Wednesday, 23 February 2011 12:18

Price cuts strip profits from supply chain

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THE RAPID growth of supermarket house brand milk during the past decade is stripping as much as $407 million annually from higher-priced processor branded milk.

The Queensland Dairyfarmers Organisation (QDO) made this claim in the wake of Coles dropping its house brand milk prices to $1 a litre, which was quickly followed by competitors Woolworths and Aldi.

The QDO says house brand sales accounted for 25% of total supermarket milk sales in 1999/2000, but this had increased to 52% (or about 581 million litres) by 2008/09.

It says the rise can be attributed to price cuts and aggressive marketing campaigns. The difference in price between milk processor branded milk and supermarket house brand whole milk was 21 cents per litre in 2000/01, but by 2008/09 it was 71c/litre.

QDO president Brian Tessmann says before house brands and supermarket marketing strategies, greater returns flowed to the processor and then on to farmers.

“We know from a recent Senate Inquiry that the growing trend toward supermarket brand milk is putting the squeeze on the value chain and ultimately the farmer,” Tessmann says. “This latest price drop will increase the price difference between supermarket brand milk and milk processor branded milk.

“So of course shoppers will opt for supermarket brand milk and, with that, lower returns go to processors and that will flow on to the farm gate.”

The move has horrified dairy farmers, who fear the price-war will ultimately lead to a permanent price cut when the supermarket chains negotiate new milk-supply contracts.

Farmers in states such as Western Australia, Queensland and northern NSW – who rely almost exclusively on the liquid milk market – fear any price cut will decimate their local industry.

Tessmann says there is an urgent need for Federal politicians to review and implement the recommendations of the recent Senate Inquiry, released in mid-2010 but so far not acted upon, to ensure long term viability for the sector.

This most recent price cut will place added financial strain and pressure on already stressed farming families.

“We are now facing the bleak prospect of retail milk prices reaching a point that is unsustainable for the milk value chain.”

Tessmann says this will flow back through the processing sector and ultimately to farmers.

“Commodities around the world are rising, and so are farming costs, but milk prices are under unsustainable downward pressure from the retailers.

“With the floods we have seen dramatic price increases in other food commodities due to shortages. However, milk is still the same price to consumers – even though cost of production for farmers has gone through the roof.

“Major retailers like Coles are using cuts in milk price as advertising to chase customers. But it is the farmers who are ultimately paying for this advertising bill not Coles.”

Tessmann says Coles’ attempts to ‘spin’ how its latest price drop will not affect milk processors and dairy farmers are simply wrong.

“There is no doubt that Coles and the other major retailers are the dominant force in the milk market.

“It appears they are using cheap milk to get people through their doors – but there is a very high risk that farmers are left carrying the loss. It is a loss they cannot afford, especially now.”

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