It is a very extensive article - and even the small section relating to MILK may be too lengthy for some...but Ive cut and pasted for you in case you are interested (y) Worth a look while youre enjoying your Sunday morning coffee - especially if you treasure the choice of having it with REAL MILK into the near future!! The link is at the bottom of this post. After 15 years as a dairy farmer, Mike Blacklock is getting out next January. His farm of 200 milking cows at Moorland, on the lush paddocks around the Manning River delta on the mid-north coast of New South Wales, produces 1.3 million litres a year. Blacklock survived the deregulation of the dairy industry in 2001 only to find a new kind of regulation taking its place. “The constraints on our income are absolute,” he says. “There is market domination by the supermarkets. They control the show.” When Blacklock started farming in 1999, Coles and Woolworths were buying 25% of Australia’s fresh milk. After deregulation in 2001, when regional supply arrangements and prices were unlocked, the supermarkets’ share doubled. Initially, Blacklock supplied to the Gerringong and Dairy Farmers co-operatives before switching, in 2009, to Norco, which has the contract to supply Coles’s private-label milk in the northern half of New South Wales. Nick Xenophon says farmers such as Blacklock are “collateral damage from the milk price war between the supermarkets”. On Australia Day 2011, Coles launched its $1 home brand milk campaign, the leading edge of its “Down Down” marketing push. “It reduced the amount sold at a premium price, so more was sold at home brand price by Norco,” Blacklock says. “It constrained what Norco could pay us.” Woolworths soon followed the strategy to attract foot traffic: consumers would pick up other items as they went to and from the dairy section. The pressure rippled outwards. Processors of branded milk, such as the multinationals Lion and Parmalat, found that their biggest customer was now their toughest competitor. Dairy farmers who were not selling to a Coles- or Woolworths-aligned processor feared a wipe-out. Non-supermarket retailers that relied on selling milk saw their custom fall. “The $1 milk campaign capped the whole market,” says an executive from one of the leading dairy processors. “Small shops would go and buy their milk at Coles or Woolies and then stock it themselves.” Coles and Woolworths intended the processors to take the heat of cost-cutting, but the processors, already making small margins on own-brand milk that needed expensive refrigeration, transport and quality control, shared the pain with the dairy farmers. “The processors skim their margins as hard as they can,” Blacklock says. “Eventually, that’s us farmers paying. We are at the bottom of the chain.” Milk hits a nerve. Most people need it and would prefer to pay less for it, but few wanted to hurt the honest dairy farmer. In July 2011, Coles survived an ACCC investigation for predatory pricing on milk; later the ACCC forced Coles to stop distributing via social media a misleading animation that showed farmers receiving higher farm-gate prices after the milk wars had started. In 2010, the Senate had held an inquiry, titled ‘Milking it for all it’s worth’, that recommended stronger measures to protect suppliers from supermarket domination. But the attack on the supply chain continued. Supermarkets continued to place “an artificial ceiling on price”, says Mike Logan, CEO of Dairy Connect, the body representing dairy farmers in NSW. “Milk is not worth a dollar a litre, but that was a decision made by supermarket executives. The ACCC told them they couldn’t lose money on milk, so to keep those discounts going they could only pass their costs on to suppliers.” Some farmers, from their subordinate position as price-takers, saw an opportunity to win more control. The so-called “Woolworths Seven” in northern NSW approached Woolworths directly. In 2013, they contracted to supply milk to the supermarket rather than to the processor, Parmalat, which became their service provider rather than their buyer. “When the Woolworths Seven approached them with this plan to get more money for their milk,” Logan says, “Parmalat said, ‘You have no idea how hard it is to deal with Woolworths.’ The farmers said, ‘Let’s find out.’” The Woolworths Seven began producing “value-added” milk, leaving the big processors to fight out the low-margin private brand business. The beverage giant Lion, at odds with Coles after the milk wars, pulled out of the processing business; Coles went into partnership with the Victorian co-op Murray Goulburn to produce its private-label milk from 1 July 2014. What this meant for the industry, according to one of the Woolworths Seven, was that there was “some improvement on price, but the average dairy farmer’s costs have gone up, so we’re getting squeezed again”. Prices were better than they had been a year ago, but costs were outstripping them. “We prefer not to see supermarkets having price wars on our product.” That battle pushed Mike Blacklock into retirement. “The Woolies Seven move was good for those farmers but bad for the industry,” he says. “Divide and conquer is the supermarkets’ game. Woolies could look like they’re looking after the farmers, but they’re only looking after a few, not the industry, which has taken a battering and can’t fight another fight. The supermarkets are pretty clever. They don’t want to destroy the industry, but they want to push prices down to that point just above where they destroy it.” The ultimate impact, he says, is a decline in farm investment and quality. “What do we do? We don’t buy new equipment. We downgrade the quality of our business through cutting costs on fertiliser and feed. We employ fewer people. We reduce repairs and maintenance. That’s what is happening on most farms.” Blacklock belongs to a long-term trend of declining milk farms in Australia. Thirty years ago, Australia had 30,000 milk farms, of which 75% were family-owned, employing 60,000 people. Now it has 7500 farms, the majority owned by foreign companies, employing 21,000. Australian annual milk production has fallen from 12 to 9 billion litres in the past decade, while New Zealand’s has risen from 9 to 20 billion litres. “How do small businesses operate in a world where two big businesses have so much power and are gouging each other’s eyes out?” Logan asks. “It’s offensive when your product is chucked in the bargain bin. It’s emotional, a slap in the face.” Logan’s hope is that farmers will be saved by international demand and rising exports. “I think $1 milk will naturally die. Farmers want to define the market, but we are not smart enough to beat Coles and Woolworths in the ACCC. Our solution is not to go to the ACCC but to find other markets which will make Coles and Woolworths supply-constrained.” Coles’s official history says John Durkan “refutes those claims with ease”. He is quoted as saying: It’s an honour that people want to try and pick apart what we have been doing, but what we’re doing is not that complicated. We ask suppliers to give us what we can sell to customers, and if they do that, customers will buy more of it and everybody wins. Australian milk consumption hadn’t gone anywhere in ten years and now it has, which means greater production for more farmers. We started making commitments to growers so that they could invest in innovation that would improve their output and profitability. These steps are important for food sustainability in Australia, not just for suppliers. The supermarkets’ current strategy is to increase their vertical integration by entering long-term contracts for own-brand milk with supplier-processors, such as Coles’s with Murray Goulburn. Coles boasts about “up to ten-year tenure” in those contracts, but as the case of CRF shows, those ten years could have a sting in their tail. In 2001, CRF, a meatworks based in Colac, south-west of Melbourne, became the national supplier of Coles’s own-brand lamb. CRF would provide and package the meat in portions suitable to Coles’s Australia-wide orders. For nearly a decade, the partnership was fruitful. It was worth $40 million to CRF, which employed 400 people and became a mainstay of life in Colac. But towards the end of the ten-year contract, Coles began pressuring CRF to change its terms of supply, forego profit and increase rebates, without the compensating offer of a contract extension. In 2011, the company was put up for sale, attracting several interested parties. Coles was one, seeing an opportunity to vertically integrate. According to one source close to the deal, Coles was “successful with some pretty aggressive tactics making them the last man standing”. Coles allegedly let it be known to other bidders that if anyone else won the bid, Coles would withdraw its lamb contract from CRF. Under the threat that the plant could lose its main source of business, bidders dropped out. Coles agreed to buy CRF for $10 million, with a three-month due diligence period. During that period, Coles raised complaints and issues for renegotiation. Knowing there were no other bidders, Coles talked the price down to just $3 million. But Coles had gone too far. Feeling they had nothing to lose, some of CRF’s shareholders scrabbled together a deal with a private equity company and fended off Coles. Coles duly made good on its threat and took away its lamb contract. CRF’s owners approached Woolworths, who declined, telling directors, “Supermarkets can be vindictive.” The plant eventually survived by redirecting its products to the Asian export market. Coles took its business to the largest food processor in the world, JBS Swift, a Brazilian company with a plant in Melbourne. A senior executive with an east-coast meat processor has observed the same disinvestment as there has been in milk. “When a business’s margins are being squeezed, they cut capital expenditure … If you don’t continue to invest, the results will be catastrophic. Importing product is the next step unless there’s some regulatory or consumer backlash. It’s a bleak outlook for Australian food production.” The merits of agricultural rationalisation can be debated. But the point of deregulation and the National Competition Policy was to increase productivity through competitiveness in markets. Instead, the outcome has been a battle between Coles and Woolworths that has had the contradictory effect of decreasing competition. In milk, Mike Logan says, “there is essentially just this one fresh milk channel”. Dee Margetts, a former Greens senator from Western Australia, has written a PhD thesis on the failures of the National Competition Policy with reference to dairy and retail. She submitted evidence to the federal government’s Harper Review on productivity, instituted in 2013, that the only winners in the milk wars were the two supermarkets, and that market-wide competition was reduced. “By the major supermarket chains reducing the gap between farm-gate and retail prices for their home-brand milk products, instead of competing against each other, they could use their combined market power to secure even greater market dominance and destroy more of their smaller and independent retail competitors,” she concluded. The supermarkets’ standard response is that farm-gate milk prices are geared to global demand via the export milk price, not by their discounting action. In the milk wars, Coles and Woolworths were importing a US–UK template for supermarket profit growth: bring prices down by demanding more cost-cutting and rebates from suppliers. The milk wars laid a path for what would be the supermarkets’ most audacious assault on their supply chain. themonthly.au/issue/2014/august/1406815200/malcolm-knox/supermarket-monsters
Posted on: Sat, 25 Oct 2014 20:41:22 +0000
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