What sort of dairy industry do we want

This morning I woke up to yet another round of what I see as bizarre cheering from the sidelines. Articles like this NZ drought Aus dairy’s boon and headlines of a revival in the fortunes of Australian dairy farmers because our dairy friends over the Tasman are doing it tough

I just don’t get it. If the only way dairy farmers in this country can survive ( let alone prosper) is reliant on climatic disasters in other countries then I say to everyone out there, there is something seriously wrong with the supply chain model for food in this country. I can assure you the Sophie’s Choice model just isn’t working for me and I am not cheering. Survivor remorse is not an easy burden to carry

Everyday u need a farmer

Farmers so important yet so undervalued by supermarket price wars

We know the model is broken. We know there is far too much power at the top of the supply chain. Hagar Cohen and the team at ABC National Background Briefing opened the lid again on just how evil this is just last week See previous post here

As I mentioned at the bottom of this post I too spoke at length to Hagar. I was initially very wary of being interviewed for the program for a number of reasons which didn’t involve a fear of retribution. However Hagar is an absolute delight and after much consideration agreed.   In the end 99.9% of what I had to say hit the cutting room floor but I did do a day’s prep for the interview and spoke to many experts before I decided what I wanted and didn’t want to say. Today I will share with you what I had to say because the supply model is broken and farmers do need to find a completely new way of doing business with the supermarkets and we cant sit around and hope somebody else will save us.

HC – Hagar Cohen ABC National Background Briefing.

What can you tell me about the state of the dairy industry and the domestic milk market in NSW?

LS – Lynne Strong

It has been estimate farm exits are currently running at about 40 % per year. 85% of milk in NSW is sold as fresh white drinking milk so there is a heavy reliance on supermarket contracts. Approximately 45% of NSW milk is sold through supermarkets as private label or homebrand milk and the supermarkets are the ‘price makers’ in this market.

As the largest players in the market, the supermarkets have used fresh milk discounting to increase sales in other sectors of their supermarkets. And it’s working Coles profits are up 16% (1.356Billion $ pre-tax earnings)

This is about all about the whole supply chain – we are all in this together we need each other. The milk price wars are hurting everybody down the supply chain. It’s not just the farmers who are being squeezed

HC – How have the price wars affected your business (bottom line, and emotional/ psychological impact)

LS- One of the big issues now is the capacity to recover from a disaster. Take the recent floods in the north for example. These dairy farmers are more impacted than they would be normally because of the lower milk prices they are receiving. They don’t have the financial capacity to recover from the continual flooding.  They are now desperately asking the State government to help them finance the recovery. It has now become a cost to the public.

This region has had similar and severe impact from recent very sharp drought through spring and summer where farms and farm business did not have available cash surplus to feed and maintain their cows.

On top of this feed prices are up and like other farmers we had to extend our overdraft and take out loans to buy in extra feed. In our case the recent drought has meant hand feeding over 1000 cows

In fact it cost us 30% more this year to feed our cows through that period in comparison to the same time last year. Wages went up 20% I it took a lot of time to hand feed these cows.

The industry is extremely exposed at the moment. Many farms have had to lay off staff. This is increasing workload on those who stay is increasing physical and emotional stress. Repairs and maintenance are not being done; Environmental stewardship spending is falling by the wayside as farms have moved into survival mode

HC – How has your relationship with the processor changed since the milk price wars began (ability to re-negotiate contracts, quantity of milk produced, farm gate price, being paid retrospectively)

LS – I know there have been some very tense conversations between farmers and their processors. Like most Lion suppliers we have lost over 30% of our contract volume since the milk price wars have started. Our milk price per litre has dropped. There is huge uncertainty around price and what next year is going to be like. It’s hard for my son, my neighbours and others I have spoken to in the industry to plan for even one year down track.

We have had a lot of budget conversations and sleepless nights and we are not alone.  This is very destabilising when you want to invest in on farm improvements for our cows and our landscapes and it’s has been very hard on our staff

HC-  How do you feel about the ACCC inquiry, and how its outcomes may (or may not) change the dairy industry.

LS- The ACCC inquiry terms of reference have not yet defined. From a dairy industry perspective . The dairy industry moved from a regulated market to a deregulated market in 2000. We do not want to go back to a regulated market. However we are now in a deregulated market where all the power is at the top of the value chain.

This is not the how a deregulated market should work and it’s not working. This farmer/ milk processor/ supermarket relationship is a logical one and should not be abused

There is room for symbiosis here that provides for the sustainability of farm businesses, processors and the supermarkets while still providing locally produced, high quality product at affordable prices for the consumer with minimal food miles accrued.

But realistically the ACCC’s customer is the consumer. I am consumer too. It is however imperative that the ACCC considers the long- term implications of its recommendations and rulings on consumers. We know consumers want fresh, healthy cheap Australia produce and we are proud to be supplying 50,000 Australia’s with this affordable nutritious cocktail that is milk

But there is a difference between affordable or cheap milk and sustainable farm gate milk pricing. If the status quo remains I am confident no-one will win.  Realistically after all milk is a staple it’s always been affordable

Increasing urbanisation in Australia has resulted in farmers and consumers been further apart than ever before. Sadly we have lost sight of each other. Its no-one’s fault it’s just the way Australian has evolved.

And it’s not just consumers, retailers and processors too have lost sight of on farm realities. It’s time to reverse this trend

So we need a new supply model where we can all work together and have a mutual understanding of the challenges and constraints.

Dairy Connect is working to do this in NSW for dairy farmers. As part of my Bob Medal Landcare win I am working with NSW Farmers Association to create a model so all Australians farmers can learn to engage with and have an active role in the way the supply chain operates

For the dairy industry we need to look at what sort of dairy industry do we want.

What sort of dairy industry do we need?

My vision for the future is an equitable supply chain for everyone. In an ideal world the outcome of the ACCC finding would be a mandatory code of conduct that protects smaller businesses in the value chain and provides equity for everyone

Brave warriors taking on the fight to rein in the power of Coles and Woolworths

This morning I listened to Radio National’s Hagar Cohen expose CASUALTIES IN THE SUPERMARKET WAR.  It sent shudder’s down my spine and left me feeling sick in the stomach. You can hear the full podcast here

Background

The consumer watchdog is investigating Coles and Woolworths for allegations they abuse their dominance. The ‘Big Two’ control over 70 per cent of the grocery market.

As part of its well-known ‘down down’ campaign, Coles cut prices across a large number of food products in its stores nationwide. The company had always claimed that it absorbed the cost of those discounts through making its business work more efficiently. But now Mr McLeod concedes that the supermarket has been passing on the cost of the discounts to some suppliers.

The food industry has been going through a major restructure, with manufacturers finding it tough to operate in Australia because of the high Australian dollar, increasing labour costs and the supermarkets’ behaviour. Many are operating on wafer thin margins, while others have already collapsed.

Food producers are claiming their margins are being squeezed by the supermarkets’ appetite for profits, and one supplier has now alleged blackmail in confidential evidence supplied to the ACCC.

During the initial stages of the ACCC’s investigation into the supermarkets’ conduct, over 50 producers have approached them, on the condition of confidentiality.

‘Speaking to the ACCC, it puts these things out in the open,’ the anonymous supplier says. ‘Companies understand that it’s not isolated situations that they go through.’ This supplier claims he’s been blackmailed by a supermarket buyer.

‘At some stage we started feeling—and this is what I hear from other companies as well—that their behaviour was really blackmailing,’ the supplier says. ‘The supermarkets expect a certain quantity of sales from your products and if that is not met they request a lump sum of money to be passed on to pay for that shortfall. Or another example is being asked to pay to be on the shelf in the first place, and that would mean a lump sum that has to be paid.’

I spent a whole day with Hagar. At this stage people willing to speak out where few and far between but as you will see when you listen to the program many have now drawn a line in the sand and are helping pave the way for much needed change

I applaud the other gutsy suppliers, farmers and manufactures (and there were a lot of them – some who preferred to speak through pseudonyms and actors) who spoke out on  out on Background Briefing. These brave warriors are taking on the fight for everyone in their efforts to rein in the power of Coles and Woolworths and get some balance and equity in the supply chain.

Firstly lets take a look at what the ACCC has unearthed and what it is investigating as a result of the initial 50 suppliers coming forward

From ACCC Chairman Rod Sims. 

‘it is clear that both farmers and suppliers are terrified of it ever been known that they made the allegations’

Allegations include

  • Persistent demands from supermarkets for additional payments from suppliers above and beyond the negotiated terms of trade
  • Threats to remove products from shelves or disadvantage suppliers if claims for extra penalties were not met
  • Failure to pay suppliers negotiated contract prices
  • Conduct discriminating in favour of house brands

Radio National found examples like

Suppliers being charged an additional fee for

    • for using the supermarket technology system for ordering even though it only improves efficiency in the supermarket business and has no real benefit for the supplier
    • Love this one – a fee for customer breakages  i.e. if the customer drops something or decide they don’t want a frozen product and leave it on the shelf somewhere else ( I despise people who do this) – a percentage is taken from the supplier to cover in store incidents irrespective of whether breakages occur or not

This extract from Tony Lutfi CEO of Green Wheat Freekeh is also a classic example

Here are just a few more things I pulled out of the Background Briefing expose that sent shudders down my spine 

The example involving CRF was the most frightening one to me. How Coles got away with this I don’t know. If this isn’t unconscionable behaviour I don’t what is ?

Hagar interviewed Simon Ramsay former board member of CRF (nice website check it out) and now Member of Upper House in Victoria. Colac based CRF had a 10 year contract with Coles to supply lamb. Coles accounted for 90 per cent of CRF business and CRF was Colac’s biggest employer. In the eighth year of their contract CRF was put on the market. ‘Coles put in a bid that was 60% below the price shareholders eventually accepted’ said Simon Ramsay. Coles then told the lamb processor it would no longer buy CRF meat if it was sold to a rival consortium.

Coles’ actions seemed “like a classic dummy spit to me. We believe we gave Coles a very competitive price and good quality product,” Mr Ramsay said.

You can read more about this very chilling story in the The Weekly Times Coles dumps CRF.  According to TWT the rival consortium withdrew its bid and Coles was left last bidder standing, but an 11th-hour bid from a new consortium EC Agribusiness saw CRF shareholders refuse Coles’ bid for the company. Coles re-opened a tender for its business and chose Brazilian-owned meat processing giant JBS Swift over CRF, ending a 10-year relationship. Good news story CRF is now trading well

Rosella, Australia’s most famous brand of tomato sauce went out of production this month when the factory that produces it in Sydney closed down and over 70 full-time employees lost their jobs. Rosella’s parent company Gourmet Food Holdings went into receivership in November. Gourmet Food Holdings also owns other well-known Australian food brands like Aristocrat.

Mr Fawcett sold Aristocrat to Gourmet Food four years ago. When he owned the business, he told Hagar that he relied on Coles and Woolworths as his two main customers.

‘Coles and Woolworths would represent around 62 to 63 per cent overall …. If you lost those two customers it would be death’ Mr Fawcett says

He says that large orders from the ‘Big Two’ retailers meant his company was producing 200 jars a minute, or around five semi-trailers a day. Such large orders meant that if his company had fallen foul of either of the major retailers, Aristocrat would likely have collapsed.

‘You’d have to reconsider whether or not you continued in business,’ he says. ‘The amount of money you spent on machinery—you just had to make that machinery work. If it didn’t work you’re in all sorts of trouble.’

And from the independent supermarkets

Fred Harrison CEO of Richie’s IGA . Fred says he participating in price wars against his conscious ‘We have got to compete. 90% of customers applaud us but 10% wont. We do stock a small amount of $1 per litre milk for those 10% but we promote the brands. We do this because we  can’t afford to lose 10% of our customer base. I know I am playing into the hands of duopoly and it has had a big impact on our business … in fact it has halved our profitability. He went on to warn ‘when you remove layers of competition the powerful players can charge whatever they like – consumers will eventually lose’

I too spoke at length to Hagar. I was initially very wary of being interviewed for the program for a number of reasons which didn’t involve a fear of retribution. However Hagar is an absolute delight and after much consideration agreed.   In the end 99.9% of what I had to say hit the cutting room floor but I did do a day’s prep for the interview and spoke to many experts before I decided what I wanted and didn’t want to say. I will share this with you in another blog post shortly    

Caging the 900 pound gorilla

Everyone who reads my blog (including Coles) knows that since milk went down, down, down to $1 per litre at Coles I have done a lot of Coles bashing. After 30 years in the very switched on world of retail pharmacy I am well aware that it is not smart business to bash your customer and with 80% market share the Australian supermarket duopoly are indeed a very important retail customer in the farm to glass story.

So why have I chosen to ignore this wise advice. It was Mick Keogh of the Australian Farm Institute who first introduced the term, “900 pound gorilla”, in reference to the dominance of the two major supermarket chains.

Furthering the analogy, he said for farmers, dealing with the supermarkets was like being hugged by a gorilla; the initial embrace may be warm and comforting but over time the oxygen gets squeezed out. GorillaHug

That’s just how I feel like my life blood is being squeezed out. Like most dairy farmers I feel helpless, undervalued and in the current climate of relentless supermarket discounting of milk it’s so hard to feel positive about the future for NSW and Queensland dairy farmers and indeed the ongoing availability of fresh milk in both of these states

Should I be feeling this way?

Yesterday one of the speakers at the Dairy Innovators Forum in Queensland said if we have 134,000 farms in Australia we have 134,000 CEO’s and 134,000 CFO’s and its time we got together and found our inner strength and found out just how powerful we could be if we all worked together.

So what’s stopping us I keep asking myself?  Highly frustrating to me the Australian dairy industry just seems to be sitting in a rowing boat waiting for the wind to change in its favour rather than determining the place they want to be and buying the biggest and most powerful motor to take us there.

So is the ACCC announcement that they are launching an investigation into Coles and Woolworths over possible misuse of their market power and “unconscionable conduct”  going to help save the dairy farmers? Is the ACCC a toothless tiger no more? Will they cage the 900 pound gorilla?

Let’s have a look at some of what Mick Keogh for the Australian Farm Institute has to say on this announcement here

The recent announcement by ACCC head Rod Sims of the supermarket investigation gained wide publicity (see here, here and here ).  The response from the major supermarkets has been tinged with surprise and indignation (see here and here ).

When both major Australian supermarkets are listed amongst the largest retailers in the world despite Australia’s relatively small population, it gets a bit hard to argue that their market share is actually less than everyone thinks!

Unfortunately for the major retailers, however, their responses to the ACCC announcement directly contradict their own actions and advertising, so are unlikely to garner much public support or sympathy.

By demonstrating the reality of their market power through, for example, unilaterally declaring that from now on the price of a major staple such as milk will be $1 per litre or the price of bread will be $1 per loaf the major retailers have sent a very clear message to consumers that they have the power to set the price of goods they retail, even though it is clear that the major retailers don’t actually produce those goods.

Complex explanations that the retailers have funded these price cuts from their own businesses and not as a result of lower prices being paid to suppliers simply don’t sound believable in the face of evidence that dairy farmers are leaving the industry and dairy processors are reporting major operating losses while supermarkets report major increases in profits.

No amount of slick advertising based on images of retailers and their moleskin and Akubra-clad celebrity spokespersons standing arm in arm with smiling farmers will be sufficient to contradict the raw display of market power that is repeatedly demonstrated to consumers every week, when they pick up their $1 a litre milk or the $1 loaf of bread.

It doesn’t take a great deal of thought before consumers make the connection between the extent of the market power that major retailers have demonstrated, and the potential to misuse that market power unless there is adequate regulation and transparency. When reports emerge from the ACCC that 50 suppliers have come forward with complaints this hardly comes as a great surprise to consumers.

Ultimately, the major retailers have promoted their market power as a major benefit for consumers, so to then try and claim that in fact they don’t have that power, and even if they did have it they would never misuse it is simply not likely to pass the “smell test” in the court of public opinion.

The Conversation also had some very interesting commentary here and here. Let me share some of what resonated with me

The Australian Competition and Consumer Commission (ACCC) announced last week that it is investigating claims that Coles and Woolworths are bullying suppliers. The issue is serious, but the ACCC investigation only treats the symptom and diverts attention away from the real cause of the problem: supermarket power.

That’s right this is all about power and it’s time for the dairy farmers to use their power and get serious and smart about how we deal with the supermarkets. The good news it is starting to happen. Tomorrow’s post will share with you some of what is happening in NSW

In the meantime check this out from clever young full-time vet student and part- time dairy farmer Cassie MacDonald. Cassie has created her own infographic to counter the half truths in the Coles version. Cassie says “Coles it’s clear you don’t give a buck” The video is averaging 1500 views and it’s pretty impressive

 

Update: Cassie Macdonald has not had 50% more hits on her video in 3 days than Coles have in 2 months

Cassie Macdonald update