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  

Coles no-one but you believes the spin anymore

I have been quiet on the milk wars saga of late. This is in main because I am finding it hard to keep up and its exhausting me. All in all the whole debacle is just bizarre. One minute large numbers of NSW and QLD dairy farmers are being paid just 12c/litre for large volumes of their milk known as T2 milk. The next minute they are being told all their milk will be paid at T1 price (full price) from February to July 2013. Then they have just being told they will be paid at T1 price  as of 1st December 2012. Fantastic news if cows where machines and you could just turn their udders on and off but it appears that whilst the rest of the world knows they aren’t machines but living breathing things the milk processor Lion doesn’t

Then the Xcheque newsletter lobbed into my in tray this morning and allowed me to share with you a reasonably uncomplicated update on the milk price situation and farmer exits. Xcheque is owned by the very insightful and bright mind that is Jon Hauser. The newsletter directed me to this excellent article penned by Kai Tanter and titled “Let them eat cake – the ongoing saga of T2 milk price and a Lion in winter”

So for all the fabulous dairy farmers supporters out there here is an update on the situation at the farm gate from the experts

Let them eat cake - the ongoing saga of T2 milk price and a Lion in winter

“Let them eat cake – the ongoing saga of T2 milk price and a Lion in winter” by Kai Tanter

What kind of responsibility do processors have to their farmer suppliers? The fight around tier two (T2) milk payments in Australia is one where domestic processors, and their supermarket customers, seem to want to have their cake and eat it too – flat milk all year round but at a market benchmark price that has no relevance to this requirement. This has resulted in a commercial and public relations mess. It also appears to have triggered another wave of farmer exits from the Australian dairy industry.

Lion is the processor who has copped the most flak over this issue from farmers recently. They may be moving into their good books after announcing a price rise for the first half of next year. Their NSW, Queensland and Tasmanian suppliers, many of whom claim they have been treated unfairly by Lion, will no longer be subject to T2 milk prices from February to July next year. The T2 price is currently 15 cents per litre (averaging around 12c/litre ). This will be replaced by the T1 price for all milk – currently 47.5 cents per litre for northern NSW and southeast Queensland.

The most recent round of T2 prices were introduced in July of this year. The price is for milk that exceeds Lion’s requirements for their domestic fresh dairy product business. Many farmers were in uproar and said that they could not produce milk at those price levels, or at the effective average price of tier one (T1) and T2 milk. This however seems to have been the point. Lion said that they had too many farms in NSW and Queensland and that they didn’t need the milk, and especially during Australia’s peak production period across spring and early summer.

“Basically there needs to at some point be a rationalisation of the amount of farms that are in those two states,” said Lion’s director of procurement, Murray Jeffrey.

Things seem to have changed over the last couple of months, hence the removal of T2. But why? Australia’s pasture based milk production is highly seasonal and it is normal for more milk to be available in some months than others. Lion says that it is the recent decline in milk production that has allowed them to make the change.

“Given that there’s been a steady decrease in volume over the last two or three months it’s allowed us to purchase Tier 2 milk at Tier one prices in South East Queensland and NSW,” said Mr Jeffrey.

Figure 1. Central / North New South Wales + Queensland milk production.

nsw-qld-milk-production

 

Less now, maybe more later – but at what cost?

Lion’s price attack on surplus milk might have given them more than they bargained for. The Land recently reported that since the introduction of T2 pricing in July, Lion’s milk receivals have decreased by 15 percent relative to two years ago. This is much more than a normal season decrease, especially against the background of relatively good rainfall and low prices for irrigation water.

It’s not just in the last three month’s that Lion’s receivals have fallen. Ian Zandstra, president of Dairy Farmers Milk Cooperative (DFMC), who are Lion’s major supplier of fresh milk, estimates that Lion’s milk pool from DFMC suppliers has decreased by 20 percent in the last two years. He attributes this to the low milk price.

The seasonality of Australia’s milk production is in part responsible for this situation. There is a lack of fit between the demand for dairy products, which stays the same all year round, and the supply of milk, which varies depending on the season. Processors like Lion want to be guaranteed a set supply of raw milk all year round, but if a traditional dairy tries to meet this demand, it results in surplus milk during high yield months.

The two tier milk price system has been devised to send a clear message to supplier about how much milk the processor (=supermarket and consumer) wants and when they want it. It is not a bad idea in principle but the brutal and uncommercial value that has been placed on T2 milk completely undermines the overall value of the dairy enterprise.

The justification for the low T2 price is that this is the effective return to the processor when they transport it to Victoria and sell it to a commodity processor. In other words “It is not our responsibility to add value to this milk … and by the way you will have to pay for the cost of getting rid of it”.

The supermarkets are just as culpable in their denial of responsibility for this milk. From an earlier article:

Coles claim that they have no effect on T2 prices, saying that their retail and farmgate milk prices have been decoupled. “Coles’ house brand milk contract with Lion is based on tier one milk pricing… [and] Coles has no influence on Lion’s decision to reduce tier two milk prices,“ said a Coles spokesman.

They might be one step removed from the buying process but in our opinion the supermarket chains cannot divorce themselves from the economic reality of the dairy industry.

The underlying assumption in the argument presented by the spokesmen for Lion and Coles is that the price for T1 milk is fair and reasonable compensation for the flat milk production profile they require. According to Murray Jeffrey:“We already pay NSW and Queensland suppliers a premium on the world price.“

But do they, and what is the world price? It turns out that the world price is the price that export processors can extract from world markets for commodity dairy ingredients. It bears no relationship to the price that farmers are paid for fresh milk in other developed countries, and it certainly bears no relationship to the cost of producing milk on a flat production basis all year round. Discounting T2 milk well below cost and its intrinsic value is just rubbing salt into an already festering wound.

So the reality for Australian farmers that are servicing the domestic consumer market is that they either need to cop a huge penalty for producing surplus seasonal milk, or move to flat production with a tier one milk price that is inadequate to support this production system.

In the southeast of Australia ( Victoria and Tasmania ) farmers at least have a choice. They can choose to supply an export ingredient processor where they have half a chance of matching the milk price to the lower cost of a seasonal pasture based production system.

What choice do farmers in the northern half of NSW and Qld have? Ship their milk south? Sell milk at the local farmers market? We don’t think so. The choice seems to be: accept this milk payment system or get out of milk production. From the recent reduction in milk supply it looks like the second option has been a popular choice.

This has been a year full of contradiction and irony for the Australian dairy industry. “Down Down Down” has been the catch cry from the supermarkets. In association with this has been the supermarkets call of “Me Me Me” when it comes to allocation of shelf space to product brands. “No No No” has been the consumer cry regarding the inclusion of permeate in milk – with the effect that removal has increased the cost of fresh milk production. “Down Down Down” has been the message to farmers on milk price. “Up Up Up” has been the cost direction for the purchased feed that is so essential for a flat domestic milk supply.

Just about the only thing that makes sense at the moment is “Out Out Out” which has been the farmer response in those regions where there is nowhere to go with this unsustainable economic equation. It looks like Lion may have come to the same conclusion. The last word goes to outgoing Chief Executive Rob Murray:

“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.’’

Mr Murray described Lion’s dairy division as a “charity”, saying that “in fact a lot of charities do better”.

The dairy industry sings for its supper

Back to me

If Lion think they are a charity where does that leave the farmers supplying fresh milk in this country?.

davesview_77

On dole queues?. Not good enough Coles. Its time to take responsibility. When you pay peanuts you get monkeys and farmers aren’t stupid and they are voting with their feet big-time . And where does that leave consumers? Milk from China?   

Coles under siege the choice is yours and the choice is now

I have been moved by the number of farmers from other industries and members of the community who have very vocally come out in support of Australian dairy farmers. Today’s blog post highlights the diversity of these people and shares why they are so passionate.

Firstly Queensland school teacher Lisa Claessen who publishes her own blog Telling Tales has launched this petition to get Coles to rethink the decimation they are raining down on the dairy industry through the milk price wars. Please read it and share it with your friends and most importantly sign it. You can find Lisa’s petition here

Lisa Claessen

QLD schoolteacher Lisa Claessen goes in to bat for Aussie Farmers

Secondly these thoughts from South Australian grain farmer and wheat trader Corey Blacksell

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We are all in this together says grain farmer Corey Blacksell

Being a grain farmer in a predominantly export orientated State; one might wonder why I have been so vocal in my support of dairy farmers.

Our property is located 295kms, by road, from the Port of Adelaide. We are predominantly grain growers, but also have a small flock of merino ewes that produce a first cross lamb, annually. We spread these operations across our 4640ha property. We began farming in our own right on July 1st, 2008.

So why does that mean I should be vocal in my support of the dairy industry? Apart from being fellow farmers, there are far deeper economic and principled reasons for my support of the dairy industry.

Firstly, I put my farmer hat on. As a grain producer in the predominantly export supply chain that is South Australian grain, it is my aim to remove myself from that supply chain. Having built on farm storage there is no point in participating in the export supply chain. In excess of $80 tonne ($40 freight and $40 storage and handling) are removed to form my farm gate price. Located on the SA/Vic border I aim to access the Victorian domestic market, a market that’s in equilibrium for supply and demand in an average season.

Dairy makes up approx 50 per cent of the cattle that consume feed grain in Australia, consuming around 1.5 tonne per head per year according to Dairy Australia. There are 1.6 million dairy cows in Australia (2010/11). This equates to approximately 2.4 million tonne of feed grain per year Australian dairy cows consume. The value adding of grain, into protein, creates a domestic demand for my grain and leaves the dollars in Australia and this is a win win for my family and my community.

Secondly, I put my consumer hat on. The permanent discounting of fresh food, by the supermarkets, is placing at risk the supply of Australian grown food, food that is universally accepted as being of the highest quality and integrity; food that the shopper can buy with confidence.

In an age when prices only go up, I ask myself how it is fresh food prices are coming “down down”. Who is paying for this deflation? Further to that, who will pay for this in the future?

The future may not be higher prices, but lower quality for the same price. Cheap food today will not create cheap food in the future. Cheap food will mean imported food, from countries with standards lower than our own. No one can demand a consumer pays for quality, but consumers must have the option. The risk is this option will be removed by the duopoly. That’s right, you will be given what Coles and Woolworths decide they want to sell you. They will want to sell you the things that make them the most margin.

“How can this be” you ask. Easily, it’s happening now and no one is even aware of it. The best eating and tasting fruit and veg do not make it to the shelf. Only the fruit and veg that creates the best value for the seller makes the shelf. One dollar milk is another example of best price, and not best quality.

Australian consumers now have a clear choice; cheap food leading to imported food of questionable quality and integrity or Australian produced high quality food.

The choice is that stark.

Perhaps a quote from The Conversation regarding the car industry can give us an insight into the future of Australian food production, minus the subsidies. You exchange manufacturing for agriculture!

If Australians want an auto industry, they must be prepared to pay for it – as ever – through the tax system. If they don’t, then they must also shoulder the consequences: a depleted skills base; a hollowed-out manufacturing sector; major job losses in every Australian state; and the decimation of a large number of regional and urban towns.”

It’s our choice now.

This great animation from the Hungry Beast opens the lid and exposes how Woolies and Coles are taking over OZ in leaps and bounds