Coles bids to contain spiralling milk prices

Farmers are being offered record prices for their milk but Coles is taking a longer-term view to shore up supply and help steady the cost at the checkout.

Coles has offered dairy farmers steep price increases under longer-term contracts in an effort to shore up the supply of its private label milk and keep sticker prices steady until 2025.

Food prices are outpacing broader inflation, putting further pressure on manufacturers to lift prices, which threatens to unleash more hip-pocket pain at supermarket checkouts.

Coles began sourcing milk directly from farmers four years ago for its private label varieties, giving it more control of its dairy supply chain. It wrote to farmers this week offering to pay up to 22c more a kilogram of milk solids under “tenure payments” to entice them onto three-year contracts in an effort to smooth out price volatility and contain further spikes.

“Coles introduced a direct sourcing model for our own brand milk in 2019 to ensure we could provide fair, competitive and guaranteed farm gate prices to dairy farmers directly. These longer-term contracts offer farmers greater security of income so that they can invest back into their farms and make them more sustainable,” Mr Gorman said.

“This tenure payment is to recognise and reward our long-term dairy farmer partners who have been working under this model. The direct sourcing model also ensures we can provide our customers with great quality locally sourced milk for the long term.”

Coles will also pay farmers in key dairy regions an extra 8c per kilogram a month, taking the farm gate price to $12.05 a kilogram by June 2025. This compares with average farm gate milk prices across Australia’s southern export regions ranging between $9.50-$10 a kilogram for milk solids.

Inflation in fresh food and groceries has been running rampant, jumping 9.2 per cent at Coles and Woolworths in the December quarter. This compares with Australia’s headline inflation, which jumped to 7.8 per cent in the year to December.

Dairy processors, including ASX-listed Bega Cheese, have been successful in securing price rises from the supermarket chains to help recover soaring input costs across the supply chain — from feed and fertiliser to energy, packaging and freight — with the price of milk and cheese soaring.

In July, Coles increased the price of its one-litre private label fresh white milk by 25c to $1.60 and the two-litre varieties by 50c to $3.10. The grocery price hikes ended a decade-long period of food deflation during which customers became used to paying low prices for household staples, particularly dairy products.

The milk wars erupted on Australia Day in 2011 when Coles slashed the price of its private label milk to $1 a litre, with its competitors quickly following suit.

Coles and its rivals have since stopped the deep discounting that farmers said devalued their product and are moving to make amends – some 12 years on – amid an exodus of farmers from the industry, while those who have stayed on have also had to battle drought and bushfires.

Coles began sourcing milk directly from farmers for its private label milk in July 2019, initially offering farmers one- or two-year contracts, at set prices. Coles also pays dairy processors to process and bottle the milk under a toll processing agreement.

Prices paid by milk processors are subject to global dairy markets and can bounce around in a particular season. The most dramatic change in prices came in 2016 when Murray Goulburn, which Saputo has since acquired, and Fonterra clawed back “overpayments” to farmers, resulting in some farmers being paid nothing for the milk they produced towards the end of the season.

In May 2017, Murray Goulburn, which previously supplied Coles with its private label milk in Victoria, scrapped its attempted clawback of $183m in milk price “overpayments” from farmers.

Rabobank analyst Michael Harvey said he was not expecting further “major uplifts” in milk prices as the current season draws to a close.

“For Australia’s dairy producers, farm gate margins remain positive and are supported by the record milk prices,” he said. “The high milk prices have mostly offset major cost headwinds – fertiliser, fuel and feed – for dairy farmers. While labour availability remains a major challenge for dairy farming businesses.”


Extracted from The Australian


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