This morning I had a call from ABC Radio National looking for comment on behalf of our regional dairy farmers on this story National Foods cutting fresh milk contracts.
This story is a very sad reflection on state of the fresh milk industry in this country and the ongoing ramifications of the supermarket milk price war
For many farmers in our region like those in the Bodalla region it is time to sign new milk contracts with Lion ( National Foods) but there has been no communication from our milk supply company (Dairy Farmers Milk Supply Company) who supplies Lion as to price per litre being offered nor contract volumes on offer .
Can you imagine how difficult it is to make smart business decisions in this situation. Dairy farmers need to make decisions about our cows, our people, equipment and environmental investment twelve months in advance. So to make the best business decisions for everyone on our team we are looking for clear market signals at this time from our processors
However, the processors are not able to commit to supply arrangements with farmers until the processors have finalised their contracts for private label milk volumes with the supermarkets.
As currently these contracts are only for short periods of time processors are second guessing supermarkets and the farmers are second guessing how the processors will respond if they don’t get the private label contract and as you can imagine all this second guessing leads to a third rate supply chain model and undermines farmer confidence in the whole milk supply sector
The latest Dairy Australia survey show 85% of dairy farmers in NSW see milk prices as the biggest challenge to the survival of their businesses.
So you may well ask why processors continue to supply private label milk to supermarkets. Well they have been asked that at several Senate inquiries so I have an answer (or 3) for you.
In confidential evidence provided to the ACCC Grocery Inquiry 2008 * (see reference at bottom of post) by processors indicate that the main reasons they pursued private label contracts were:
- overhead recovery—generating revenue through private label sales to contribute to fixed costs of running the business
- supply relationships with retailers—supplying private label product provides a stronger relationship and possibly improves processors bargaining position in relation to branded products
- volume—the volume of milk supplied through private label contracts provides some stability to the business
The first national contract for supermarket private label milk was given to National Foods (now Lion) by Woolworths in 2002 The ACCC remarked in 2008 that the change in tendering arrangements by Woolworths in 2002 had a clear impact on the returns farmers received
National Foods (Lion) like all processors tenders for private label milk contracts to maintain relationships with the supermarkets and gain shelf space for its own brands
When the volumes of private label milk were relatively small compared to their own brands then the milk processor could recover the costs associated with supplying this milk at the low price
This is no longer the case. There has been an 11 per cent increase in the sales of private label milk in the last 12 months alone and now private label milk sales are 72% of all fresh milk sales
As you can imagine this is putting a lot of pressure on both farmers and processors. In fact I believe whilst all supermarkets in this country compete on price alone the entire fresh food sector in this country is at risk
Already 85% of products in a typical supermarket trolley are either imported or are supplied by foreign owned companies. This will only increase as more and more private label products are introduced so the supermarkets can compete with each other and continue to make profits.
At the moment milk processors have been the first line collateral damage in the supermarket milk price wars, farmers are starting to feel the brunt of it now and it wont be long before it impacts on consumer choice in the supermarket
At the moment shoppers have three choices “Will I buy a local product, will I buy an imported product, will I buy private label?” Unless we all stand up and be counted the only choice will be private label (imported from overseas)
So this is not just about the farmers, families who buy the Dairy Farmers brand are making an investment not just in the future of their community but in the future of Australia
Lets all get together and make an investment in the future of this great country
Further commnet on this story in this interview by Sarina Locke found here
*Australian Competition and Consumer Commission, Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008, pp. 234–5.