The dollar milk debacle - dairy's down, down decade

Big supermarket chain, Coles, chose Australia Day to slash its house brand two- and three-litre bottled milk prices to $1 a litre in a blazon marketing blitz to lure more shoppers into its stores.

Its "Down, Down" advertising jingle to win the hearts and wallets of consumers via big discounts on food basics was soon inflaming rage from farmers everywhere.

Producers were angry with Coles for undermining fresh food's true value and ignoring the cost and effort involved in producing it.

Within days rival retailers Aldi and Franklins had followed with their own private label milk discounts, down to $1.99 for two litres - price cuts of up to 33 per cent.

Australia's biggest supermarket group, Woolworths, also fell in line soon after, despite executives at the big retailer admitting the new benchmark was "not a sustainable price level for milk ... it will inevitably lead to pressure at the farm gate".

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Coles shunned accusations of predatory pricing behaviour and calls for the Australian Competition and Consumer Commission to step in, justifying its discounting offensive by reporting a 10pc jump in house brand milk sales in the weeks after Australia Day.

Eight bitterly contentious years of "dollar milk wars" ensued.

A truce was eventually brokered at the height of the recent drought.

Today house brand milk prices have hit a comparatively generous $1.55/l as retailers feel the pressure of shrinking milk supplies.

A decade ago, however, supermarkets were seemingly indifferent to farmers' fears about rising input costs, high exit rates from the sector and eastern Australian drought driving up feed and irrigation costs.

Meanwhile, as retailers' house brand milk lines grew from 40pc market share to 60pc, the dairy processors' own proprietary labels lost sales which, in turn, generated less margin for them to pay farmers as much when farmgate contracts were renegotiated.

Long term dairy segment profitability decline and an asset devaluation spiral even convinced multinational Japanese beverage giant, Kirin, to sell its local Lion Dairy and Drinks division by 2019.

Even more dramatic was a 2016 farmgate price crash triggered by a revenue fall at big dairy business, Murray Goulburn, which had spent $160 million building plants in Sydney and Melbourne to process milk for Coles.

Stalling export sales, a rising dollar and supply setbacks compounded the big co-op's financial troubles, which triggered an exodus of farmers from the sector in southern Australia.

Ian Zandstra, the stoic chairman of the Dairy Farmers Milk Supply Co-operative, which contracted raw milk to Lion from Queensland, NSW, Victoria and South Australia, insisted Coles had deliberately "trashed the value of milk".

In 2011 he also correctly foresaw repercussions for all dairy farmers, whether their milk was used in the fresh market, to make cheese or in flavoured drinks.

By 2017 a cheese war was indeed in full swing as retailers priced cheddar at just $6 a kilogram - equivalent to just 60 cents/litre (retail) for each 10 litres of milk used to make a kilo block of tasty cheese.

Dollar milk also sealed the fate for many corner shops and accelerated the demise of milk vendor home and business deliveries as shoppers increasingly visited supermarkets for their milk and bread.

Even cafes and restaurants began buying milk by the trolley-load from supermarkets.

"It was a catastrophic period for dairy industry morale," recalled recently retired chief executive of dairy NSW-Queensland advocacy group, EastAusMilk, Shaughn Morgan.

"Bottled water, pumped straight out of the ground, was worth more than a litre of fresh milk."

Processors had lacked the leadership and will to publicly challenge price discounting because they were locked into supply contracts and relied on private label supermarket milk to keep their processing plants busy.

Now, as annual milk production sinks below 6 billion litres a year - the lowest figure in more than 30 years - the dairy industry is still struggling with the impact of the 2011-2019 morale hit and low farmgate prices which forced cost-weary farmers to scale back or quit.

Australia had more than 7500 dairy farms in 2011, but now has less than 5700.

Former Australian Dairy Farmers president and Victorian Gippsland farmer, Chris Griffin, said it was little wonder supply shortages now existed, particularly in fresh market milk states such as NSW and Queensland.

"It was a long and difficult decade. It left many people determined to sell up or switch to beef as soon as they got a chance," he said.

"Supermarket credibility in the community also took a big hit ."

In fact, Coles even admitted to the ACCC it likely misled customers in 2013 by wrongly claiming its house brand milk had put more money into farmers pockets.

"Dollar milk certainly didn't show supermarkets in a good light," Mr Griffin said.

"They were clearly using milk as a loss leader to get shoppers into the store, and farmers effectively paid the price."

While he had not expected the $1/litre price tactic to continue so long, he felt retailers were also unprepared for farmers to fight so hard and win so much community support.

In fact, it was public empathy for drought-hit farmers which effectively forced Woolworths to blink and lift its house brand price by 10 cents a litre in late 2018, capturing an extra $30m in six months as drought support payments.

Coles followed, also paying producers in drought.

Both then extended the "temporary" price rise into 2021, before conceding milk shortages and rising farmgate prices would force house brand prices to rise further.

Mr Morgan led NSW Dairy Connect's negotiations with Woolworths alongside ADF and NSW Farmers, amid rising political and ACCC criticism of $1/l milk and processors ignoring options to pay producers more.

"In many respects it was a bold move by Brad Banducci and the Woolworths board, because if other supermarkets hadn't lifted their prices, too, Woolies could have been quite vulnerable to losing market share," he said.

He observed today's farmgate contracts had responded to the shrinking milk pool to pay much fairer returns - up from around 35c/litre in 2016 to more than 87c/l.

"Although there's plenty of ground to catch up, and farm input costs like fertiliser and energy have jumped a lot in the past year, too," Mr Morgan said.

Meanwhile, although farmers had also won a long-running battle to have milk processors' farmgate contract arrangements made more transparent and fairer under mandatory code of conduct, a mandatory code was still badly needed to hold supermarkets more accountable for their powerful position in direct negotiations with producers and dairy processors.

Former ADF boss, Mr Griffin, wondered if supermarket bosses believed the dollar milk saga was worth the pain for everybody involved.

"When the price eventually lifted beyond $1/l clearly it didn't deter people from buying milk," he said.

"The supermarkets still seem to sell as much as they did four years ago."

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