The world and your customers are watching Coles. Will you deliver?

I have sat in on many meetings since the Coles/ Murray Goulburn 10 year deal was announced and there are a lot of wise people in the dairy industry very concerned that Murray Goulburn has bitten of more than they chew by getting into bed with Coles. I hope they are wrong

Dairy Farmers Milk Supply Cooperative Chairman recently said in an open letter to farmer suppliers

The Coles media assault says that Coles want to look after Australian dairy farmers, that they want farmers to have security of tenure, that there will be an increase in milk prices and a premium over current regional milk pricing, and that they expect milk to be sourced locally for  MG contracts.

Macquarie Equity analysts inform that there has been a reduction in wholesale price into Coles so there are real questions as to the transparency of it all; what will be the price set and the price premium. It is a question of what is the money and where will it come from. Let us not forget that Coles also said that $1 milk would not hurt farmers. Coles has the media story, will their new partners deliver? In truth it is a test for Coles to deliver.

Many are saying that the Australian dairy industry is entering the perfect storm. Milk’s heartland Victoria is under extreme pressure from dry conditions, and no real break in the weather is predicted before mid-June and the weather is turning cold, a dire combination that means there will be a shortage of grass to feed cows. On top of this 4% of Australia’s milk supply has rumoured to have gone into receivership

Milk supply in NSW is predicted to drop below 1 billion litres for the first time ever

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Source Dairy Australia

Large processors supplying the domestic market are hurting

It is in this market that Lion has no return on capital in the milk division, low EBIT margins and has written off approximately two billion dollars.

Fonterra is realigning their Australian business, changing its consumer brands as the retail price war in milk begins to bite into its profits. EBIT from its Australian consumer brands fell 31 per cent.

Fonterra Chief Executive Theo Spierings said that “there’s a new reality in Australia,” and that Fonterra is facing “aggressive competition” in milk supply and, with a retail price war in Australia; it has to ensure its supply chain is cost-effective.

Fonterra currently has 21 brands in Australia, which has room for a maximum four or five, he said. It was too soon to say what plants or jobs losses may result, though Mr Spierings noted the company has a wide variety of yoghurt brands and also faces pressure in the milk market.

On a positive note the Global Trade Weighted Index for all dairy all around the world has gone sharply upward.

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This is likely to mean that the tanker after tanker load of milk that is currently coming up from Victoria to fill the milk shortfall in NSW and Queensland will stay in Victoria for export

Seasonal conditions have been part of the perennial challenge and there is no doubt adverse climatic conditions are harder to handle in our dairy businesses that ever before. This goes for all of agriculture, there is simply less room for failure.

The fact that dairy is tougher than ever is evidenced by the tough climatic events causing farmers to exit the industry. We are running out of reserve, both in terms of cash but also equity, and the ability (and incentive) to borrow.

The national industry is not growing; the pincer of cost and revenue is tightening. When tough times such as floods and dry spells occur, low levels of farmer confidence result in some questioning why they would battle on again for this uncertain future. For this reason among others, the assurance of better terms for longer term is an imperative for farmer confidence and viability. said the DFMC Chairman

Tomorrow I am attending yet another review with a very large regional business that relies on our region prospering. What heartens me is there are many people big and small out there who care about our farmers and they are working side by side with us on the solutions

Yes indeed Coles you do appear to have trumped Woolworths with your latest media story, but no-one is forgetting you lied when you said that $1 milk would not hurt farmers. In fact its got to the point where it is hurting consumers and the country as a whole

The world and your customers are watching Coles.  Will you deliver?

A job to die for

Now here is a job for a very brave person. Lion is recruiting for a National Business Manager Dairy – Coles. Personally  I would rather be Julia Gillard constantly watching my back than take on this job that will surely lead to a stomach full of ulcers and antidepressants

National Business Manager Dairy – Coles

Would you like the opportunity to be the best you can be, really make a difference and have a great time doing it? At Lion, our success comes from Great people and Great Brands. We are Australia and New Zealand’s leading food and beverage company with great brands for every occasion.
We are currently looking for a talented National Business Manager to join our Coles team based at our Docklands site.
This role offers an exciting opportunity to join a motivated and supportive team of National Business Managers, responsible for driving above market growth in one of Australia’s largest retailers. This will be achieved through the development and implementation of strategic business plans, leveraging category insights and driving a promotional program to build our brands.
Key responsibilities include achieving volume and profit targets, managing the joint customer business plan and partnering on customer initiatives within the Coles Group. Fostering Strong customer engagement will be a key measure of success.
To be successful in this role you will enjoy being part of a collaborative team and possess a strong record of achievement in a previous senior marketing, category and/or key account management role. You will also possess:

  • strong business acumen and analytical skills
  • proven ability to successfully partner and negotiate with internal and external customers
  • strong people management and coaching skills
  • demonstrated previous key account management experience with sophisticated customers
  • significant knowledge of the FMCG environment (within a highly competitive grocery category would be welcomed)
  • relevant tertiary qualifications will be highly regarded (Marketing/Business/Commerce)

If you meet these skills and qualifications we look forward to receiving your application.

Ongoing impact of milk wars

There is a dire shortage of milk in NSW and QLD and consequently as reported in my post “Coles no-one believes the spin anymore” NSW and QLD dairy farmers are no longer being paid just 12c/litre by milk processor Lion for their off quota milk (large volumes of their milk known as T2 milk) as of 1st December 2012.

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Milk is now in short supply in NSW and QLD

Believe it or not paying farmers more does not automatically equate to more milk because as I mentioned previously cows are not machines and you cant turn their udders on and off. Now you may ask why the milk processor Lion got itself in this position, bizarre as it may seem?.

Milking Machines

Cows are not machines

Here is my take on it (and mega apologies it is complicated). ……

First it is necessary to understand the way in which the domestic (fresh milk ) dairy industry operates. New South Wales and Queensland are the main domestic milk market states followed by South Australia and Western Australia.  The largest domestic milk processor Lion has very little manufacturing capacity (which means it cant produce longer life products), little presence in export markets and supplies the bulk of house brand label milk to Coles in NSW.

 

The current practice is for Lion to announce what is known as an Anticipated Full Demand (AFD). AFD is what they believe is the milk required from farmers to service their customers retail milk sales.

To fill this AFD dairy farmers are allocated milk allotments akin to quota and sell this to Lion at an announced price. This milk price is known as Tier 1 milk. Farmer suppliers who produce above their allotment or do not hold an allotment receive a lower price which is currently close to 25% (11c/litre) of the price of Tier 1 allotment milk. This milk is known as Tier 2 milk. This system is designed to force farmers to have a flat milk supply curve with the extra costs this incurs, has little transparency, and effectively acts a restraint to trade, encourages rent seeking and serves to drive costs up. NSW Milk Production vs Sales

This graph of milk sales vs milk production clearly shows achieving a flat curve (red line) isn’t exactly easy for the cows and the farmers and its a very expensive goal to chase for many reasons 

Tier 2 milk is traded between processors creating a secondary milk market and effectively they are each others customers. A little too cosy for my liking as there is no transparency at farmer level as farmers have no idea what prices are being paid by the processors for milk being traded in this secondary market.

Secondly the Australian liquid milk market is I believe manipulated by the the duopolies in a number of ways.

Whilst house brand label products generally provide lower margins to both the retailers and manufacturers, they offer greater control of the supply chain, and reinforce loyalty to the retailer rather than manufacturer brand. Increasingly the use of house brand private label products has seen supermarkets reducing the shelf space available to branded products, narrowing the range of branded suppliers within each category and driving consumers toward house brand label products. This in turn increases competition amongst manufacturers for the house brand label contracts and drives down wholesale prices. 

Over the past 10 years the retail price gap between branded and private label prices as widened, as their increased share has prompted processors to try and claw back margin through branded products.

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With house brand milk being sold by Coles and now Woolworths and Aldi at one dollar per litre this means milk is now cheaper than water and soft drinks in our supermarkets.

On top of this the purchasing practices of Coles in particular markets equate to running a Dutch auction. This means processers have no way of know if they have lost the contract fairly and squarely has they have no way of knowing what the winning bid was. In a world where fair is equal retailers should bid by tender for products rather then rely upon undisclosed supply arrangements.

 

Pivotally contracts are very short term and currently only for two years. This means domestic processors in order to coordinate their activities and to share their risks are prone to undertake opportunistic behaviour and they in turn offer their suppliers short term contracts that often have onerous conditions attached to them.

The current milk shortage is a reflection of Lion’s short term view of the market place , lack of knowledge of and sadly lack of interest in what happens on farm.

Lion’s contract with Coles comes up this year. Lion are very nervous they may not retain the contract and hence they don’t want to be stuck with farmers on contracts if they suddenly find themselves without a market for their milk  This is believe has led to the Tier 2 milk strategy which makes producing milk off quota unviable and did force a number of dairy farmers out of business which has led to the current milk shortage in NSW and Qld

This has meant Lion now heavily trades on the secondary milk market ( excess milk that processors like the biggest cooperative in Australian the Victorian based Murray Goulburn don’t need). Whilst this comes with a number of serious risks for them in reality you cant blame them.

So currently we have large volumes of milk coming to NSW from Victoria and similar amounts of milk from NSW going to QLD. The big risk for Lion is Murray Goulburn will sell their milk to whoever will pay the highest price and as they are heavily involved in the export market if it is overseas buyers that is where it will go   

Nick Simone Smith 

Behind this smile is one very worried dairy farmer

I love the farm but sometimes I hate farming – it shouldn’t be this scary and its time to get our dignity back. There are a number of ways you can help our dairy farmers get their dignity back and a great way to start is to sign this petition found here 

Wish list for 2013 – Dairy Farmers get their dignity back  

Where is your ANZAC spirit Coles?

Today this media story ‘Kirin dairy business no longer a curdling story’ is doing the rounds on twitter along with this classic photo from a report on German dairy farmer protests in Brussels 

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Back to Oz ‘OUTGOING Lion chief executive Rob Murray said the fresh milk part of the dairy business was in a terrible state and not too dissimilar to the profitability profile of a charity. ”We have a challenge which is the core of the business, the fresh milk business, which is a charity – in fact, a lot of charities do better than that,” Mr Murray said. He went on to say the blame … was down to Coles and Woolworths, which nearly two years ago launched their own-label milk priced at $1 a litre, effectively undercutting branded milk sold by Lion. ”We don’t make any money [on milk],” Mr Murray said. ”The simple truth of that is nobody is making money and you can’t make money if [consumers] buy milk at $1 a litre, it physically can’t be done.”

This begs the question if Lion see themselves as providing a charity service (giving milk away for free) where does that leave their farmers?

Dairy farmers are a volatile lot in the EU aren’t they? There were images like this in 2009 when Belgian farmers continued European-wide protests by spraying about three million litres fresh milk onto their fields.

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Back to OZ where earlier this year the owner of Coles Wesfarmers announced “their full-year net profit rose 11 per cent to $2.126 billion and its Coles unit capped a third year of market-beating performances as it stepped up its price war with bigger rival Woolworths.” See previous post here.

Its clear Coles P&L doesn’t mirror that of a charity. Their CEO Ian McLeod earns $15.63 million in salary alone. McLeod’s spectacular earnings are more than double that of his boss, Wesfarmers CEO Richard Goyder, who made $6.9 million last year.  I don’t know whether to laugh or cry when they spruik the milk price wars are solely to help Australian families.

Australian dairy farmers tend to be a pretty peaceful lot. We have a lot of faith in the ANZAC spirit of helping your mate out, regardless of the consequences and knowing that your mate will do the same if the situation was reversed. The sense of doing what needs to be done when it needs to be done. 

The ANZAC spirit of people like QLD school teacher and blogger Lisa Claessen who has organised a petition which you can sign here.

The ANZAC spirit and fighter for all things of value to rural and regional OZ Alison Fairleigh who has an innate sense of what’s right and wrong and what is good and evil in the world.

As Alison reminds us ‘As consumers we have the power to drive market trends. We can stop buying home brand milk, and vote with our feet and our wallets.  We can all accept our personal responsibility for ensuring a sustainable dairy industry for the future of all Australians’.

As a farmer I ask Australian consumers to help us fight Coles where it hurts them not in our fields and in our streets. Lets show them we will never surrender our farmers just so Coles can line their pockets with gold driven by short term vision and pure greed

Lets get our ANZAC spirit out Australia.  All it takes is a signature here.

Show me the love

Did you know that one teaspoon of healthy carbon-rich soil can contain almost as many organisms as there are people on the planet, that is, close to 7 billion living things – and a greater diversity of life than the Amazonian rainforest.

At Clover Hill Dairies our soil organic carbon varies from 5.5% to 12%. Now for anyone not au fait with soil organic carbon stats I can assure you that’s damned impressive and I am very proud to share this with you. I am even more proud to tell you that extensive soil carbon tests on many dairy farms in our region show similar results. That’s a lot of living organisms our regional dairy farm soils are proudly feeding and supporting.

Why am I telling you this?

Because Coles uses it marketing power and financial might to run loss leader marketing strategies with our Aussie farmer’s produce – like milk.  Marketing campaigns that give Australians the impression they are the reason for cheap groceries in this country when its our farmers who should be getting the credit for this

This behaviour is crippling NSW dairy farmers. The destructive pricing policies just have to stop because it doesn’t stop with our dairy farmers – it is undermining the financial viability of our great Aussie farmers.

I don’t have millions of dollars to spend in TV advertising campaigns to right this wrong. In fact my business like all Dairy Farmers Milk Supply Coop and Lion suppliers will take a heavy battering this year from the fallout from these Coles destructive pricing policies

But I do have voice and I have taken a pledge to get out there and tell every single Australian the real story behind food at rock bottom prices in this country and why they should be proud and loud of our Aussie farmers

This week I am speaking at ABARES in Bega. Since I first put forward the title of my presentation a lot has changed in the NSW dairy industry and the new title “Show me the Love” more reflects the need for everyone to think differently about the way farmers are embraced in this country

By the end of my talk I want nothing less than a pledge from every single person in the room to use their  LOVE to wake up Australia and get them behind our farmers!!!!

What do you reckon? Can I pull it off?

Show me the Love

 She certainly hopes I can because her future depends on it. 

Coles is making my blood boil

What a month it has been. On the home front Michael took the plunge and attempted the double knee replacement . The less said about the outcome of that at this point in time the better .

Out in the wider dairy community suppliers to Lion via the Dairy Farmers Milk Supply Coop (DFMC) got the devastating news (and there is more to come) of what their “quotas” were likely to be and the atrocious price on offer for Tier 2 milk (milk in excess of quota). What was this bad news?  I am finding it difficult to even put the figures on paper. Farmers supplying Tier 2 milk are receiving a max of 14c/litre and some even as low as 11c/litre

I can categorically say the NSW dairy industry is facing decimation and in the short term its the emotional trauma that is hitting first for those farmers finding themselves affected by this double whammy.

As in any situation like this, various factors have bought on the conditions DFMC suppliers find themselves in. The one underlying factor that is preventing any hope of a revival is the Milk Price Wars started by the Coles Prices are Down Campaign  that comes surrounded with spin like this COLES CUTS PRICES AGAIN TO HELP AUSTRALIAN FAMILIES.

Well I can tell you Coles there are a lot of wonderful, caring dairy farming families hurting very badly at the moment and I am finding it hard to believe you are that naive that you think Australian families want you to destroy other families to deliver an extra $450 savings in their pockets by shopping at Coles

Then this came along and it made me even more furious. In another blatant marketing gimmick Coles has announced it wants to put video cameras on Aussie Farms. This stunt has been covered superbly by Milk Maid Marian in these two blog posts

http://milkmaidmarian.com/2012/08/10/coles-wants-video-cameras-on-aussie-farms/

http://milkmaidmarian.com/2012/08/10/coles-wont-rule-out-cctv-on-australian-farms/

As soon as I have a window I will be officially inviting Coles leadership team to our farm. I can offer them 6 star Eco accommodation, hands on milking experiences as well as a guided tour of our dairy facilities, pasture research trials and natural resource management activities but that will have to wait a few weeks.

Today I am off to Canberra with my farm consultant Dr Neil Moss. Neil and I both care very much about our fellow dairy farmers and we are doing everything in our control to make the future a better world for them to farm in

Today we have a wonderful opportunity to talk to some very bright minds in Australian Government Lands and Coast and we will be listening and having highly productive two way conversations and we will come up with a plan I am confident of that.

And we need to, because, Australia we have a big problem, the supply value chain model isn’t working and we have to get it remodelled fast.

Sustainability must be embedded in the supply chain system. It is imperative we have partnerships between community, government and the private sector to enable our farmers to continue to supply the best quality products for people, animals and the planet.

This will only happy when our supply chain partners become advocates for our farmers and sadly Coles you just don’t get it  YET but you will and I look forward to helping you see the light.

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Coles their future is in your hands – lets make it happen together  

Frontbenders or backbenders – Being flexible in an inflexible market place

Contortionists according to wiki “have unusual natural flexibility, which is then enhanced through acrobatic training, or they put themselves through intense, vigorous and painful training to gain this flexibility”.

Contorsionists

So how does this relate to dairy farming? Quite a bit in fact! Cows and farmers are living things that ideally should be able to operate in a flexible environment to achieve the best outcomes for their health and wellbeing. However more and more they are both finding themselves operating in a totally inflexible market place and quite a bit of intense vigorous and painful training is going on to help them bend and weave and duck to cope

Let me explain

Dairying systems in Australia are probably as diverse as they get and they depend on a combination of factors which include the best options for the cows, the milk market you supply, where your business is located, and your soil and the types of pastures you can grow, the amount of rain, the temperature range, your access to grains and other bought in feed. I could go on forever.

This diversity of production systems also means a diversity of calving patterns. These include batch calving, seasonal calving, split calving and year round calving

The most common is seasonal production where cows calve during the peak period of pasture availability. This system is used by nearly two-thirds of Australian dairy farms and is most prominent in Tasmania, Victoria and South Australia.

Graeme Nicoll who farms in Victoria and writes the excellent blog Montrose Dairy has written a great post about the ins and outs of his seasonal calving pattern here

Milk Production

Most of Australia’s milk production is concentrated in Victoria with the second biggest milk production state being NSW

The second most common production system is year round production. Under this system, calving is spread throughout the year, which means that milk production is stable during the year (or as close as it can be.) This production system is most prominent in areas like ours which supply fresh milk for domestic production.

Clover Hill Dairies pregnant cows

Hello welcome to my world

We supply two different milk processors (Parmalat and Lion via Dairy Farmers Milk Supply Coop) who both process and supply drinking milk for the Australian domestic market. This means they need a consistent supply of high quality fresh milk close to their processing plants which are invariably located either in or as close to the major capital cities as possible

Producing milk consistently all year round is not as easy as it might sound. It fact it’s damned tricky. Milk production is essentially the conversion of pasture to milk.

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The paddock in front of my house was planted with ryegrass and oats 3 weeks ago and its not growing near as fast as it should be

The milking herd

Hopefully we will get a nice drop of rain, a bit of warm weather and it will look like this again shortly

So pasture is the Holy Grail and the best pasture is available in spring and early summer so logically cows produce more milk during this time of the year.

Current Seaon

As you can see milk production goes up significantly in Australia in Sept – December

To encourage farmers who supply the domestic market to balance this and achieve a “flat supply curve” i.e. less milk in spring and more milk in the autumn/winter we are paid a higher price for autumn/winter milk for the milk we supply Parmalat

Lion/Dairy Farmers Milk Supply Coop. on the other hand have a two tier system (as Malcolm Fraser said “life wasn’t meant to be easy”)

Tier 1 milk prices are paid on milk supply volumes representing an allocation of what Lion (formerly National Foods) have estimated is their fresh drinking milk requirements (“anticipated full demand” or AFD). That is you are essentially allocated a milk quota

To discourage you (and believe me it’s very discouraging) farmers who supply milk in excess of these contracted Tier 1 volumes attract Tier 2 prices.( which in the main are half the price you get for Tier 1)

For farmers, the pressures arise because they must make investment decisions about the size and composition of their herds and their infrastructure investments more than nine months in advance. Those decisions necessitate a longer term investment horizon and exposure to ongoing fixed costs. Consequently, farmers look to the processors to provide guaranteed cash flows over the farmers’ investment horizons. However, the processors are not able to commit to supply arrangements with farmers until the processors have finalised their contracts for house/private brand volumes with the supermarkets.

The processors are exposed to the risk of significant loss when their milk supply arrangements with farmers extend beyond the term of their house brand contracts. In  2011, Lion claim changes in the configuration of demand for fresh white milk caused them to lose approximately $20 million on its fresh white milk contracts. On top of this Lion lost the Woolworths house/private label supply contract which was a whopping 20% of its milk intake and they have subsequently written down their business by $1 billion, this is on top of a ½ billion dollars write down in the previous financial year. Scary stuff

Milk producers like us contracted to Lion (through direct supply contracts or milk supply co-operative DFMC) currently suffer from the combined effects of a rationalization of Lion’s processing requirements in dairy products (other than fresh milk) and the loss of private label volumes.

Our business is doing the very best it can to listen to the market place and we are focused on changing with the world. We are not unique in this respect.

We have outsourced expertise to help us manage risk and adopt new technology and farming strategies that improve efficiency.

We have found novel ways to grow the businesses and have built strong natural resource management partnerships and have undertaken extensive Landcare projects to adapt to climate variability and build carbon in the soil

We have innovatively grown our business in a peri urban environment where 90% of the prime agricultural land is now owned by lifestyle farmers without large injections of capital through procuring lease land

We are actively working to secure markets for our products by working with the processing sector and supplying the companies that best fit our farming system. That is DFMC/Lion on the home farm and Parmalat on the lease farm.

We are also thinking of hiring a full time physio/chiropractor because the constant balancing act ain’t getting any easier

Juggling act