Don’t cry over $1 milk, ACCC says
DAIRY farmers are paid the same for their milk whether it ends up as $1-a-litre private label or more expensive branded milk, a 12-month inquiry into Australia's dairy industry has found.
But the Australian Competition and Consumer Commission's interim report also dismissed the rationale put forward by Coles when it introduced cheap milk in 2011 that it would "make the dairy industry stronger", finding the price cuts "did not appear to have any meaningful impact" on per capita milk consumption.
"We don't think that an increase in the retail price of private label milk would necessarily benefit farmers, and that any additional profit would mainly be captured by the major supermarkets and processors," ACCC Commissioner Mick Keogh said.
Cheap milk has been a source of controversy since its introduction, with many dairy farmers believing it "denigrates all the effort they put into producing milk", the ACCC said on Thursday.
Last year, widespread media coverage of struggling dairy farmers led to a boycott of cheap supermarket milk in favour of more expensive branded alternatives.
Mr Keogh said the ACCC's analysis, however, showed the "decided move away" from private label milk simply increased the margins for the processors and retailers "quite significantly but didn't deliver a single cent to dairy farmers".
"It probably confounds people, but when you look at the detail of the contracts between supermarkets and processors you see why," he said. "They work on a cost-plus basis, which in other words means they take the cost of the milk from the farmers as a given and then negotiate over the processing and transport costs beyond that.
"They don't include a fixed price for the farmers' milk, so it's up to the processor to work out what they can pay or need to pay to secure that contract. Sure, there's an argument that they indirectly transfer that [to the farmers], there is some truth in that but it's not very evident from all the analysis and data."
Earlier this month, the buyer of troubled dairy co-operative Murray Goulburn flagged the end of $1 milk. Lino Saputo, chief executive of Canadian dairy giant Saputo, said he didn't "know the economics" of the deals which allow supermarkets including Coles to sell milk for less than the price of bottled water.
In its report, however, the ACCC concluded that farmers "earn the same regardless of whether their milk ends up as private label or branded milk", noting that farmgate prices were "quarantined" from other costs which affect prices earned by supermarkets and the margins earned by processors for cheap label milk.
"Supermarkets have leveraged their buying power to drive wholesale prices down and reduce the profit margins of processors," the report said. "This has particularly been the case with private label drinking milk. Supermarkets have used some of these wholesale cost savings to reduce real retail prices for Australian consumers.
"Processors earn higher gross margins on branded products than private label products. Branded product margins are a key driver of processors' overall profitability.
"Increases and decreases in processors' and retailers' margins on private label drinking milk have not had any observable impact on farmgate prices, or trends in farm profitability and farm exits."
The ACCC instead blamed farmgate prices on farmers' "weak bargaining position with processors".
"The processors set a farmgate price only as high as they need to in order to acquire the volume of raw milk production that meets demand," it said.
The watchdog has recommended a mandatory code of conduct should be considered for the Australian dairy industry to address problems caused by bargaining power imbalances between processors and farmers.
David Inall, chief executive of Australian Dairy Farmers, hit back at the report and called for a return to "sustainable" dairy pricing. "Our organisation has said since 2011 that $1-a-litre milk is not sustainable as it takes money out of the supply chain," he said.
"Retailers like Coles have said that they would absorb all of the costs for the benefit of their customers, but we believe it defies logic that you can absorb all of those costs forever and a day.
"Going as far back as 2011, the West Australian dairy industry calculated that $1-a-litre milk took $22.5 million out of the value chain just in WA alone. If you extract significant moneys out of a supply chain over a long period of time nationally, it just makes sense that it will impact farmers.
"What's important in agricultural supply chains is that money finds its way through the supply chain for the benefit of all parties so the farmer is not left at the end. We need to ensure a fair price for everybody along the supply chain."
But Mr Inall said the peak body did "not have a number as to what that is". "There are branded milks on the shelf for a whole range of prices, however selling $1 milk cheaper than water as a loss leader we don't believe sends a great signal for the value of the industry," he said.
A Woolworths spokeswoman said the supermarket "contributed to the ACCC report as requested and look forward to it being finalised early next year".
Coles has been contacted for comment. Earlier this month, outgoing Wesfarmers boss Richard Goyder said he had "no issue" with $1-a-litre milk, saying Coles' suppliers were subsequently paid more and money went back to farmers.