7th April 2014
Woolworths has announced new long-term milk supply contracts

Australian supermarket giant Woolworths has announced two new 10-year milk contracts across Australia that it says “will give dairy farmers and processors more certainty to invest and innovate”.

The new arrangements see food and beverage company Lion lose its contracts to supply milk to Woolworths in Victoria and Western  Australia.

Woolworths has reached agreement with milk processors in Queensland, Western Australia and Victoria for significantly longer periods than it has made in the past. Additional arrangements have been made to keep milk in the State in which it is produced, especially in Queensland and Western Australia.

The two 10-year contracts have been made in Victoria, with New Zealand-based dairy giant Fonterra (from 1 February 2015), and Queensland, with Italian-owned Parmalat (from 1 July 2014). Woolworths has also announced a 7.5-year agreement in Western Australia with Brownes (from 1 July 2014); a 2-year deal in New South Wales with Parmalat (from 1 July 2014); and 1-year deals in Tasmania, South Australia and the Northern Territory with Lion.

Lion loses Victoria and Western Australia

Meanwhile, Lion has expressed disappointment in the loss of its supply contracts with Woolworths in Victoria and Western Australia, saying the decision will impact volumes at Lion’s milk processing plants in Chelsea (Victoria) and Bentley (WA).

“We put forward our most competitive bid in each state, reflecting Lion’s commitment to grow the Australian dairy industry through fair pricing that ensures a sustainable future for the whole supply chain — including farmers and processors — and long term contract certainty that supports investment,” Lion said in a statement.

“However, we fully respect that this is a decision for Woolworths, which remains an important customer and partner for Lion,” the Company said.

Lion said that in the coming weeks it would work through the detailed implications of the reduced volumes at its processing plants in Victoria and Bentley.

There has been speculation that the loss of these milk contracts in Victoria and Western Australia might create pressures for Lion. Lion owns many well-known Australian dairy brands such as Pura, Dairy Farmers, Moove, Farmers Union, Dare, Big M, Masters M, Yoplait, Fruche, YoGo, Coon, King Island Dairy, Mersey Valley and South Cape. In April 2013, Australian Food News reported that Lion had also lost out on milk deals with Woolworths’ rival Coles.

Australian Food News reported in February 2014 that Lion’s Dairy and Drinks business had faced “significant margin pressure” in the last quarter of 2013, and faced “considerable headwinds” in the coming year. Some commentators have suggested that the dairy division in Australia might be “a distraction” for Lion’s Japanese parent Kirin.

Long-term contracts allow for investment and innovation

Woolworths said its house brand Select milk range is being sourced from milk processors rather than direct from farmers, meaning it “has no direct control over farm gate prices”. However, the supermarket group said in a carefully worded media release, that this new long-term contract model will “allow both farmers and processors to invest and innovate and reap the benefits that come from efficiency gains and increased volumes”.

“We want farmers and the processors to provide high quality milk for our customers,” said Tjeerd Jegen, Managing Director of Supermarkets at Woolworths. “Some producers have told us that with the certainty of a long-term contract they and their farmers can invest and innovate,” he said.

“Changes like integrated seals for milk containers and new, hospital grade processing equipment would not be possible without the investment this certainty will bring,” Mr Jegen said. “It’s these innovations that will see better tasting, fresher milk available in Woolworths stores and we hope our customers will enjoy the difference,” he said.

“We no longer want to see milk shipped across borders which only adds cost and increases the time between the farm and the supermarket shelf,” Mr Jegen said. “These new contracts mean local farmers will supply milk into their own states and to local families,” he said.

Fonterra to invest $30 million in Victorian processing plant

Meanwhile, rival supplier Fonterra Australia has announced that it will invest more than $30 million into a milk processing plant at its Cobden site in South West Victoria as a result of the deal with Woolworths. The Company said the investment will support 30 new jobs at the Cobden facility.

Fonterra Australian Managing Director Judith Swales said Fonterra was excited to partner with Woolworths in the initiative.

“This proposed arrangement will help us deliver on our strategy to provide healthy, nutritious dairy foods — in every dairy category — to Australians,” Ms Swales said. “It expands our current white milk portfolio complementing our Riverina Fresh milk business in New South Wales,” she said.

“Using Fonterra’s global innovation leadership and the high-quality milk from our farmers, we can optimise the freshness and shelf life of milk to ensure a better product for Woolworths’ Victorian customers,” Ms Swales said.

“Just as importantly, the proposed arrangement will provide certainty for dairy farmers so they can invest on farm and grow their milk production,” Ms Swales said. “Australia is our second largest milk pool outside of New Zealand, so we take a long-term view and aim to deliver profitability, growth and sustainability in the Australian dairy industry,” she said.

In Australia, Fonterra operates 11 dairy manufacturing sites across Victoria, Tasmania and New South Wales and employs around 2,000 people. Fonterra collects around 1.7 billion litres of milk annually from almost 1,300 suppliers and their 300,000 dairy cows and uses the milk to produce Fonterra dairy food products under such brands as Perfect Italiano, Mainland, Western Star, Nestle (under license), and Ski.

Parmalat seals Woolworths deal in Queensland, but farmers living in hope

The new 10-year deal between Woolworths and Parmalat for Woolworths’ house brand milks in Queensland has been welcomed by Queensland’s dairy industry group, the Queensland Dairyfarmers’ Organisation (QDO). The QDO said the deal “gives some positive signals to the Queensland dairy industry”.

QDO President Brian Tessmann said that the longer term contract for fresh Queensland milk brought some longer term security to the industry, which was “badly needed”, given the current production deficit facing the State and the “cost-price crisis” at the farm gate.

“When we surveyed Queensland dairy farmers earlier in the year, more than 70 per cent could not pay their monthly bills from their milk cheque and 50 per cent were uncertain about their future in the industry beyond one year in the current trading environment,” Mr Tessmann said.

“Queensland dairy farmers are in need of some good news after suffering a disastrous three years of natural disasters and the ongoing man-made disaster of the milk price war,” Mr Tessmann said.

“The announcement is indication from these companies that they want fresh milk from Queensland farms for Queensland consumers,” Mr Tessmann said. “This is the most sustainable and sensible option for our milk, and I am sure it is exactly what consumers want as well,” he said.

Mr Tessmann said the deal was “a step toward stabilising milk production in a very tough environment”.

“We hope that this deal results in Parmalat being able to pay much stronger farm gate prices, but at this stage that is unknown,” Mr Tessmann said. “We also hope it signals the start of the end of the supermarket milk price war and the start of a turnaround to a brighter future for Queensland dairy farmers and milk processors,” he said.