What do safe sex and milk have in common you ask

Well the answer to that is a lot.  According to 100 Great Things You Can Buy for a Dollar $1 you can buy one condom from a restroom dispenser for $1 and we all know thanks to Coles and heavily subsidised by Australian dairy farmers you can buy 1 litre of milk in this country for $1

With the two year anniversary of Coles declaring the milk price wars would begin they have bought the spin doctors in to garner support for this $1 milk abomination

With the help of specialist food market analysts Freshlogic Coles are once again crying “its isn’t my fault ” and absolving themselves of any responsibility for the dire state of the dairy industry in NSW, QLD and SA

Thanks to Freshlogic apparently here is the good news for milk processors

  • Sales of branded fresh white milk products have grown in Queensland by 11.5% and in NSW by 5.5% in the 5 months of 2012/13, while private label sales have fallen by similar percentages.
  • While private label sales grew in the 2011/12 year, the effects of this growth have been reversed by the effects of strong consumer support for permeate-free products in the first half of 2012/13.

Scary isn’t it fear sells and the “permeate free labels” on the milk processors brands has given them a short term gain for long term pain as the home brand/private labels now too spruik the permeate free claim

Whilst sales may be up its the value of the sale that counts. If you sell something for nothing then we all know no matter how big the number you multiply it by the answer is always nothing  

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This graph tells the real story. As you can see in NSW home brands (private label) hold 48% of milk sales market share. That’s almost 50% of milk being sold in NSW supermarkets provides little or no return to the milk processor. Coles has recently announced it is going to move the $1/litre milk campaign into its convenience stores and you can see why from the graph it is keen to smash the brands in the non-grocery* sector.

Whilst Coles claws back market share from anybody who dares get in their way, back here on the farm there isn’t a blade of grass to be seen and we are hand feeding 1000 cows everyday. Yes Coles you don’t control the weather but you certainly have a huge affect on our ability to cope with the vagaries   

Coles can afford Freshlogic to tell the story they want told because they make billion dollar profits. I don’t need a spin doctor because I can see the devastation by just looking out the window  

What else can you get for a $1 in this country. I don’t have a fax machine but I found out the other day that a local shop will charge me $1.45 per page for local transmissions and $2.85 per page for transmissions to anywhere else in Australia and $5.50 per page for any international transmissions.

Isn’t it a shame that supermarkets seem to think farmers and cows are machines but don’t value them as much.

As Milk Maid Marian says so well in her post today

But what those claiming to be “the voice of reason”  dismiss is the effect ‘milk that’s cheaper than water’ has on the psyche. It signals to farmers that a fair go no longer matters. And that’s what hurts the most on Australia Day.

*The non grocery food and beverage sector is called the Route Trade in supply chain lingo. If you want to learn a little more some valuable insights can be found here 

Route Trade

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